Mark Andraos

The Emerging Markets Dry Spell Continues - but is there a light at the end of the tunnel?

August was a particularly tough month across nearly all asset classes, as stocks were down anywhere from 6-10% for the month depending on which market you’re looking at. Past experience shows us that volatility and market draw-downs are relatively common, particularly if you parse performance on a month-to-month basis. The true test for long-term investors comes when there are bad multi-year periods. One specific asset class fits the bill on this one: the emerging markets.

Since coming off their highs in late 2007, the emerging markets have a total return of (-24.3%) through the end of August – that’s a (-3.5%) per year return for nearly the past 8 years. In the same period, the S&P 500 is up around 5.5% per year since the last cycle peaked. A few obvious questions come to mind when looking at this data:

 

1. Why would an investor allocate any money to emerging markets when they have been lagging for so long?

2. Why would a diversified investor continue to hold emerging markets during this type of environment?

 

While both are valid questions, it’s important to look at some historical data to get an idea about why anyone would hold assets in a market that is so prone to a boom/bust cycle. Since the inception of the MSCI Emerging Markets Index in 1988, the index averaged a 10.7% annualized return. During that same time period, the S&P 500 Index returned a fairly similar 10.1%. The annual returns for the two markets are nearly identical; however the path to get there certainly was not. The below table shows the total returns for each market and the respective time periods:

 

 

Emerging Markets

S&P 500

1988-1993

545.5%

122.0%

1994-1998

(-38.5%)

193.9%

1999-2007

420.2%

38.0%

2008-2015

(-18.8%)

60.0%

Annual Returns

10.7%

10.1%

(Source: Ben Carlson, CFA – “A Wealth of Common Sense” & YCharts)

 

If we look at what happens when we take the two markets and utilize a simple 50/50 allocation split, the real benefits of diversification start to take place. Assuming an annual rebalance, the 50/50 portfolio provides an annual return of 11.6% (almost a point and a half higher than either of the individual indices!)

It is important to remember that asset allocation is a long-term game. There may be cycles that last several months or years before investors see the diversification benefits of holding assets that have different risk and return characteristics. By having a focused and disciplined rebalancing approach, we believe that we are better able to navigate certain market environments and conditions.

 

Mark Andraos is a Portfolio Analyst at Heller Wealth Advisors. If you would like to learn more about the benefits of asset allocation and diversification, please email Mark at  This email address is being protected from spambots. You need JavaScript enabled to view it. . 

 

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