One of my favorite charts is the annual Callan Institute Periodic Table of Investment Returns. I like it because it shows in one chart how all of the major classes have done over time. Also, it shows the variability of returns such that the chart almost looks random!
The 2024 Table (below) shows some interesting data points. First, it is no surprise to anyone who follows the news that the S&P 500 Large Cap Equity index led all major asset classes (again!) in 2024 with a total return of +25.02%! Trailing behind it by a fair amount was Small Cap Equities at +11.54%.
A surprise is that High Yield bonds came in third at +8.19%; certainly a function of Fed easing during 2024 with the requisite narrowing of credit spreads and bullish economic forecast. Cash equivalents was in the middle of the pack at 5.25%. Bringing up the rear was Global Ex-U.S. Fixed Income at -4.22%; partly a result of the strong dollar.
Point in time analysis is nice, but the trends also tell a story. Certainly, U.S. Large Cap Equity took the lead the most recent two years in a row, but also has been in the top spot 4 of the last 6 years! Moreover, looking over a longer horizon it has a 20-year average annual return of +10.3% and an even higher return over the most recent 10-years at +13.1%! Emerging Market Equities, the darling with outsized 30%+ returns in the mid-2000’s, continues to labor with middling returns in 2024 and a smallish 20-year average annual return of +5.5%.
Readers of this blog post are well aware of me bemoaning the lack of diversification benefits over the past few years. Certainly, with the S&P 500 loaded with booming mega-cap tech stocks like Nvidia, Microsoft, Alphabet, Meta, Amazon, Tesla, etc. it is hard to fault that index for leading the pack; well-deserved! Bonds, meanwhile, have been a necessary evil with middling returns to help smooth the risk profile of diversified portfolios.
To that end, D&A client accounts over the past couple of years and currently have been overweighted in equities with a strong tilt to growth and momentum factors to help capture some of that excess return. We still favor some exposure to small/mid-cap equities and are overweighted there relative to benchmarks but are less interested in international and emerging market equities where we are underweighted. On the fixed income side, we continue to keep bond duration short to core bonds in order to protect against interest rate risk while the yield curve remains a bit flat, but steepening.