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Bringing performance into context after a shocking 2022
Where did it all go wrong?
Having experienced one of the more chaotic periods for financial markets in at least a decade, investors could have been forgiven for thinking 2022 would be a little less eventful than years past. The end result was the exact opposite, however, with the traditional ‘balanced’ portfolio delivering one of the worst 12-month periods of performance in the history of sharemarkets.
Anyone with a basic knowledge of investing understands that markets don’t increase everywhere, yet the tailwind of falling interest rates since the 1970s clearly lulled many into a false sense of security.
2022 offered a reminder that forecasts, as always, tell us more about the forecaster than the future, with very few predicting the type of market capitulation that occurred across asset classes in the year just past. For those used to the heady days of 2020 and 2021, when returns were counted in multiples, not percentages, this likely came as a shock.
The most popular investments of the last few years, such as technology companies or even government bonds, fell by as much as 30 per cent and 13 per cent respectively. The result was an incredibly tough period for most portfolios constructed according to traditional asset allocation approaches.
So how did portfolios perform in 2022? Vanguard offers one of the most popular diversified or ‘balanced’ funds to investors, with their core strategy falling by 11 per cent over the 12 months. This compared with a fall of 10.6 per cent for its benchmark.
Among the more popular comparisons for those managing diversified portfolios is the AMI Mixed Asset Balanced index, which tracks a bucket of similar strategies that are broadly split between equities and fixed income. This benchmark fell 6.8 per cent for the year.
The divergence in returns between ‘balanced’ funds that follow the same broad approach to asset allocation was incredibly wide this year and among the widest in recent history. There were many reasons for this, something that all investors should be considering as they review portfolios in a period of heightened uncertainty.
What didn’t work in 2022?
To put it simply, anything broadly correlated with interest rates suffered one of the worst periods of performance in several decades, and in some cases in history. Starting with perceived ‘low risk’ investments, both US and Australian government bond values fell by more than 10 per cent over the year. That is, the so-called safe haven portion of portfolios was among the biggest detractors for the year and is unlikely to ever be fully recovered.
The performance of the technology sector is well known, with the Nasdaq falling by 30 per cent after reaching another all-time high on 1 January 2022, but it was joined by some of the largest companies in the world. The likes of Netflix, Amazon, Facebook, Tesla and many other ‘quality’ companies fell by as much as 50 per cent in a short period of time.
Hindsight is a wonderful thing, but it is, was and remains clear to many that interest rates near 0 per cent were unsustainable, and the valuations of high-growth companies were being driven predominantly by the falling cost of capital.
What went right?
Unfortunately, not much. The Australian sharemarket was a rare standout, once again benefitting from a heavily mining- and energy-tilted index, as the war in Ukraine sent the price of everything from oil to coal and agricultural commodities to multiyear highs. The S&P/ASX200 fell by just 5.5 per cent for the year, with those able to avoid the high-growth technology sector or lesser-quality smaller companies significantly outperforming.
Private-market assets like private equity and venture capital offered a ballast, but many are now questioning the accuracy of their valuations and whether performance will eventually lag public markets. Among the biggest contributors to performance was a willingness to move to shorter duration or floating-rate fixed-income investments in recent years, when few were willing to consider this as an alternative.
Where to from here? That’s a piece for another day.
