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Talk to UsThere are many asset classes available to investors these days, but choosing the right ones for your portfolio can be difficult. Learn more about why portfolio construction matters below.
Many investors rely on a limited number of assets as they build their portfolios. They tend to think that accessing a range of equities from various countries or regions represents diversification. We believe that this approach does not go far enough. The historical returns of regional equities have often been similar to one another.
To see historical results, select two regions and watch $10,000 grow.
Source: GSAM. As of June 30, 2017. Past performance does not guarantee future results, which may vary. The rolling 20-year time period was chosen to represent a long-term investment window. Volatility, measured by standard deviation, is a risk calculation that characterizes the dispersion of individual returns around the average return. It is a measure of the degree of uncertainty of returns during any single time period.
GROWTH OF $10,000: A graphical measurement of a portfolio's gross return that simulates the performance of an initial investment of $10,000 over the given time period. The example provided does not reflect the deduction of investment advisory fees and expenses which would reduce an investor's return. Please be advised that since this example is calculated gross of fees and expenses the compounding effect of an investment manager's fees are not taken into consideration and the deduction of such fees would have a significant impact on the returns the greater the time period and as such the value of the $10,000 if calculated on a net basis, would be significantly lower than shown in this example.
Global Equity is represented by the MSCI World Index (total return, unhedged, denominated in USD).
UK Equity is represented by the FTSE 100 Index (total return, unhedged, denominated in USD).
Europe Equity is represented by the EURO STOXX 50 Index (total return, unhedged, denominated in USD).
Asia Equity is represented by the MSCI Pacific Index (total return, unhedged, denominated in USD).
US Equity is represented by the S&P 500 Index (total return, unhedged, denominated in USD).
Over time, a reliance on one or two asset classes can mean that investors miss out on a number of potential standout investment opportunities. How have the returns of Global Equity or Global Aggregate Bonds compared to the returns of other asset classes?
The coloured bars represent the annual returns of asset classes, ranked from best to worst.
Source: GSAM as of 12/31/2016. Past performance does not guarantee future results, which may vary.
Global Aggregate Bonds are represented by the Barclays Global Aggregate Bond Index, total return, hedged to USD, denominated in USD. This index represents an unmanaged diversified portfolio of fixed income securities, including US Treasuries, investment-grade corporate bonds, and mortgage backed and asset-backed securities.
US Equity is represented by the S&P 500 Index, total return, unhedged, denominated in USD. The S&P 500 Index is the Standard & Poor’s 500 Composite Index of 500 stocks, an unmanaged index of common stock prices.
Europe Equity is represented by the EURO STOXX 50 Index, total return, unhedged, denominated in USD. This index tracks large European companies.
Asia Equity is represented by the MSCI Pacific Index, total return, unhedged, denominated in USD, which tracks the performance of 5 developed markets in the Pacific region.
UK Equity is represented by the FTSE 100 Index, total return, unhedged, denominated in USD, which is designed to track large British companies.
Emerging Market Equity is represented by the MSCI Emerging Markets Index, total return, unhedged, denominated in USD. The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets.
Global Real Estate is represented by the FTSE/NAREIT Global Index, total return, unhedged, denominated in USD, an index measuring the performance of companies involved in ownership, disposal, and development of real estate.
Global High Yield Bonds is represented by the Barclays Global High Yield Index, total return, hedged to USD, denominated in USD. The Barclays Global High Yield Index provides a broad-based measure of the global high-yield fixed income market.
Emerging Market Debt is represented by the JPM EMBI Global Diversified Index, total return, hedged to USD, denominated in USD. The JPM EMBI is an unmanaged index tracking foreign currency denominated debt instruments of 31 emerging markets.
Local Emerging Market Debt is represented by the JPM GBI-EM Global Diversified Index, total return, hedged to USD, denominated in USD. The JPM GBI-EM is an unmanaged index tracking local currency denominated debt issued by emerging market governments. Before 2003, we use the JPM EMBI Global Diversified Index (defined above) as a proxy due to data availability.
Global Small Cap Equity is represented by the S&P Developed Small Cap Index, total return, unhedged, denominated in USD. The S&P Developed ex US Small Cap Index covers the smaller companies from developed countries.
Global Infrastructure is represented by the S&P Global Infrastructure Index, total return, unhedged, denominated in USD, which tracks 75 infrastructure companies from around the world in an attempt to track the listed infrastructure market. It includes companies engaged in energy, transportation, and utilities.
Commodities are represented by the S&P GSCI Commodity Index, total return, unhedged, denominated in USD. The S&P GSCI Commodity Index is a composite index of commodity sector returns, representing an unleveraged, long-only investment in commodity futures that is broadly diversified across the spectrum of commodities.
Alternatives are represented by the HFRI Fund of Funds Index, total return, hedged to EUR, denominated in USD. The HFRI Fund of Funds Index is an equal weighted, net of fee index composed of approximately 800 fund-of-funds.
In keeping with the classic investment adage “it is hard to time the market,” forecasting which investments to own, and when to own them, can be difficult. To examine investors’ timing decisions, we can use mutual fund cash flows as a window into how investors move in and out of their investments. Fund flows suggest that investors may have missed out on the full return potential of some asset classes as a result of their timing decisions. This timing effect is the "investor return gap," shown in light blue.
In other words, the investor return gap is the penalty the average investor bears by entering and exiting investments at the wrong times compared to the average investment manager, who generally stays invested for the long term.
For example, as shown by the first bar, the average investor in Japanese Stock reaped 6.4% (dark blue), but missed out on an additional 2.8% due to timing decisions (light blue), since the average manager achieved a 9.1% return (dark blue + light blue).
As the chart shows, some commonly owned investments have accounted for outsized proportions of portfolio risk. For instance, core equities historically have accounted for as much as 99% of overall portfolio risk.
As of March 2017. May not sum to 100% due to rounding. Risk allocations that appear as "0%" have been rounded to 0%. Past performance does not guarantee future results, which may vary. This is for illustrative purposes only. Diversification does not protect an investor from market risk and does not ensure a profit.
The illustrative portfolios provided herein have certain limitations. Such portfolios are hypothetical and do not represent actual trading, and thus may not reflect material economic and market factors, such as liquidity constraints, that may have had an impact on the Adviser's actual decision-making. These portfolios are shown for illustrative purposes only and do not purport to show the portfolio holdings or sector weightings of an actual account. It does not constitute a recommendation of exposures for any client account. The exposures for the illustrative portfolios will differ from the exposures for a client account because of specific client guidelines, objectives and restrictions.
“Diversifiers” represents a blend of emerging market debt, local emerging market debt, global high yield, global real estate, global small cap equity, and emerging market equity. “Alternatives” represents daily liquid alternative investments.
While investors must make choices about their individual risk tolerance, we believe a disciplined approach to portfolio construction creates the potential for improved returns and reduced risk.
Past performance does not guarantee future results, which may vary.
“Diversifiers” represents a blend of emerging market debt, local emerging market debt, global high yield, global real estate, global small cap equity, and emerging market equity. “Alternatives” represents daily liquid alternative investments.
The illustrative portfolios provided herein have certain limitations. Such portfolios are hypothetical and do not represent actual trading, and thus may not reflect material economic and market factors, such as liquidity constraints, that may have had an impact on the Adviser's actual decision-making. These portfolios are shown for illustrative purposes only and do not purport to show the portfolio holdings or sector weightings of an actual account. It does not constitute a recommendation of exposures for any client account. The exposures for the illustrative portfolios will differ from the exposures for a client account because of specific client guidelines, objectives and restrictions.
Volatility, as measured by standard deviation, is risk calculation of the dispersion of individual returns around the average return. It is a measure of the degree of uncertainty of returns during any single time period.
Given the uncertainty pervading the current equity and interest rate environment, we believe now is a particularly important time to consider diversifying portions of traditional portfolios. Although specific allocations may vary over time, we view diversification as a long-term effort. Today, for many investors, this may be easier to accomplish than ever. Investors can access a number of diversifying and alternative strategies in broadly available investment tools such as mutual funds and exchange-traded funds.
Many investors have a heavy home-country bias, meaning they tilt their allocations towards what's familiar. Such a bias can mean missing out on a world of potential opportunity.
There are many tools that can potentially be used to diversify a portfolio. A "diversifier" is defined as a complement to an investor's traditional, or core, portfolio. Their risks have tended to diverge from the risks of core equities. Incorporating diversifiers into a well-balanced portfolio potentially enables investors to access several different sources of risk and return.
Seek to potentially provide exposure to asset classes that are broadly representative of the market
Have the potential to increase returns and reduce risk by tapping into differentiated markets
More efficient portfolio construction with higher return potential and increased diversification
Diversifiers are asset classes with attractive return potential and historically lower correlations when compared to core investments such as investment grade fixed income and most equities of developed markets. We believe the diversifiers below can be deployed in search of improved returns or lowered risk, and may help build more balanced portfolios.
For illustrative purposes only. Diversification does not protect and investor from market risk and does not ensure a profit. The portfolio risk management process includes an effort to monitor and manage risk, but does not imply low risk. There is no guarantee that these objectives will be met.
Alternatives are an additional tool that can potentially be used to diversify a portfolio. Alternative strategies may complement an investor’s traditional portfolio by employing tools such as shorting and/or leverage. Incorporating alternatives into a well-diversified portfolio potentially enables investors to access a differentiated source of return, lower the overall risk of their portfolios, and provide shallower drawdowns during market crises.
Past performance does not guarantee future results, which may vary. Drawdowns are declines in investment value. The use of alternative investment techniques such as shorting or leveraging creates an opportunity for increased returns but also creates the possibility for greater loss. Leverage increases a Fund’s sensitivity to market movements. Funds that use leverage can be expected to be more “volatile” than other funds that do not use leverage. This means if the instruments such a Fund buys decrease in market value, the value of the Fund’s shares will decrease by even more. Losses on short positions are potentially unlimited, since the positions lose value as the asset that was sold short increases in value. Taking short positions leverages a Fund’s assets, because the Fund is exposed to market movements beyond the amount of its actual investments.
Use this tool to explore the potential benefits of adding alternatives to a hypothetical portfolio.
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