‘M5’  Comparing Asset Classes


Exhibit-1 (above). The graph shows performance of M5 Composite Indices (M4 for foreign currencies) over twelve months to date. Note how dominant equities were in this time. Bear in mind that M5/M4 composite indices are all equal-weight. Both, US equities and US Bonds were among the strongest performers in their respective asset class and these two have a greater weighting in the pension fund benchmark than in this concept.

Exhibit-2 (below). In the upper portion of the exhibit, a graph displays the relative performance of equities (M5 Composite) and of bonds (M5 Composite) to cash (M5 1-Month LIBOR return). The bar chart in the lower part of the exhibit shows the balance between equities and bonds, equal to the distance between the two lines in the upper graph. Note how comparatively short-lived periods are during which bond returns keep rising relative to those of money market investments. For the period between May 2012 and June 2014, Bond returns were more or less equal to money market returns. The same can be said for the period June 2016 to December 2018.

Arguably, strategic asset allocation may as well operate without bonds. They lack the return potential of equities while simultaneously also lacking the stability of ‚cash’ returns. There is even less rationale for strategic bond holdings during times of negative yields. In any event, the exhibit illustrates powerfully how important an active, strategic asset allocation is in order to optimize return and risk.


Exhibit-3 (above). The table gives values for each asset class composite index (upper section)  and calculates rates of return (lower section) for the corresponding time frames. The best and worst returning asset class in each time frame is highlighted in color.

In 2019 (currently coinciding with latest 12 months and year-to-date), equities have performed exceedingly well, more than three times their annualised return over ten years and significantly better than the multi-asset benchmark (which itself is impacted by it’s equity weighting of 40%). Further, equities have been the best performing asset in every single time frame shown.

Exhibit-4 (below). The graph shows the performance of all assets classes across the latest 36 months, re-based to 100 at inception. Most meaningful gains between January 2017 to August 2018 were lost again in the final quarter of 2018.

Money market returns, and foreign currencies were essentially flat in this time


Exhibit-5 (above) shows the same data as in the previous graph, but now for a period of ten years, again rebased to inception. Unsurprisingly, money market returns were almost flat. From a Swiss base, FOREX exposure was a meaningful drag on performance, although most of the decline on currencies against CHF occurred in 2010 & 2011. From 2015 on, CHF exchange rates were virtually stable.

While equities and bonds performed well on balance, the first two years if this time frame saw bonds outpace equities. With the latter experiencing a set-back in 2015 to 2016, for a time, bonds and equities had produced nearly identical returns (January 2016) . Since then, equity markets clearly outperformed bond markets again.

Exhibit-6 (below). The graph shows all four asset classes in a grid, with normalised rates of return on the y-axis, and normalised observed risk on the x-axis. The dashed diagonal indicates an even ratio between return and risk.

The ‘odd one out’ in this  illustration are currencies, having combined meaningful risk with near zero return across the three years covered in this chart.

While equities showed more than 3x the risk of bonds, their return was in proportion with that.


Exhibit-7 (above). The table lists metrics describing risk and return in numerical form, also for the latest three years. Note the significant horizontal distortion of monthly rates of change from ‘normal distribution’ for equities and bonds.

Also noteworthy is the similar frequency of positive and negatives changes in the two main asset classes.

Exhibit-08 (below) displays normalised rates of returns, calculated across trails of 36 months and shown for a period of ten years.

Since the end of 2011, neither bonds nor equities have had negative readings, and more often than not, normalised returns for equities have been considerably higher than those of bonds. But of late (latest 12 months), there is a notable stabilisation of momentum in equities, at a high level.


Exhibit-9 (above). The graph shows ‚observed risk’, calculated over trails of 36 months each. Remarkable is the similarity of risk levels between equities and foreign currencies from the end of 2011 onward. This is an ex-post measure of risk.  Excessive readings on either end of the historic spectrum (distinct for each asset class) will likely suggest a reversal.

Exhibit-10 (below). The graph shows on-balance annualised returns for all asset classes across latest three years, emphasising the dominance of equities in this time. This contrasts sharply with an identical display covering two decades worth of returns (Exhibit-11).


Exhibit-11 (above). The graph illustrates annualised performance of all four asset classes since the end of 1999. The comparison with Exhibit-10 drives home the massive swings in relative performance of asset classes to one another, over the course of the last two decades.