The global financial crisis (GFC) formally faded from history last week – at least as measured by the Mercer annual asset class ‘periodic table’.
But despite sweeping 2008 off the table – an analysis that tracks the annual performance of 16 asset classes across the previous 10-year stretch – the latest Mercer numbers don’t quite erase the negative GFC vibe.
David Scobie, Mercer NZ principal, said 2018 reprised the doom-and-gloom result of the-now relegated 2008 (the worst year of the GFC) “though with negative numbers not nearly as savage”.
“In 2008, nine asset classes returned worse than -20 per cent. In 2018 none were below -20 per cent, with the single worst outcome being -12 per cent (commodities),” Scobie said.
Nonetheless, after enjoying two straight years where all asset classes returned positive results, 2018 was mainly a downer for investors with 10 out of the 16 categories tracked by Mercer falling into the red.
NZ investors were mostly rewarded for a home bias last year with four of the six above-water asset classes sourced locally, including: NZ direct property (9.1 per cent); NZ equities (6 per cent); NZ government bonds (4.6 per cent); and NZ cash (2 per cent).
The four solidly-performing NZ assets were bookended by global private equity (up 18.2 per cent – or double the next-best result achieved by local direct property) and the 1.8 per cent return of global bonds.
“Cash rebounded from its bottom-ranking in 2016 and 2017 to place higher in 2018,” Scobie said in the Mercer report. “Cash and global bonds are the only two sectors to have recorded a positive return in every calendar year. These asset classes, as well as New Zealand bonds, proved their worth as safe havens during last year’s turbulent market conditions.”
He said the “defensive characteristics” of the NZ stock market also played to the advantage of investors in 2018.
However, the outsize returns from global private equity showed last year wasn’t all about staying conservative.
“Sometimes perceived as a riskier option, [global private equity] has placed in the top half of the table an impressive nine times over the decade, benefiting those investors with some illiquidity tolerance,” Scobie said. “Meanwhile, it has been a challenging run for commodities, which featured at the wrong end of the table in 2018, as it has in four out of the last 10 years.”
Just two years ago commodities topped the Mercer table with a 13.4 per cent return.
While the hedge fund sector (-2.8 per cent for the year) didn’t appear to provide much of a hedge against the market negativity, the asset class has demonstrated a few good points over the years, Scobie said.
“Of some note is that hedge funds have never been at the bottom of the table (and the hedge fund returns are shown after fees, unlike other asset classes aside from global private equity),” he said. “At the same time, the sector has only delivered a double digit return once in the decade (in 2014).”
With the 2008 nadir now off the Mercer radar, the award for single-best performing asset across the 10 years covered in the table goes to emerging market equities, which returned 43 per cent in 2009: at the other end of the scale, commodities ranked worst over the decade with a 23 per cent loss in 2015.
“If there is one thing the Periodic Table tells us it is that, after a downturn, riskier asset classes frequently return to have their time in the limelight,” Scobie said. “The challenge is knowing when.”
He said the topsy-turvy nature of asset class returns over time as highlighted in the Mercer table should remind investors “of the merits of… diversification and maintaining a focus on the longer term”.
And don’t forget the GFC.