We’ve recently experienced a market in which the rising tide of global central bank easing has lifted virtually all boats. With everything going up regardless of price or quality, has diversification through active management lost its sheen? The rolling returns for the S&P 500® Index provide a crystal-clear illustration of the reality of market cycles. At 364%, the past decade has been impressive—and this bull may yet have room to run—but remember that markets cycle down, as well as up.
S&P 500® Rolling 10-Year Cumulative Total Return1 (%)
12/31/1935 - 3/31/2019
Active vs. Passive Fund Flows2
- Over the past decade, most net new money has flowed into passive strategies, and away from active managers.
- But do investors understand both sides of the passive tradeoff? In exchange for seeking to track 100% of the market’s upside, they are exposed to 100% of the potential downside.
- A portfolio should strike a healthy balance between the full market exposure of index funds and an active approach that pursues compelling risk-adjusted returns.
- Differentiated active managers who have successfully navigated market cycles in the past may help keep an investor’s sweet tooth from derailing their long-term goals.
Performance of a Diversified Portfolio3
- After a rocky fourth quarter of 2018, most global markets recovered during the first quarter of 2019. A broadly diversified portfolio of assets returned 9.1% in Q1.
- U.S. large- and small-cap stocks led the way, with the S&P 500® and Russell 2000®Indexes rising 13.7% and 14.6%, respectively. International and emerging markets stocks each returned nearly 10% during Q1.
- Real estate posted strong performance for the quarter, with the FTSE Nareit Equity REITs Index up 16.3%. The rally also lifted fixed income, particularly high yield bonds, and commodities.
Past performance is not indicative of future results.
1Ned Davis Research. Calculated monthly 12/31/35–3/31/19. © 2019 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All rights reserved. See NDR disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo. Rolling returns are the percentage return for the 120-month period ended with the year shown.
2Source: Simfund. Active = Active Open-End Mutual Funds and Active ETFs; Passive = Index Mutual Funds and Passive ETFs. Neither includes direct sales, Money Market Funds, or Fund-of-Funds.
3Source: Virtus Performance Analytics.
Annualized Returns In %
as of 3/31/2019
The Diversified Portfolio assumes the following weights: 25% in the S&P 500®, 10% in the Russell 2000®, 15% in the MSCI EAFE®, 5% in the MSCI EM, 25% in the Bloomberg Barclays U.S. Aggregate, 5% in the Bloomberg Barclays U.S. Treasury Bill 1-3 Month Index, 5% in the Bloomberg Barclays Global High Yield Bond Index, 5% in the Bloomberg Commodity Index, and 5% in the FTSE Nareit Equity REITs Index. Assumes annual rebalancing. Data represents total return for stated period. The Diversified Portfolio is not representative of any Virtus portfolio. Investors should consult their financial professional to identify suitable portfolio allocations. There is no guarantee that a diversified portfolio will outperform a non-diversified portfolio, or that diversification among different asset classes reduces risk.
Index Definitions—The S&P 500® Index is a free-float market-capitalization weighted index of 500 of the largest U.S. companies. The index is calculated on a total return basis with dividends reinvested. The Russell 2000® Index is a market capitalization-weighted index of the 2,000 smallest companies in the Russell Universe, which comprises the 3,000 largest U.S. companies. The MSCI EAFE® Index (net) is a free-float-adjusted market-capitalization weighted index that measures developed foreign market equity performance, excluding the U.S. and Canada. The index is calculated on a total return basis with net dividends reinvested. The MSCI Emerging Markets Index (net) is a free float-adjusted market capitalization-weighted index designed to measure equity market performance in the global emerging markets. The index is calculated on a total return basis with net dividends reinvested. The Bloomberg Barclays U.S. Aggregate Bond Index measures the U.S. investment grade fixed rate bond market. The index is calculated on a total return basis. The Bloomberg Barclays Global High Yield Bond Index is a multi-currency flagship measure of the global high yield debt market. The index represents the union of the US High Yield, the Pan-European High Yield, and Emerging Markets Hard Currency High Yield Indices. The high yield and emerging markets sub-components are mutually exclusive. Until January 1, 2011, the index also included CMBS high yield securities. The index is calculated on a total return basis. The Bloomberg Barclays U.S. Treasury Bill 1-3 Month Index includes all publicly issued zero-coupon U.S. Treasury Bills that have a remaining maturity of less than 3 months and more than 1 month, are rated investment grade, and have $250 million or more of outstanding face value. In addition, the securities must be denominated in U.S. dollars and must be fixed rate and non convertible. The Bloomberg Commodity Index is composed of futures contracts on physical commodities and represents 22 separate commodities traded on U.S. exchanges, with the exception of aluminum, nickel, and zinc. The FTSE Nareit Equity REITs Index is a free-float market capitalization-weighted index measuring equity tax-qualified real estate investment trusts, which meet minimum size and liquidity criteria, that are listed on the New York Stock Exchange, the American Stock Exchange, and the NASDAQ National Market System. The index is calculated on a total return basis with dividends reinvested. The indexes are unmanaged, their returns do not reflect any fees, expenses, or sales charges, and they are not available for direct investment.
IMPORTANT RISK CONSIDERATIONS
Investing involves risks and the possible loss of principal. This report is based on the assumptions and analysis made and believed to be reasonable by the Adviser. However, no assurance can be given that the Adviser’s opinions or expectations will be correct. This report is intended for informational purposes only and should not be considered a recommendation or solicitation to purchase securities.
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