WHICH ASSET WILL PRODUCE THE BEST RETURN?

In the last article we looked at emerging market equities. In 2009 this asset class produced a return of 78.5%, way above all other asset classes.

But in 2008 and 2011 it produced the biggest losses! So what are the alternatives and which asset class should we be looking at for the best returns? Here are the nine major asset classes you could consider investing in:

Global Cash (fixed deposits in a basket of currencies)
Developed Market (US, Europe etc) Bonds
US High Yield Bonds
Emerging Market Bonds
US Equities (specifically US due to the market’s dominance)
Developed Market (US, Europe, Japan etc.) Equities
Emerging Market Equities
Commodities (including gold, oil)
Global Property

What about residential property?

For many people the most important investment they will ever make is in their home. It is likely to be their best investment as over the long term it is an appreciating asset and avoids the need to pay rent. But it doesn’t work well for everyone. There are maintenance costs and liabilities and there are times when selling a home can prove very difficult. If your home is not in your own country, like Bali for example, there are other potential issues.

Where investment properties are concerned, from a global perspective there are so many variables that it is not possible to make a meaningful comparison with other asset classes. Suffice it to say that a residential property in your home country is an important investment that is likely to take priority over other investments, and there is also a place for investment properties if you can put up with potential hassles and the illiquid nature of property.

Global Property does however figure in the list of nine asset classes but rather than physical properties it is a measure of theprices of property-related stocks which are listed and completely liquid. An investment in a fund containing property shares will reflect the overall trend in property values. Interestingly, Global Property was the top performing asset in three out of the nine years covered by this study which was compiled by Momentum Investment Management and Bloomberg.

Property sounds good but what about the other assets?

The next best performer at the top of the chart was Emerging Market Bonds, taking the no. 1 position in 2011 and 2015. These were both very poor years in global markets and while the bond funds produced only modest returns they helped to counterbalance the poor performance of other classes. Hence the importance of diversification.

Developed Market Bonds took the top spot in 2008, returning 7% at a time when global stock, property and commodity markets were in turmoil and falling by 37% to over 50%. They came second in the chart in 2011, another poor year for other investments, but have performed relatively poorly in every other year. With interest rates at rock bottom and likely to rise they remain poor value, yet will still be seen as a safe haven in troubled times.

US High Yield Bonds have been at the higher end of the chart through most of the period, dropping into the bottom four only once in nine years. They reflect the strength of US corporations but lack the volatility of equities.

US Equities performed relatively poorly in the years 2008- 2012 but have been in the top three spots for the past four years. The ‘Trump Bump’ has given them added momentum this year but they are now considered over-valued, although it may be premature to write them off. Developed Market Equities have been very much ‘middle of the range’, occupying the middle three spots for seven out of the nine years. Returns were positive in six out of the nine years.

Emerging Market Equities we covered last time and mentioned again earlier. Suffice it to say they are likely to be found either close to the top of the chart or the bottom! Since they have been close to the bottom for three out of the last four years there is a good chance they will return to the top in the next couple of years.

Commodities have performed very similarly to emerging market equities. Hardly ever in the middle, they are either close to the top of the chart or right at the bottom. In fact they spent six of the past nine years in the bottom three places. They did well last year, coming second only to US High Yield bonds but with increased global spending on infrastructure and defence they could be in for a good run again.

The worst performer in terms of places on the chart would be Global Cash. It was bottom of the chart for four years out of the nine. But, and this is an important but, it was the only asset class never to show a negative return. True, the returns have been miniscule since 2010 but at times when other asset classes are losing heavily it is good to have a healthy level of cash as a buffer. This should preferably be held in bank accounts as opposed to within a portfolio as the charges of the latter would negate the small returns.

Cash within a portfolio should be kept to a minimum to cover charges or should be held as such for only very short terms. But solid reserves in the bank are a must. They will help you cope with short term needs and contingencies and provide a buffer to ensure you can keep up contributions to savings and pension plans and maintain all your long term financial plans.

So which asset class will produce the best return?

By now you will have guessed it. We don’t know, and in any given year it could be any one of the nine listed assets classes. In a year when everything goes belly up it could be cash with its zero return. In a boom growth year commodities and emerging markets can and do produce returns in excess of 75%.

If you could forecast the ‘winning’ asset class every year you would soon be very rich indeed. But your chances of doing so are extremely small. The wisest strategy is to build a core of assets that are most consistently in the middle to upper range surrounded by smaller amounts invested in the assets that are more volatile. The latter will produce bonus returns in good years that should more than counter the losses in poor years. But sticking to the plan is important. Ditching assets after two or three years of poor returns will only lead to disaster. Winning strategies call for patience and a will to stay the course.

Colin Bloodworth, Chartered Member of the Chartered Institute for Securities and Investment (UK), has spent over 20 years in Indonesia. He is based in Jakarta but visits Bali regularly. If you have any questions on this article or related topics you can contact him at colin.bloodworth@ppi-advisory.com, colin.bloodworth@yahoo.co.uk or +62 21 2598 5087

You can read all past articles of Money Matters at www.BaliAdvertiser.biz