Nothing’s Quite Like US Equities

I alluded to this in a post last week, but it’s worth expanding on the gap in performance between US equities and everything else so far in 2013.  While US stocks are up more than 10%, other asset classes are showing less robust returns.  Morningstar’s Core fixed income indices, which had provided equity like returns in years past, are flat to down in 2013, and even high yield is only up 2.8%.  Meanwhile foreign equities are similarly weak compared to the US:  the MSCI World index excluding the US is only up 4.7% in dollar terms, while the MSCI emerging markets index is down year to date.  Commodities are also in a lull, with gold down 4%.

All this has contributed to some respectable but not necessarily stellar returns for a diversified asset allocation portfolio.  Investors with moderate risk tolerance are likely up somewhere around 4% this year, while conservatively positioned investors may be up as little as 1%.

As we head into Q2, this mediocre performance compared to equities could be a source of consternation for advisors and their clients.  The areas that are lagging are precisely the ones that most investors have pushed into in order to diversify away from US equities since the financial crisis.  To complicate matters, as advisors conduct quarterly reviews, most clients will know that the Dow has made all time highs, and the discrepancy may tempt clients to chase performance.  And so greed overtakes fear.  Sic semper conservativis.

Asset Class Performance Year to Date

Fixed Income ETF Growth Since 2000

Over the past decade there have been two major trends in the asset management industry:  the growth of ETFs and the shift in asset allocation away from Equities towards Fixed Income.  Below are some charts that use data from the Fed’s Flow of Funds report to look at both of those trends.

The first set of charts show the growth of ETFs relative to mutual funds.  In 2000 only 2% of equity assets in listed funds were in ETFs and Fixed Income ETFs didn’t even exist.  Today 17.7% of equity assets and 5.5% of Fixed income assets are in ETFs.  Combined ETFs hold 12.5% of assets in listed funds–$1.3T in ETFs vs. $9.2T in open end mutual funds (Note: I excluded closed end funds to make this easier on myself).

ETF Share of Equity


ETF Share of Fixed Income

Since I had the data from the first two charts, I figured it would be interesting to put together the chart below, which quantifies how much share Fixed Income has taken from Equities in the last decade.  In 2000 Fixed Income made up only 25% of the assets in listed funds.  Thanks to the financial crisis, that number has grown to 40% today overall (but only 17% of ETF assets are in Fixed Income).  It’s worth noting that a standard balanced portfolio is 60% Equities 40% Fixed Income, which means Fixed Income allocations may be reaching a tipping point.

FI Share of Listed Fund Assets