Now that the first quarter is over, I thought it would be good time to take a broad look at a few asset classes.I asked Morningstar to run some data for me on mutual fund returns for domestic equities, fixed-income and alternatives.
For the first quarter, and for the past 12 months, equities trounced the other two. In the three-year timeframe, fixed-income came out a little higher than equities with alternatives trailing a distant third.
That probably isn’t a surprise if you’ve been paying any attention to the markets. But the picture gets more interesting when you look at fund flows. Morningstar didn’t have first-quarter fund flows available yet, so the timeframes aren’t exactly the same. But they’re close enough to draw a rough picture that shows investors are still moving in and out of markets at the wrong time. For the 12-month period ending with February, investors pulled $142 billion out of equity funds, roughly the same time period that these funds posted 17.9% return.
It’s just one more example of investors zigging when they should zag. To quote the cover story of our current issue of On Wall Street, equities have been throwing a great party, but almost nobody showed up.
So what to do for your clients? They may well be scared of equities after the drubbing they took in recent years, and it’s hard to blame them. It would take an exceptionally steely nerve to jump into equities after a meltdown, but that’s what they would have had to do in order to really enjoy this party.
But the lesson isn’t that investors should have plowed back into equities at a certain point. Rather, the lesson (and this is the oldest lesson in the book) is about the importance of diversification. During and after the meltdown, there was a lot of angst over the idea that modern portfolio theory was dead. Diversification didn’t work because everything declined at the same time.
But if you consider a longer period—at least judging from these three broad asset classes—they are not moving in lockstep with each other. To be sure, you would want to segment asset classes more finely than just equities, fixed- income and alternatives. But viewed as broad groups, they are indeed taking diverse paths again. Except for alternatives, it was a generally positive path, but even then they truly excelled at different times.
But this is supposed to be your chance to tell us your thoughts. What are your clients asking about these days regarding diversification? How are you providing a level of safety in their portfolios? Weigh in and leave your comments below.
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