The Enduring Power Of Passive Asset Allocation

By James Picerno: The Global Market Index (a passive benchmark of all the major asset classes) has a history of delivering competitive returns against its actively managed competitors over the past decade. Surprising? Not really. It's tough to beat the market generally, and the lesson applies to asset allocation too.

By James Picerno: Actively managed asset allocation products are hot. The supply is growing rapidly and there's a broad variety of strategies to choose from. The product designs range from conservative balanced funds to aggressive trading-oriented strategies and they're available in open-end mutual funds and ETF formats.

By James Picerno: Monday's article on the average to above-average results that usually describe a passive allocation to all the major asset classes brought charges of foul play from some quarters.

Over the next few weeks investors will be focused on how best to make their retirement savings grow. The solution for many will once again revolve around plowing their annual contribution into high-cost, underachieving mutual funds, which have been the go-to investment vehicle for Canadians for years. It’s a tough cycle to break, but one that investors should consider in favour of many other more attractive opportunities if they want to make the most of their investments.

James Picerno submits: The big shift in the mix for the Global Market Index (a proprietary benchmark that uses a passive weighting of all the major asset classes) over the past year has been a drop of nearly three percentage points for U.S. bonds and the same for foreign developed-market government fixed income. Meantime, the leading increase in relative terms for the 12 months through this past May has been a rise in the weighting for foreign-developed market stocks.

By James Picerno: Last week, I updated the Global Market Index’s (GMI) relative performance scorecard vs. actively managed asset allocation products. Now it’s time to look ahead.

James Picerno submits: March was generally kind to risk exposures. The main exceptions were commodities overall, foreign government bonds in developed markets and investment-grade U.S. bonds. But the slippage in that trio was more than offset elsewhere in the capital markets. As a result, our passive benchmark of the major asset classes—the Global Market Index (GMI)—rose by handsome 3.4% last month. That's the highest monthly performance since last September's 3.5% gain.

James Picerno submits: Economic anxiety is taking a toll on risky assets so far in August. The mid-month summary for the major asset classes boils down to: bonds are up, stocks, REITs and commodities are down. High-yield fixed income has lost ground on a price basis as well this month through August 16, based on representative ETFs listed in the table below.