On paper, the set-up sounds toxic. An ongoing war on Europe’s eastern border, a new conflict in the Middle East that could turn into a regional battle, and sharply higher interest rates to combat inflation. It doesn’t sound like the conditions that are conducive to robust gains, but year-to-date results for global portfolios suggest otherwise.
Despite an array of risk factors, diversified strategies are poised to record a solid gain for 2023, based on numbers through Friday’s close (Nov. 10). CapitalSpectator.com’s Global Market Index (GMI) is up a robust 9.1% year to date – roughly double the “safe” current yield on most legs of the US Treasury yield curve. GMI holds all the major asset classes (except cash) in market-value weights and represents a competitive benchmark for multi-asset-class portfolios.
Several asset allocation ETFs are posting similar results this year. The iShares Core Aggressive Allocation ETF (AOA), for example, has climbed 9.0% so far in 2023.
The key driver of this year’s performance: healthy performance in equities, US stocks in particular. Using a set of ETF proxies, American shares continue to lead the 2023 horse race with an outsized performance, based on Vanguard Total US Stock Market Index Fund (VTI), which is up 15.1% this year. That’s far ahead of the rest of the field, but note that foreign stocks in developed (VEA) and emerging (VWO) markets are also posting gains year to date, albeit modestly.
The main drag on global diversification in 2023: high-grade bonds, commodities overall and most flavors of property shares. Indeed, US and foreign real estate stocks (VTI and VNQI, respectively) are nursing year-to-date losses of more than 5% each.
With a month and a half to go there’s still room for a reversal of fortunes in calendar year results, of course, and given the state of the world no one should discount that possibility. But for now, the allure of global diversification remains intact and compelling.
With the benefit of hindsight, it’s obvious that heavily overweighting US stocks and minimizing just about everything else would have juiced returns substantially. Alas, highly concentrated portfolios tend to impress mostly on an ex post basis.
By contrast, the embedded risk management that arises in global diversification across asset classes has proven to be a tough benchmark to beat–again. Why? The future’s still uncertain and always will be. In turn, predicting 2024’s winners and losers will be no less challenging.
Learn To Use R For Portfolio Analysis
Quantitative Investment Portfolio Analytics In R:
An Introduction To R For Modeling Portfolio Risk and Return
By James Picerno
