Asset Allocation & Rebalancing Review | 19 June 2013

The great divergence of returns among the major asset classes rolls on in 2013. Indeed, the range of performance has widened since the previous edition of Asset Allocation & Rebalancing Review. US stocks are still at the top of the list while emerging market equities continue to toil in red ink at the bottom on a year-to-date basis. The only change in the extremes is that the leading return is higher and the trailing return is lower.

It’s anyone’s guess how the divergence will evolve in the second half of the year. But as 2013’s midpoint draws near, trailing return correlations are comparatively low in recent history among the following list of ETF proxies for the major asset classes. This is exactly what opportunity looks like when it comes to searching for fertile ground in the rebalancing game. But as you might expect, a comparatively wide array of trailing performance is uncomfortable for most folks and so relatively few investors are able to exploit these conditions on a timely basis. Once again, we have a real time demonstration of why the rebalancing bonus can be so attractive, and earned by so few: the best opportunities tend to arrive at rocky moments in the capital markets.
For another perspective on how the year stacks up so far, here’s a recap of an equally weighted portfolio of all the major asset classes in terms of relative changes to the asset allocation. Using a start date of Dec. 31, 2012, the chart below depicts the current portfolio structure and the range of allocations year to date. The strategy for this illustration is equally weighting everything and letting the unmanaged allocations fluctuate through yesterday’s close (June 18).

Finally, here’s a visual profile of how the major asset classes have performed this year in relative terms through June 18, 2013. In the chart below, all the ETF prices have been reset to 100 as of Dec. 31, 2012: