Are the last four years testing the power of diversification?

Since 2013, U.S. equities have significantly outperformed all other major asset classes. Investors may be wondering why they should remain diversified; however, historical asset class performance analysis may give investors more confidence in a diversified portfolio. Diversified investors focused on the long term have been rewarded with superior risk adjusted returns relative to the S&P 500 Index, which is a winning combination.

Think beyond the S&P 500 Index

A Diversified Portfolio* has historically smoothed out the ride over the long term without sacrificing returns.

 Roll over for a breakdown of the diversified portfolio

Source: FactSet. As of December 31, 2016. Click here for a list of representative indices. Past performance is no guarantee of future results.

Diversification does not guarantee a profit or protect against a loss in declining markets.
The indices are unmanaged, are not available for investment and do not incur expenses.
The performance shown is not indicative of the performance of any mutual fund or other investment product.

Kevin Cooper,
Head of Portfolio Research

In this video, Kevin discusses why investors are driven to do the wrong thing, at the wrong time, for the wrong reason and why a diversified portfolio can help close the gap between market returns and investor returns.

Q3 2017 Market Returns Review

After strong returns in the first half of 2017, global equities continued to rally in the third quarter on improved economic data, strong corporate earnings, and global accommodative monetary policies. Fixed income and real estate assets generated positive returns as the U.S. Federal Reserve (the "Fed") did not raise the target short-term interest rate at the September meeting.

  • Despite ongoing geopolitical risk surrounding North Korea, emerging markets equities continued to outperform all other asset classes as global economics improved, energy prices were stable, and the U.S. dollar weakened
  • International small-cap and foreign developed equities outpaced U.S. equities on improving Eurozone economic data, U.S. dollar retrenchment, and receding political concerns, particularly in France where pro-Euro President Emmanuel Macron continues to gain influence
  • In U.S. markets, the S&P 500® Growth Index (5.3%) continued to outperform the S&P 500® Value Index (3.5%) as the information technology sector generated robust returns
  • U.S. bonds outperformed real estate as the 10-year Treasury note rose from 2.31% to 2.33%, after bottoming out at 2.05% on September 7
  • During the third quarter, the Fed took a break from raising short-term interest rates, but implied a third hike in the fourth quarter, and announced an October start to the unwinding of its massive balance sheet

Source: FactSet S&P Dow Jones Indices. Click here for a list of representative indices. Analysis based on 20 years ending September 30, 2017.  Past performance is no guarantee of future results.

Annual Drawdowns: Keep Things in Perspective

Since 1980, the index has generated 29 calendar years with a negative drawdown that ultimately finished with a positive return for that year. Furthermore, the S&P 500 Index has averaged a +12.9% return since 1980 despite several years of double-digit drawdowns.


36 Year Average S&P 500 Index Return = 12.9%

Returns

Drawdowns

Source: FactSet S&P Dow Jones Indices. See below for representative indices. Analysis based on 20 years ending December 31, 2016.  Past performance is no guarantee of future results.

Risk/Return Profile of Major Asset Classes

Diversified investors focused on the long-term have been rewarded with returns comparable to the S&P 500 Index with less risk, which is a winning combination. As the extreme volatility of 2007—2009 demonstrated, a key to successful investing is to keep calm and remain diversified.

Source: FactSet, S&P Dow Jones Indices. See below for representative indices. Analysis based on 20 years ending September 30, 2017.  Past performance is no guarantee of future results.

The diversified portfolio is based on a 5% allocation to cash, 25% allocation to investment grade bonds, 5% allocation to municipal bonds, 20% allocation to S&P 500 Index, 10% allocation to small caps, 5% allocation to commodities, 15% allocation to international equities, 5% allocation to emerging markets, 5% allocation to REITs, and a 5% allocation to alternatives.

Investments in debt securities are subject to credit and interest rate risk. An increase in interest rates typically causes the value of bonds and other fixed income securities to fall.

Investments in international securities are subject to certain risks of overseas investing including currency fluctuations and changes in political and economic conditions, which could result in significant market fluctuations. These risks are magnified in emerging markets.

Investments in small-capitalization companies are subject to greater price volatility, lower trading volume and less liquidity than investing in larger, more established companies.

Real estate investments are subject to factors such as changing general and local economic, financial, competitive and environmental conditions.

Alternative investments are speculative, subject to high return volatility and involve a high degree of risk including, but not limited to, the risks associated with leverage, derivative instruments such as options and futures, distressed securities, may be illiquid on a long term basis and short sales. There can be no assurance that these types of strategies will achieve their objectives or avoid substantial losses. Alternative investments may also be subject to significant fees and expenses.

Effective August 24, 2016, the Barclays indices were renamed Bloomberg Barclays indices.

The Bloomberg Barclays U.S. Corporate High Yield Bond Index (Representing U.S. High Yield) is a total return performance benchmark for fixed income securities having a maximum quality rating of Ba1 (as determined by Moody’s Investors Service).

Bloomberg Barclays U.S. Aggregate Bond Index (Representing Investment Grade Bonds): The Bloomberg Barclays U.S. Aggregate Bond Index is an index of the U.S. investment-grade fixed-rate bond market, including both government and corporate bonds.

The Bloomberg Barclays U.S. Municipal Bond Index (representing U.S. Muni Bonds) is a broad-based benchmark that measures the investment grade, US dollar-denominated, fixed tax exempt bond market. The index includes state and local general obligation, revenue, insured, and pre-refunded bonds.

The HFRI Fund Weighted Composite Index (Representing Alternatives): is a global, equal-weighted index of over 2,000 single-manager funds that report to HFR Database. Constituent funds report monthly net of all fees performance in US Dollar and have a minimum of $50 Million under management or a twelve (12) month track record of active performance. The HFRI Fund Weighted Composite Index does not include Funds of Hedge Funds.

MSCI World Index Ex USA (Representing International Equity): The MSCI World ex USA Index captures large and mid cap representation across 22 of 23 developed markets countries*—excluding the United States. With 1,021 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.

MSCI Emerging Markets Index (Representing Emerging Market Equity): The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. The MSCI Emerging Markets Index consists of the following 24 emerging market country indices: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Pakistan, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey, and the United Arab Emirates.

The MSCI All Country World Index (ACWI) ex USA Small Cap (representing International Small Cap) captures small cap representation across 22 of 23 Developed Markets (DM) countries (excluding the US) and 24 Emerging Markets (EM) countries*. With 4,329 constituents, the index covers approximately 14% of the global equity opportunity set outside the US.

Russell 2000® Index (Representing U.S. Small Cap Equity) Measures the performance of approximately 2,000 small-cap companies in the Russell 3000 Index, which is made up of 3,000 of the biggest U.S. stocks. The Russell 2000 serves as a benchmark for small-cap stocks in the United States.

The Dow Jones U.S. Select REIT Index (representing U.S. Real Estate) tracks the performance of publicly traded REITs and REIT-like securities and is designed to serve as a proxy for direct real estate investment, in part by excluding companies whose performance may be driven by factors other than the value of real estate.

The S&P 500 Index (Representing U.S. Large Cap Equity) is a capitalization-weighted index of 500 stocks. The S&P 500 Index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The indices are unmanaged, are not available for investment and do not incur expenses.

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