‘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 classes 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 120 months, re-based to 100 at inception. Once more, a superior performance by equities is evident in these ten years, although that trend started in the summer of 2012. Up to that point, only bonds had generated a meaningful return.

From the point of view of Swiss Franc based investors, foreign currency exposure has been a clear drag on performance, to the tune of some 20%, with most of that damage accruing from the end of 2009 to mid 2011. Since then, there has been no meaningful appreciation of the Swiss Franc although there was upward pressure on the Franc again in the first part of 2015.


Exhibit-5 (above). Using the pension fund benchmark as a reference, this table compares returns during the last ten years. The lower portion of the table shows the result of regression analyses, using that benchmark as independent variable. The regression is based on 120 monthly rates of change. Although equities have a 40% weighting in the benchmark, the M5 composite is the only asset class to have a reasonably meaningful congruency with it (r-squared = 66.7%). While equities were the engine of benchmarks returns (being the only asset with a positive return differential), the equity index has a highly negative Alpha.  As can be expected, equities’ Beta is very high.

Exhibit-6 (below). The graph also shows regression analysis data but this time only r-squared values, calculated on the basis of 36 month trails. The apparent fluctuations result from pronounced price changes of equities, either up, or down, in spite of the constant weighting of equities in the multi-asset benchmark (LPP-C40) used as independent variable.


Exhibit-7 (above). The graphs shows relative performance of each asset class against LPP-C40. While equities have been the only asset class to outperform, they are below a peak in relative performance reached in the fourth quarter of 2018.

Exhibit-8 (below). The list is based on the three years to date. Note how monthly rates of change of most asset classes are heavily distorted horizontally and thus not ‚normally distributed’. The seemingly attractive reading for ‘percentage of positive months’ in money market returns (=94%) belies the fact, that these are indeed minimal at best (and the M5 Money Market Composite being impacted by US Dollar LIBOR, masking negative rates in other currencies). Equities, having experienced 69% of monthly changes in positive territory, are not far from the upper boundary of the typical range of any bull cycle. This ‘maturity’ is most advanced in US equities.

The multi-asset benchmark has the second highest percentage of positive changes (72%) and combines a fairly attractive risk-adjusted return (+3.5% annually), with a decent nominal return (+5.7%), all tribute to the general benefits of co-mingled data, or even diversification. Be that as it may, these readings have recently declined, due to the drag from bonds.


Exhibit-9 (above). Showing trails of annualised rates of return over 36 months each, this graph highlights how equities have been the superior asset class from the end of 2011 onward. Current readings are somewhat below the peak reached in 2014/2015. Even so, the data is not far from levels that historically have proven unsustainable.

Exhibit-10 (below). 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 and excessive readings on either end of the spectrum will likely suggest a reversal. Currently, risk for equities seems comparatively low in a historic context, but not so low as to constitute a warning.


Exhibit-11 (above). The graph illustrates annualised performance of all four asset classes and the pension fund benchmark over three years to date. Obviously, except for equities, all other asset classes have diluted performance in this time. This is a rather different picture than that of the much longer time frame shown in the subsequent exhibit.

Exhibit-12 (below). Unlike the three years to date comparison of exhibit-11, this graphs shows returns for the (nearly) twenty years since the end of 1999. In spite of their recently very powerful performance, equities have generated less than half the benchmark return. Over these two decades, it had been bonds to propel any multi-asset yardstick.

The comparison of exhibits 11 & 12 implies one or both of the following scenarios: Either equities have been a catastrophic investment between 1999 and 2009 (autumn 2009  being start of the ten year period illustrated in several exhibits above), and/or bonds are now similarly overpriced, and subject to corrections, as equities were during the first few years of the millennium (2000 to 2003). That said, without excessively low bond yields, equities would unlikely be able to maintain current valuations. In that sense, a ‘perfect storm’ may be building in financial markets.