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How diversification is working during the coronavirus crisis

One of the ‘joys’ of a market crash is that it enables us to test all those asset allocation theories in real-time. Yay!

A reminder: What we look to do when we construct our passive portfolios is to combine complementary asset classes. This way, when one asset is plunging, other assets will hopefully break our fall.

Diversification stops us placing all our bets on the wrong horse.

What often happens though is that people are not as diversified as they think, or they sack off investing in the more sluggish asset classes during – oh I don’t know – an 11-year bull market. Feeling over-confident, they shun the very asset classes that can stop you losing your mind when reality strikes.

Well reality has struck and then some. Did diversification work?

Diverse interests

If diversification really is ‘the only free lunch in investing’1 then we must have all had a belly full by now.

Let’s see how diversification has delivered even over a relatively short period.

I’ve tracked the impact of the crash on the main asset classes since global equities hit their 2020 peak on 20 February. All the returns quoted are measured from 20 February using Exchange Traded Funds (ETFs), and include dividends.

The ETF returns data and charts come from the excellent portfolio-building service JustETF.

100% equities during the coronavirus crisis

From that February high, global equities hit a low of -25.95% on 23 March. (To relive the panic, read this coronavirus crash edit culled from the Monevator comment threads.)

The markets have rallied since. They were only down -15.45% when everyone knocked off for the weekend on 10 April.

This glib summary understates the drama endured by anyone who stared in horror at this most shocking of bear markets. Many days over the period have seen wild mood swings. The situation has been volatile and movements more violent than normal. It’s been easy to be swept up in the emotion of it all – thanking the heavens for every rally and then wondering where the bottom is as we lurch back down again.

World’s. Worst. Rollercoaster.2

So far, so horrific for hard-charging investors committed 100% to global equities

But how did things look if you diversified into other equity sub-classes that are commonly held to be a good thing?

Equity diversification in a crisis – looks like this

Splendid, splendid. Everything and everyone was screwed!

All correlations ‘go to 1’ in a crisis, and all that. In other words, we all go down the toilet when markets are panicking, and there are no hiding places among equities.

You can see from the line of impact craters (28 February, and 9, 12, 16, and 23 March) that each market fell in lockstep, though the lead changes hands as if they’re a troupe of tumbling acrobats.

Global property and UK equities had the worst of it:

Global Property (the blue line, Amundi’s EPRA ETF)

  • Low point: -36.56%, 23 March
  • 9 April: -22.5%3

UK Equities (the red line, iShares’ ISF)

  • Low point: -32.33%, 23 March
  • 10 April: -20.59%4

Emerging Markets Equities are renowned for their volatility but haven’t bled as much as they did in 2008 so far… (orange line, iShares EMIM)

I looked at a lot of other markets for respite. It was all just various shades of the brown stuff:

US Equities (IUSA)

  • Low point: -26.24%, 23 March
  • 10 April: -14.17%

Global Dividends (VHYL)

  • Low point: -27.96%, 13 March
  • 10 April: -18.04%

Global Multi-factor (FSWD)

  • Low point: -27.09%, 13 March
  • 10 April: -15.33%

Global Momentum (FSWD)

  • Low point: -23.57%, 13 March
  • 10 April: -14.01%

Global Quality (IWFM)

  • Low point: -24.97%, 23 March
  • 10 April: -13.35%

Global Small Cap (WLDS)

  • Low point: -34.5%, 18 March
  • 10 April: -22.14%

The two brighter spots were:

US Tech: Nasdaq 100 (ANXG)

  • Low point: -23.5%, 16 March
  • 9 April: -11.68%

Global Low Volatility (XDEB)

  • Low point: -21.12%, 13 March
  • 10 April: -10.07%

As of 9/10 April, those last two markets show losses that are a quarter to a third less gruesome than global equities.

What does all this reveal? Mostly that equity diversification doesn’t stop your portfolio getting smashed in a bear market.

But it can still help. Your losses would be one-third higher right now if you were 100% in UK equities versus global equities.

But the real diversification benefit comes from other asset classes.

Long government bonds to the rescue

This is why we hold government bonds. As the stock market routs, high-quality bonds rally.

The chart above shows the famed flight to quality in action. As the mother of all recessions potentially looms, investors protect their capital by buying the bonds of countries that should be able to weather any storm, short of all-out disaster.

High-quality bond prices rise and cushion our portfolios from some of the damage born by equities, if we’re correctly positioned ahead of time.

Long-term, high-quality government bonds perform best in a panic. In the chart above you can see how a long-term, UK gilts ETF (GLTL) performed against our global equities ETF (VWRL).

In the first couple of weeks of the crisis, long gilts behaved impeccably. They peaked at 11.9% on 9 March, counterbalancing the slide of equities, even as the Saudis and Russians declared an oil price war. VWRL hit -18.46% on 9 March.

The negative correlation of bonds and equities does not work perfectly. Sometimes it does not work at all.

Equities and long gilts fell together like Holmes and Moriarty from 10 March. Equities slid to -25% on 16 March 16, and long bonds bottomed out at -5.32% on 18 March.

At least your bonds weren’t bombing like equities. But that would have been a hard week anyway you cut it, if you couldn’t pull your eyes off your portfolio.

Why was this happening? Does it matter?

Well, we humans like an explanation. A number of commentators described this phase of the crash as a liquidity crunch: financial titans selling off government bonds and even gold as they tried to cover their losses in equities.

Your best defence as a passive investor – dwelling far below Mount Olympus – is not to watch the war in the heavens. Ignore the daily drama and give your strategy time to work. A burnt offering or two wouldn’t hurt, either.

Long gilts rallied after 18 March to reach 8.52% on 10 April.

You can see that gilts and equities look broadly correlated with each other after the equity market bottom on 23 March. But the equities rally has only taken shares back to -15.45%.

Bonds in a crisis: short-, intermediate-, and long-term varieties

This chart illustrates the difference between short, intermediate and long-term government bond funds when faced with a recession.

As long as inflation isn’t your enemy, then long bonds tend to benefit most from the flight to quality. Their higher interest rates are a haven for investors as equities and interest rates swan dive.

You can see that the long gilt ETF (orange line) has offered the greatest crash protection overall, though it also fell hardest during the sell-off from 10-18 March. Long bond funds are considerably more volatile than their intermediate and short-term cousins. That’s written into the peaks and troughs of this chart.

The intermediate gilt ETF (blue line) has underperformed the long gilt ETF by over 40% as of 9/10 April, while the short-term gilt ETF (red line) barely registers life. It’s more like cash than anything else. That inertia is fine as far as it goes – short-term bonds will preserve most of your capital over brief timescales – but you don’t get a portfolio boost when you need it most.

The performance of the intermediate- and long-term funds shows why cash is not a good substitute for bonds in a crisis, defying the claims of many commentators who couldn’t see the point of bonds because interest rates just had to return to normal after the Global Financial Crisis. Ignore-the-crystal-ball-gazers, Lesson #497.

As with equities, I checked out some popular alternatives to conventional gilts for UK investors:

Global Government Bonds £ hedged (IGLH)

  • High point: 4.32%, 9 March
  • Low point: -1.13%, 18 March
  • 9 April: 1.88%

Global Total Bond Market £ hedged (AGBP)

  • High point: 2.3%, 9 March
  • Low point: -3.45%, 19 March
  • 9 April: -0.38%

The global government ETF is an alternative to the intermediate gilt ETF but has a shorter duration. That shows up in its relative underperformance in this crisis.

The total bond market ETF has a shorter duration still – half that of the intermediate gilt ETF – and it is also hampered in a crisis by some of its lower quality holdings.

The bottom line is that when the world is at panic-stations, a high-quality government bond fund will likely outperform its equivalent total bond market fund due to the flight to quality.

What about inflation-linked gilts and corporate bonds?

I’ve plotted unhedged, investment-grade global corporate bonds (blue line) and long-term inflation-linked gilts (orange line) against our intermediate gilt ETF (red line).

Neither sub-asset class should be expected to cover themselves in glory during a crash, and nor have they.

The inflation-linked ETF did awfully during the liquidity crunch that bottomed out 18-19 March, bringing home an equity-like -14.35% loss. Linkers are there to protect us from rampant inflation (think the stagflationary 1970s) but they’ve generally underperformed conventional gilts in deflationary recessions.

Inflation was definitely higher up most investors’ list of concerns than pandemics before now, so don’t go binning off those linkers!

That massive dump of fresh government debt that’s coming will have to be gotten rid of somehow. Inflated away, perhaps?

Just add gold

No disaster management post would be complete without examining the performance of gold.

The chart shows gold’s contribution to the imbroglio in comparison to global equities and long gilts.

Gold is a real loner of an asset class. You’d normally expect gold to plot its own path, indifferent to the concerns of equities and bonds.

Gold does tend to hold up when the bear is on the loose – doing so around four-fifths of the time according to Larry Swedroe’s review of the gold-as-safe-haven evidence. But it’s erratic. Gold was down 30% at its worst during the financial crisis, for example, before ending up 90% between November 2007 and February 2009.

Gold is doing its job right now. It’s in positive territory – not quite up there with long gilts but better than intermediates – and it bobs about to its own rhythms, acting neither quite like equities nor bonds.

I had a quick look at gold miners and broad commodities while I was as at it. They are regularly cited as plausible diversifiers in the passive investing literature.

Gold Miners (GDGB)

  • High point: 4.46%, 24 February
  • Low point: -27.22%, 13 March
  • 19 April: -2.7%

Broad commodities (BCOM)

  • Low point: -17.63%, 1 April
  • 9 April: -13.32%

While gold miners and commodities may provide long-term diversification benefits, I don’t recall anybody claiming they would help in a panic. Sure enough, they haven’t.

Diversification vs 100% equities

Here’s the tale of the tape when you pit 100% global equities (green line) versus a diversified portfolio of global equities, intermediate gilts and gold (blue line).

This diversified portfolio is:

  • 60% global equities (VWRL)
  • 35% intermediate gilts (GILS)
  • 5% gold (SGLN)

In other words, the kind of portfolio that many passive investors may well have picked. (I didn’t go for long bonds because only the very brave would have invested so heavily in them over the last ten years, though with hindsight you would have been handsomely rewarded for doing so.)

You can see for yourself which portfolio would have helped you sleep better at night. The diversified portfolio is still dominated by equities, so it’s still down. But most of us would be relieved to see losses of only 7% at this stage.

You can also see how a riskier Monevator passive portfolio with a different approach to diversification has fared during the crash.

Spoiler: it’s fine for now. I hope you are, too.

Take it steady,

The Accumulator

  1. First called such in 1952 by Harry Markowitz, the father of modern portfolio theory. []
  2. Note, the flat-top rest points on the chart represent the weekends. []
  3. Last day JustETF are displaying data for, as I write this. []
  4. Last day JustETF are displaying data for, as I write this. []
{ 55 comments… add one }
  • 1 ZXSpectrum48k April 14, 2020, 2:16 pm

    With regard to global government bond funds. Just remember that something like IGLH, in addition to being shorter in duration, is 21% JGBs (Japanese Govt Bonds), 9% BTANs/OATs (French Govt Bonds) and 8% BTPs (Italian Govt Bonds). JGBs can’t really rally due to the BoJs YCC (yield curve control) policy that targets a yield range for 10-year JGBs. BTPs could act like a credit product during a flight to quality and the yield could go up (in this case around 60-70bp since Feb). OATs will often get caught between the rally in Bunds (German Govt bonds) and the selloff in BTPs and end up going nowhere.

    So in something like IGLH you’ve got 35-40% of the weighting not always providing the behaviour you might expect and some of that is going in the wrong direction. If you want a cleaner manifestation of a foreign government bond holding for a “risk-off” scenario, you might want to stick to USTs and Bunds.

  • 2 Neil Richardson April 14, 2020, 2:30 pm

    SGLN smashing GLTL out of the park on 1 month, 6 months and beyond (trustnet today). Just sayin’ 😉

  • 3 Atlanticspan April 14, 2020, 2:39 pm

    As a relative novice to investing,may I ask if it is likely that interest rates may have to rise sharply to enable the government to claw back the money they’ve been forced to outlay to cover salaries of all those laid off, once the pandemic subsides,and if so will this have an adverse effect on Gilts?

  • 4 Dawn April 14, 2020, 3:10 pm

    Great summary.
    Last year moved into index linked gilts and I also bought the royal london global hedged fund monevator suggested. So good moves there.they were hardly hit. No gov bonds though Still got a cash stash.
    I know…..mistake!

    Re balanced abit into equities once as isa opened.
    It’s my first crash with a sizable portfolio and Ive past the test well.
    the rental property is carrying me thru as I’m lucky to have a very good tenant so the rent is paying my income floor so dont have to touch equities.
    So far so good

  • 5 SemiPassive April 14, 2020, 3:29 pm

    I have 5% in gold now, but does anyone have any feelings on a US TIPS ETF as an alternative to index linked gilts for a stagflation-suited asset class?
    For instance iShares INXG has a real yield of -2.22% and huge duration risk so not very appealing, whereas TI5G iShares $ TIPS 0-5 (hedged to GBP) has a real yield of 0.54% and very low duration risk.
    Wondering what the catch is? Or whether any real yield will be lost to hedging costs?

  • 6 Simon T April 14, 2020, 3:33 pm
  • 7 ZXSpectrum48k April 14, 2020, 5:56 pm

    @SemiPassive. On FX hedging costs. I can’t speak for the management charges of various funds. The actual bid/offer slippage for FX hedging is small (a few bps/annum).

    The main “cost” (it’s covered interest parity) is driven by the interest rate differential between the GBP and USD. The good news is the Fed cut much more than the BoE. So that cost is now just 15-20bp per annum. So perhaps reduce the TIPS real yield by say 25bp to be conservative when you make your comparison.

  • 8 MrOptimistic April 14, 2020, 6:35 pm

    @Atlanticspan. All the Central Banks would love to be able to raise interest rates. They haven’t been able to do so as economic growth has been anemic. The US had a go this year, to the outspoken disgust of the POTUS, and swiftly was forced to reduce rates again. So I don’t think anyone expects a significant rise in interest rates for the foreseeable future. Bigger danger is that they go even lower. There are lots of macro economic factors in play, and potentially lots of politics ( think Italy and Brexit).

  • 9 Atlanticspan April 14, 2020, 7:00 pm

    MrOptimistic : Thanks very much for your reply.

  • 10 Fremantle April 14, 2020, 7:48 pm


    An interest rate rise would cripple the UK government’s ability to borrow at below inflation rates.

  • 11 Fatbritabroad April 14, 2020, 8:31 pm

    @the accumulator

    Completely understand the reason for bonds in a portfolio but all historic performance says that equities outperform and will recover. With how comfortable you are with investing risk can I ask why you hold bonds knowing that over the long term and with you being young you will likely underperform a 100% equity portfolio?

    Definitely not saying your wrong (far from it) I’m asking to be educated as I’m currently 100% in both my pension and my Isas at age 39. Well I suppose technically maybe 4 or 5% bonds given I have 80k in life strategy 100 and 10 k for shorter term needs in life strategy 40. I’ve chosen this as I 100 %believe equities will outperform over the longer term so am happy to accept even the massive volatility we’ve seen over the last few months.

  • 12 Marco April 14, 2020, 9:11 pm

    In the last graph plotting 100% equities against the diversified portfolio, I’m guessing the 100% equity portfolio would have started from a higher value than the diversified portfolio do the current value may still be higher despite the greater fall.

    If volatility doesn’t bother you at all, I think 100% global equities is the best choice

  • 13 Fatbritabroad April 14, 2020, 9:55 pm

    @marco at the risk of answering my own question it may be that you Dont ‘need’ the higher returns a 100%equity portfolio gives you to meet your goals Therefore why bother having that kind of stress if you don’t need it. Or you favour stability over greater returns to help you sleep at night.

  • 14 William April 14, 2020, 9:58 pm

    Great timely post.
    How would you amend this post for individuals who only have access to the Vanguard index funds and etf’s. Do the bond elements of the Lifestrategy funds incorporate the long, medium, short and index linked categories that you cover. Perhaps a separate post in the same vein but Vanguard centric.

  • 15 Whettam April 14, 2020, 11:08 pm

    Thank you @TA really interesting, as I said before, much prefer it when we talk about asset allocation. A few observations:

    • interested in your view on property, I think before you said that you did not believe it was a good diversification for equities, but as your post shows property has been impacted much worse than equities. Have you reconsidered your view on it as a diversification? Property still seems to me to behave differently to other assets, but maybe I’m just desperate to justify why I’m hanging on to the worst performing proportion of my portfolio.
    • it’s harder to do with passive investments, but I still believe alternatives have a role. If you look at the sector average for infrastructure and renewable energy investment trusts, over this period, they are both down, but only by about 6% and 3% respectively.
    • The analysis of bond duration was interesting.

  • 16 TCA April 14, 2020, 11:52 pm

    That information is on the Vanguard website but I can’t see a quicker way than manually looking at the individual VLS bond components like the Vanguard Global Bond Index Fund. Alternatively, Morningstar gives some decent fixed income analysis on the VLS products but I don’t know how accurate or up-to-date it is.

  • 17 The Accumulator April 15, 2020, 8:54 am

    @ ZX – that’s really useful to know about global bonds. Thank you for the insight.

    @ Fatbritabroad – not everybody can stomach this level of volatility. I know people who sold out and well before we got down to -25%. They panicked. That’s one of the big reasons to hold some bonds and not try to shoot the lights out with 100% equities. There will be times when you think it’s all in ruins. Some people just don’t need the stress, as you rightly say.

    There’s plenty of historical evidence to show that what you give up in return is compensated for by enduring much less volatility. All depends on your timeframe.

    There also comes a point when you cross a threshold. Suddenly you’re not so young any more, or have much more skin in the game, or are less than 10 years from needing some of those investments… without realising it your risk tolerance has gone down, but you were enjoying the bull market so much you didn’t know until the big one hit. Again, bonds can protect you in this situation, as they have me.

    Bonds are also your dry powder. You can make large profits by rebalancing back into equities when they’re on sale.

    Finally, we don’t know that equities will outperform bonds. Or by enough to make them worth while. They’re risky for a reason. What if they stayed down for 20 to 30 years? Equities went down 90% in the Great Depression. If you had bonds you could pay your bills. Most people didn’t have them.

    @ Whettam – my view on property was particularly influenced by the argument that it’s not a good diversifier during a downturn. We’re seeing that in spades right now. I don’t mind holding some, but I don’t expect it to make a great deal of difference over the long term.

  • 18 xxd09 April 15, 2020, 10:09 am

    Warren Buffet aimed to set up a retirement fund for his wife who is not a money buff
    90% S&P 500 index fund and 10%US Treasuries
    As near 100% equities as could be BUT I would guess that it would be a massive fund in the tens of millions of dollars
    So it can be done but sadly not an option for most of us
    A rough guide for most investors is to have their age in bonds
    That way you get the best of both worlds
    You pays your money and takes your choice

  • 19 Simon T April 15, 2020, 10:24 am

    I am late to the party on understanding bonds, however this DIY short term bond ladder “calculator” I found interesting. https://www.blackrock.com/tools/portfolio-analysis/ibonds. Only really looking and investigating as I am so close to early retirement (November), luckily I have been 90% in cash since July 2018 and putting in normal monthly pension contributions – as such I am only 0.3% down since that date. I have been checking out the following strategy. 1 year cash, 1 year premium bond, 3 years bonds, 5 years 60/40, the rest (25 years) 100%. For the splits mostly HSBC, MyMap and Vanguard split across three platforms with a little bit of Fundsmith (invested a few weeks ago now up 10%), gold as before – up 15%, City of London – 0% but the dividend in the future at the low price I paid would be nice. Right – back to the conf calls

  • 20 Simon T April 15, 2020, 10:30 am

    And a quick question if I may (sort of related), what happens to a bond at its maturity rate. Do the platforms suddenly get cash? or do you have it physically sell it?

  • 21 SemiPassive April 15, 2020, 10:31 am

    Thanks for the info ZXSpectrum48K, much appreciated.

    Whettam, agree the green energy infrastructure trusts, things like JLEN and BSIF have held up better than commercial property which has been terrible.
    I’m actually up overall on JLEN and BSIF having topped up near the bottom 3 weeks ago, but have halved my commercial property exposure and taken a kicking there.
    It’s not just shops and industrial units but offices that will suffer if working from home becomes much more prevalent in the future. The genie is out of the bottle there, but I think it is a good thing. Commuting is risky for anyone not wishing to be part of the herd immunity experiment, bad for the environment and a complete waste of time for anyone who can work remotely.
    Anyway, sorry to get sidetracked from the main message from TA. Only intermediate to longer dated government bonds offer useful diversification in panic events.

  • 22 Guido Maluccio April 15, 2020, 10:59 am

    Thanks again @TA for the insight on asset allocation and the action of long gov bonds in particular. This is really backed up in the Portfolio Charts article that you recently shared in the weekend reading “High Profits at Low Rates: The Benefits of Bond Convexity”. Most of my bonds are in two ishares ETFs, AGBP (global aggregate bonds) and IGLH (global gov bonds), both hedged to GBP. Now I regret not focusing more on long duration U.S. treasuries, e.g. IDTG ishares US treasuries 20+yr.

  • 23 Pendle Witch April 15, 2020, 11:23 am

    Lightly touching on the property point above.

    My husband has been locked out of his online employer DC pension account (held with Aviva) since late March.

    It’s taken 3 weeks to get a response from Aviva, and they say it is due to their Property Fund being suspended. Ok, but that is a small part of his allocation, and he can’t access anything at all. Totally locked out. This seems to me to be absolutely shocking.

    Has this happened to anyone else?

  • 24 Naeclue April 15, 2020, 11:55 am

    @Simon T, you don’t need to sell bonds at maturity, they are automatically paid out by the issuer, as are the coupons. It has been many years since I held a bond to maturity. I sell once they drop below 5 years to maturity and reinvest in a 12-13 year bond, although I might sometimes top up shorter dated bonds to balance out the ladder. Gilt funds/ETFs are very cheap now though and you might find it simpler to just invest in those instead, e.g. IGLT 0.07% per year. I am considering switching the ladder to ETFs/funds instead. The only complication with this is with matching the duration you might want.

    Regarding your strategy (1 year cash, 1 year premium bond, 3 years bonds, 5 years 60/40, the rest (25 years) 100%), this clearly will not stay the way you set it up for too long, so you need to think about managing it (when/how to rebalance) and how much that will cost you. Don’t forget to included taxes if you have substantial savings outside tax shelters. Capital gains tax issues on rebalancing for example can creep up as time goes by. Also, holding bonds/bond funds outside tax shelters are very tax inefficient as the running yields can be relatively high and fully taxed at your marginal rate, unlike lower taxes on dividends.

  • 25 SemiPassive April 15, 2020, 12:05 pm

    Hi P, presumably you mean through the Aviva member dashboard. Mine is functioning OK but I don’t hold any property funds with them (the one I do is an investment trust in my SIPP, but holding property as an OEIC fund is a terrible idea in general as you will have now discovered with the suspension).
    Aviva run on a FNZ platform which is a bit flakey to be honest, maybe it cannot offer any kind of fund switch functionality if any of the funds are locked, but you’d think it would at least let you see valuations and transactions. So yes, rubbish excuse from them.

  • 26 marked10 April 15, 2020, 12:58 pm

    When contrasting asset classes against a global tracker is it correct to do it against the dividend paying version (VWRL) or is it better to do it against the accumulator (VWRP)?I do concede that VWRP isn’t that old, but it did pay a notional dividend in April.

    Probably not too much of an issue for such a small time window, and against Bonds I understand since they pay out it should be contrasted to VWRL, but against Property and other classes??? I’d think the accumulator share would be a fairer comparator particularly against longer time windows.

    I only note this since I’m trying to buy some VWRP for my kids JSIPP’s to find the platform I use doesn’t list it as an option, although they potentially can if the Platform gets approval within 2 weeks. They do VWRL so may go with that as 2 weeks could be a long time in this climate. Do others not bother with the accumalators (inside an ISA / SIPP because of the tax implications otherwise)? I was looking at trading volumes of VWRL versus VWRP. VWRL has 100x the daily trading volume. Is that habit (as VWRP is new) or some other reason?

  • 27 Pendle Witch April 15, 2020, 1:24 pm

    @SemiPassive, thanks for the response. Yes, via the member dashboard. Calls weren’t answered and he eventually got an answer via email. Still, no chance of any panic selling, I suppose.

    Wrt property, I believe our home provides large enough property exposure, but I don’t give advice – especially to him since I wouldn’t want the blame! 😉

  • 28 Whettam April 15, 2020, 2:40 pm

    @Pendle Witch I’m also an Aviva Membersite customer and also hold the Property fund. Same experience “locked out” of site, they eventually confirmed by Email that its because of suspended property fund. I have raised a formal complaint and suggest you might want to do same. In my experience Aviva customer service is abysmal, charges are pretty good for passive funds though, which is why I have stuck by them for some of my portfolio.

    With regards to property, I don’t mind that its performance has tanked and is worse that equities (well I do 😉 but you know what I mean) for me its there as a diversifier and I still believe that commercial property behaves as an asset class, differently to my own home and equities. This time it has been hit worse, but maybe in other bear market scenarios, it will behave differently (better) than equities, like for example it did in tech bubble.

    Long term, with decline in retail and rise in home working, then I think that could still be OK for property investments, because eventually the land will be repurposed and the asset will still have value.

  • 29 Pendle Witch April 15, 2020, 5:05 pm

    Thanks, Whettam, I’ll recommend the formal complaint. Ironically, we are not able to see how his diversified portfolio held up overall, which is the topic of @TA’s post, since he can’t see it! Same for you…

  • 30 Hospitaller April 15, 2020, 5:32 pm

    Very instructive. It will be interesting to see the behaviour of the asset classes over the next month or so. It is not uncommon in equities crashes based on a global crisis for the crash to have two main legs. The first drop at sight of the theoretical problem, then some recovery as monetary and fiscal responses are announced, then a second drop as the market wrestles with the reality that this really is a problem. I expect another move down but do not how far it may go. The second move rarely gets to a worse point than the first. But this is a situation of such uncertainty that that pattern may not hold here.

    I am certainly very glad that I bundled a significant amount into GBP-hedged roughly 10 year US straight treasuries, which did nicely. I took the profit and reinvested it into equities near the last bottom.

  • 31 Fatbritabroad April 15, 2020, 8:34 pm

    Thanks for that yes I understand for me I was intending to do this in 7 years when my fixed rate mortgage is up. Pay a big chunk off and then de risk. I’ll be 46

  • 32 Fatbritabroad April 15, 2020, 8:36 pm

    @hospitaller I thought in the financial crisis the second drop was worse. Wasn’t it then when it went down to 50% loss?

  • 33 The Investor April 15, 2020, 10:02 pm

    @Fatbritabroad @Hospitaller — Sorry to be a curmudgeon, but speculating about how the stock market is going to perform in the short-term — something barely anyone has any demonstrable record in doing well with consistently, or at least if they have we’re not going to thrash it out and prove it here — isn’t really appropriate for this passive investing, stick to the plan thread. Cheers! 🙂

  • 34 cat793 April 16, 2020, 8:35 am

    Not relevant for most of you on here I know but interesting nonetheless I think to see how some of the most highly rated and popular Superannuation funds are suffering in Australia because of diversification into illiquid alternatives to stocks and bonds. Not helped by the Australian governments decision to allow people to take $20k out of their funds during this crisis:


  • 35 Al Cam April 16, 2020, 9:07 am

    Interesting article, with possible faint echoes of liquidity issues that plagued a former “star manager”.
    It also reminded me of recent chatter on Monevator about alts.

  • 36 Whettam April 16, 2020, 9:09 am

    @Pendle Witch – Aviva will (eventually) respond to an Email asking for details of current fund prices / valuation – I intend to ask this question every month until I have visibility online again.

  • 37 Boltt April 16, 2020, 9:22 am

    Talking about Aviva, have you come across this 2015 article about some Aviva clients with “rights” to make trades retrospectively! It terrified me.



  • 38 ZXSpectrum48k April 16, 2020, 10:54 am

    Re: alts. The article on Supers is very skewed. It chooses to use a super which has very small balances of just $37k to illustrate the damage of allowing $20k redemptions. The average balance in the super industry at end-19 was 185k, 5x the example they used. It’s pretty obvious that if you select any fund, built to a be a long-term retirement product, to have a one-off 54% redemption in a stress scenario then you will have issues! It’s a silly govt policy but also a silly example. Imagine, Vanguard, Blackrock etc all found themselves with a 54% redemption on all their ETFs and funds at the same time? You think that would go well? You think they could get out of a fraction of that?

    It also represents the ridiculousness of the whole “alts” terminology. Stuff like commercial property REITs, low-end infrastrcture and levered loan portfoio have been understandably illiquid after getting smacked down. By comparison, high grade infrastracture are doing really well in relative terms due to their high sensitivity to bond discount rates. They have “bond-like” characteristics. Some renewable infrastructure funds I own are only down a few percent due to these PVing impacts.

    It’s also down to the mix of “alts”. My better half’s super is down around 8% year-to-date. The damage has been done mostly by listed equities. The alts component is down just 4% (as of 16-Apr) with hedge funds up over 10%, infrastructure and private equity flat (very skeptical on that one tbh) but property and loan funds down large.

  • 39 Al Cam April 16, 2020, 1:05 pm

    So, as usual, the devil is probably in the details.
    However, to use your words “the ridiculousness of the whole “alts” terminology” sure does not help the average joe – but again nothing new there either I guess!!

  • 40 Whettam April 16, 2020, 3:15 pm

    I think the original article shows that there is huge variation within all the high level asset classes (e.g. not all bonds are the same). Surely alternatives are just a particularly “clumsy” asset grouping, because it’s such a “hotch potch” of assets e.g. hedge funds, private equity, debt, renewables, infrastructure, commodities, etc. Personally for me they have been the other highlight of my portfolio over the time period looked at in the article, the others being a With Profits Policy and my intermediate bonds (as I have said before, just with I’d had a higher allocation to those!)

  • 41 Edward April 16, 2020, 4:31 pm

    I’m very confused. I thought the value of bonds goes up when the price of shares goes down as a ‘flight to quality’, yet the bond funds available to me have also fallen.

    Most of my pension savings are in the company scheme, so I have a limited choice of funds. The global equity fund is down about 17% (although it was down 25% at one point) and the global bond fund is down 3%.

    The best performers have been the fixed and inflation-linked annuity trackers (UK gilts mainly) which are up around 0.5-1% since Feb, although they were down 11-13%, respectively, at one point.

    A large further drawdown in equity prices seems likely, as the reality of the self-inflicted global depression sinks in, which of these funds should perform the best?

  • 42 Vanguardfan April 16, 2020, 5:58 pm

    @hospitaller, I am relieved to see you posting again! How are you and family doing?

  • 43 Fatbritabroad April 16, 2020, 9:57 pm

    @accumulator I wasn’t speculating anything I was asking a question about when the low point was during the gfc?

  • 44 BillG April 17, 2020, 2:00 am

    Excellent article showing the performance of the asset classes over a 3M period. It illustrates the nature of each asset class in a crash. However to get a complete picture we should perhaps compare each strategy over the whole market cycle. Say from the last crash this crash say the low point to low point. I strongly suspect that a portfolio of 100 equities would have out performed and other asset class. Also taking the low point in the cycle would favour a balanced approach whereas comparing market peaks between cycles I suspect would favour 100% equities even more. If I am correct a balance portfolio would be less volatile but in general a 100% equity portfolio would return a greater profit. so your 20year old should go 100% equities and take a more balanced approach say 5 years before retirement if they plan to purchase an annuity.

  • 45 The Accumulator April 17, 2020, 8:46 am

    @ Fatbritabroad – I think you’ve got me mixed up with self-confessed curmudgeon, The Investor. I didn’t question your question.

  • 46 cat793 April 17, 2020, 9:27 am

    @zx. My concern is also the temptation funds have to opt for an overly optimistic valuation for some of these assets to prevent panic. I understand that some funds have particular issues that bigger funds with a different membership profile may be less vulnerable. The average balance may seem high but the median would not be I would guess.

  • 47 The Investor April 17, 2020, 9:46 am

    @Fatbritabroad @TheAccumulator — It was more the two of you (@Hospitalier, not @TA!) going down a path that I thought better to cut off before it started persuading other general readers that they would do well to start to try and time market bottoms et cetera.

    I’ve got nothing against anyone who wishes to do that sort of thing (I do) but I prefer to try to keep these passive threads as passive as possible. Cheers!

  • 48 Fatbritabroad April 17, 2020, 12:24 pm

    Sorry yes I realised that but had already posted. Fat fingers! @investor understood

  • 49 ZXSpectrum48k April 17, 2020, 12:48 pm

    @Edward. Bonds are not a homogeneous asset class. As I mentioned in the first comment on this post, govt bonds will typically rally in this situation, but a few will sell off due to enhanced credit risk. You also have supras and agency bonds that can do either. The spread of corporate bonds to govt bonds will widen, so whether they rally or sell-off depends on how much govts bond yields fall compared to that spread widening.

    Passive investment, broadly, is a good idea for most investors. Nonetheless, it’s still important that investors know the composition of their passive funds, else the behaviour may not fit one’s expectations.

  • 50 Matthew April 17, 2020, 1:38 pm

    Short dated quality bonds might not be cash, but not miles off, it’s almost like saying you’ve already sold out some of the corporate portfolio ahead of a crash – so no wonder it’d dilute the experience you’d feel in the market – less crash, less gain, less invested in risk basically

  • 51 MrOptimistic April 17, 2020, 4:04 pm

    @ZX. Yes, the cacophony of opinions on the various forums is bewildering: this or that is ‘ cheap’, the buying opportunity of a generation, only a fool would buy now ( ok that’s me) sounds like Painless Poorer in The Paleface with the contradictory advice:
    Potter : He draws from the left so stand on your toes… There’s a wind from the east, better lean to the right… He crouches when he shoots, better aim to the west… He draws from his toes, so lean toward the wind. Ah ha! I got it!

    Convinces me I should just go fully passive which I intend to do.

  • 52 Al Cam April 19, 2020, 8:47 am

    Out of interest, did you do any comparisons of alternate global equity trackers to VWRL.
    I ask as, by way of an example, the HSBC FTSE All World Index ended up at pretty much the same place as VWRL by 9/10 April but did not track the actual Index so well en-route.
    And, by 17/4/20, HSBC was slightly ahead of the actual Index.
    I suspect this may be down to different replication/sampling methods used.
    What do you reckon?

  • 53 The Accumulator April 19, 2020, 9:28 am

    @ Al Cam – agreed. Over the short-term there’ll be differences between trackers that are ostensibly the same thing due to varying management. I’ve generally found, without exhaustively investigating it, that Vanguard trackers are pretty faithful to the index – at least when it comes to the products I know well.

  • 54 Martin B April 19, 2020, 6:48 pm

    That’s another great article, great insights, thank you for it!
    I wonder what does the current situation means for bonds going forward, though.
    The interest rates are already at all-time low, so it can only (or at least most likely) go up from here, which will mean failing prices. At the same time the 10Y gilt yield is just 0.30%. Isn’t it better to just open a saving account with let’s say Marcus Bank, where the interest is 1.20%?
    Basically the only way to make some return with bonds right now is, if investors continue moving towards safer assets. I understand that people don’t hold bonds to boost returns, but an online savings account sounds even safer.
    What do you guys think?

  • 55 The Accumulator April 22, 2020, 8:43 am

    @ Martin B – The problem is that ‘interest rates can only go up from here’ has been the mantra of the last 12 years. And then interest rates fell. Moreover, interest rates went negative in Europe. The lesson I’ve learned is that events can defy expectations. No matter how rational those expectations seemed at the time. My best defence against that is diversification. Cash for sure. Government bonds too because their ability to spike during a panic has really helped me weather the storm so far. Linkers because you can never count inflation out. Wish I had some gold but I don’t. Focussing on one thing, like current interest rates, risks not being prepared for the unexpected.

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