The common catchphrase from the 1970 movie Love Story goes, “Love means never having to say you’re sorry.” This can be modified and applied to diversification in an investment portfolio to read, “Diversification means always having to say you’re sorry!” This certainly applies to the performance metrics we have seen from diverse asset classes so far in 2019.
A baseline moderately aggressive strategy with a 70% equity and 30% fixed income allocation produced a 14.16% cumulative return for the year-to-date period ended June 30, 2019 (see the chart). The component asset classes were spread amongst the usual suspects including large cap, mid cap, and international equities; plus a few special purpose alpha generators. The “core” asset classes turned in their benchmark returns, whereas the alpha generators did there job by adding (and subtracting) excess return. Who were the winners and losers over this 6-month horizon?
On the equity side, the S&P 500 represented by the iShares Core S&P 500 ETF (IVV) turned in a great performance with 18.33% total return for the period. However, others did better! Positions in the factor space, momentum and minimum volatility (MTUM and USMV) produced benchmark-beating returns of 19.28% and 18.91%, respectively. Likewise, mid-cap and small cap equities won out as well with 19.87% and 18.49% returns ouflanking the S&P 500. On the flip side, however, REITs marginally underperformed, but international developed equities and emerging market equities underperformed the S&P 500 by wide margins for the first half of 2019.
On the bond side, the Bloomberg Barclays U.S. Aggregate Bond Index (through the iShares AGG ETF) turned in a stellar return (for bonds!) of 5.84%. Other alpha generators in the fixed income space, however, all beat the “agg” handily including investment grade corporate bonds, emerging market bonds, high yield bonds, and bank loans with YTD returns of 11.92%, 11.29%, 9.91%, and 6.62%, respectively. Only short term bonds lagged the agg with a measly 2.15% return. So much for placing a bet on the consensus views that rates were going to “go up” and that credit spreads were ready to spike!
So, despite some good calls, being diversified cost this strategy some upside… over the long haul we hope to have more ups than downs.