Duvet day here at Monevator as we update our asset allocation quilt with another year’s worth of returns.

The resulting patchwork reveals the fluctuating fortunes of the major asset classes across a decade, and invites a question…

Could you predict the winners and losers from one year to the next?

Asset allocation quilt 2024

The asset allocation quilt ranks the main equity, bond, and commodity sub-asset classes for each year from 2015 to 2024 from the perspective of a UK investor who puts Great British Pounds (GBP) to work.

We’ve also squeezed in money market funds this year. These can be thought of as cash-like, if not quite as safe as money in the bank.

Here’s what you need to know to read the chart:

• We’ve sourced annual returns from publicly available ETFs that represent each sub-asset class.

• The data is courtesy of justETF – an excellent ETF portfolio building service.

• Returns are nominal1. To obtain real annualised returns, subtract the average UK inflation rate of approximately 3% from the nominal figures quoted in the final column of the chart.

• Returns take into account the Ongoing Charge Figure (OCF), dividends or interest earned, and are reported in pounds.

• Again, these are GBP results. If our numbers differ from yours, check that you’re not looking at USD returns. (It’s either that or our minds have been obliterated from staring too long at the crazy pixel explosion above.) 

Shady business

While our chart may look like the worst pullover pattern ever, it does offer some useful narrative threads.

For starters we can see investing success is not as simple as piling into last year’s winner. The number one asset in one year typically plunges down the rankings the next. A reigning asset class has only once held onto its crown for two consecutive years – broad commodities achieving the feat across 2021 and 2022. 

Long periods of dominance are possible – see US equities. S&P 500 returns have only dropped into the bottom half of the table once in the past decade (in 2022), and stand head and shoulders above the rest in the ten-year return column. If you started investing after the Global Financial Crisis then you have US stocks to thank for the bulk of your growth. 

The danger is such patterns gull us into thinking it will always be thus. Whereas in reality, the asset allocation quilt for, say, 1999 to 2008 would have looked very different. US stocks lost 4% per annum over that ten-year stretch.

I suspect S&P 500 tracker funds were a touch less popular back then!

Indeed, US stocks have fallen behind the rest of the world many times over the last century. 

And credible voices warn we can’t expect US large caps to rule forever. Albeit such commentators simultaneously acknowledge that they cannot predict when regime change may come.

(We’ve written more about this problem and what you might do about it.)

The golden thread

Gold looks attractive as the leading non-equity diversifier in our chart. Its ten-year return of 10.2% is incredible for an asset class that theorists claim has no intrinsic value. 

It’s volatile stuff though. When we first created this asset allocation quilt in 2021, gold’s ten-year return stood at zero after inflation 

I remain personally ambivalent about gold.

If you’re a young accumulator you don’t really need it. However aging wealth-preservers may be grateful for gold’s ability to improve risk-adjusted portfolio returns.

And the yellow metal may mitigate sequence of return risk as part of a portfolio designed to cushion the downside. 

A chequered past

It’s notable how a truly awful few years can completely contaminate our perceptions about an asset class. 

Bond’s ten-year returns were perfectly satisfactory back in 2021. But they have taken a drubbing since.

Now UK government bonds (gilts) look like a liability by the light of the last ten years.

Yet higher bond yields are almost certain to deliver better returns from bonds over the next decade, provided inflation is tamed and the global political outlook doesn’t go from bad to worse. 

Over the long run, ditching a key diversifier like bonds is likely to prove a mistake. Splitting your defensive measures between nominal bonds, index-linked bonds, cash, commodities, and gold does make sense though. 

Getting defensive

A major Monevator theme over the past couple of years has been to improve our coverage of the defensive asset classes – delving deeper into how they work, when they work, and what the risks are. 

Take a look at:

• Why bonds aren’t enough 
• Defensive asset allocations
• Cash versus bonds
• Money market funds
• Inflation hedging
• Is gold a good investment
• Why commodities belong in your portfolio
• Decumulation portfolios: The No Cat Food portfolio and the All-Weather portfolio 

I appreciate that’s a lot of links. But the more you know, the less the disco dance floor of asset returns in our chart above will cause you a headache. 

The colour of money 

The bond crash has caused many investors to simply replace bonds with cash.

We think of cash as an asset class like any other and so we’ve introduced it to the table, using a money market ETF as a proxy. 

More than any other asset class, cash (here our money market ETF) lurks in the lower half of the table. 

That’s no surprise. The job of cash is to be liquid and stable, not to make lurching advances and retreats like the more temperamental asset classes.  

On the ten-year measure, cash looks okay. But over the long-term it’s delivered only about half the return of longer bonds.

Material matters

Commodities have crept up the ten-year rankings every year since we began the asset allocation quilt. Now they’re up to fourth place and stand in line with their expected real return of about 3%. 

Commodities present a fascinating dilemma.

They’re the one asset class that positively thrives when inflation melts bonds and equities. Commodities are also a tremendous diversifier due to their lack of correlation with equities, bonds, and cash.

 But you’ll need testicular fortitude to live with the volatility of raw materials.

Commodities have inflicted losses for five out of the last ten years, but redeemed themselves with spectacular 30%+ gains on three occasions – most critically when inflation lifted off in 2021 and 2022. 

Commodities had a surprisingly quiet year in 2024, delivering a decent 7% return thanks to a late comeback in the final quarter.

Our asset allocation quilt suggests they’re rarely so moderate. Most years you’ll love or loathe them. 

The missing link 

Inflation-linked bonds still make sense despite their desperate showing in 2022.

We’d been warning for years before that mid to long duration UK linker funds were badly flawed. But even our preferred short-duration inflation-linked funds haven’t kept pace with inflation, due to the massive hike in yields that accompanied the 2022 bond rout. 

One solution is to hedge rising prices with individual index-linked gilts which – if bought on today’s positive real yields and held to maturity – will protect your purchasing power against headline inflation. 

We’ve recently written about how to do that: 

• See the Using a rolling linker ladder to hedge unexpected inflation section in our post about deciding whether or not you need such a ladder. 
• How to buy index-linked gilts demystifies how to purchase individual linkers. 
• See our step-by-step guide to constructing your own index-linked gilt ladder if you do want to do it yourself. 

Note that to get ten years worth of returns, our asset allocation quilt currently tracks Xtracker’s Global Inflation-Linked Bond ETF GBP hedged. This is a problematic mid to long duration fund, as discussed!

Stitch in time 

However you weave your response to the challenges of investing, the asset allocation quilt makes it plain that the best way to anticipate the future is to be ready for anything. 

Buy your asset classes on the cheap after they’ve taken a kicking, grit your teeth while they’re down, then reap the reward when their day – or year – comes around again. 

Finally, as uncertainty abounds, let’s be thankful that if you banked on the default position of global equities then you did just fine.

In fact, more than fine over the last decade. That 11.5% annualised return – 8.5% in real terms – is excellent.

Take it steady,

The Accumulator

1. That is to say they are not adjusted for inflation. [↩]

What caught my eye this week.

There’s a mildly titanic battle going on in the beleaguered UK investment trust space.

Everything from the rise of index funds to the 2022 reset in interest rates to steady outflows from all UK equities – not to mention lousy performance in many cases – has left the sector littered with sub-scale funds trading on huge discounts to net assets.

Kicking the boot in were disclosure rules that made often high fees look ever higher. That prompted wealth managers to abandon the sector in fear of fiduciary regulation violations.

But it’s probably the unstoppable might of an S&P 500 tracker fund – or even just a global equities ETF – that has done the most damage.

Why own an old-fashioned investment vehicle with a board of directors and odd assets from all over the place when the simplest ETF has trampled your returns – and with less volatility for good measure?

No wonder even a bluest of the blue chips trust like RIT Capital Partners has traded for as much as 30%-off in recent times.

Or that I’ve been drawn like a moth to this bin fire for multiple Monevator Moguls articles – and with many more to come I’m sure.

My precious

Now if everything I just wrote made no sense to you then (a) congratulations, you’re hopefully a passive investor in cost-effective index funds and (b) you’re part of the problem, from the other perspective.

You see, investment trusts were the original collective vehicles, invented more than 100 years ago to enable everyday investors to get exposure to much wider pools of assets at a far lower cost.

They were the global trackers of their day. But the problem is that the global trackers of the day these days are, well, global trackers.

Even worse, attempts to recalibrate trusts towards more sophisticated investors by offering more exotic exposures have also come a-cropper.

In theory, investment trusts are the perfect vehicles to enable the ownership of more illiquid, unlisted, or esoteric assets, whether that be music royalties, wind farms, or warehouses for the logistics industry.

Investors don’t really need these in their portfolio, but a case can be made for all of them.

Yet they’re about as popular right now as a glass hammer in search of a nail. And as soon as their underlying assets face a problem – such as more competitive yields from government bonds – it seems investors dump these trusts. The discount widens and a potential death spiral begins.

So again, the dispassionate reading is these vehicles have outlived their usefulness. The market is telling us that.

As Brandon Lee said in The Crow: “They’re all dead. They just don’t know it yet.” 

They have a cave troll

Well maybe, but I’m an investing romantic. Where you see a bunch of overpaid fund houses peddling unwanted products to a disinterested market that’s moved on, I hear J.R.R. Tolkien.

One phrase keeps coming to mind from The Lord of the Rings. The ‘last alliance of elves and men’ that united to defeat the dark Lord Sauron, who in Tolkien’s mythology represents brutish and ugly modernity.

And conveniently, in the last year or so we’ve been able to put a face on this fanciful clash. One Mr Boaz Weinstein of Saba Capital, an American hedge fund manager turned supervillain in the UK Investment Trust Cinematic Universe for his attempts to roll-up and extinguish seven of their number.

Weinstein is – conveniently for scriptwriters – a brash American, who dubbed his targets The Miserable Seven amongst much else. It’s fair to say both the press and the trust industry returned fire in kind.

Critics point out that Weinstein can see what many of us can see – that trusts trading at big discounts to their net assets are pregnant with value – only he wants to unlock it more for himself and his wider business aims.

Ironically, such discounted value has always been underwritten in investment trust lore by the potential of an activist to come along and liquidate a fund to release it, even if the possibility might often have seemed more theoretical than red in tooth and claw.

Yet now that Weinstein has set about doing it at scale, it’s a different story.

To quote another suitably-geriatric screen legend: “They don’t like it up them Mr Mainwaring.”

All that is gold does not glitter

I see and acknowledge everything above.

But as I said, unlike my purely passive co-blogger The Accumulator I’m an investing romantic.

And so I mentally punched the air this week when the first of these seven battles was resolved – with shareholders voting overwhelmingly to reject Saba’s takeover of the Herald Investment Trust.

A whopping 65% votes went against the hedge fund manager. Exclude Saba’s own 35% stake and just 0.15% of shareholders sided with the enemy at the gates.

A last alliance of fund managers and ordinary investors indeed. Hargreaves Lansdown – which, like other platforms, has publicised and facilitated the votes – said such engagement was ‘unprecedented’.

This, my friends, is the shareholder democracy that some say is being destroyed by passive investing. Active funds that (ideally) strive to allocate money towards the best prospects, and engaged shareholders who (you’d hope) care how and where their money is invested and managed.

Even the very wise cannot see all ends

Of course the Monevator house view is that most of us shouldn’t bother with any of this active malarkey.

That’s because index funds can more cheaply hitchhike on the price-discovery efforts of active managers – or parasitically exploit them, if you prefer – and active investing is a zero sum game.

The result is the average investing pound will do better in an index fund than in an active fund. Any big picture consequences are moot when it comes to growing your own wealth.

As for engaged shareholders, long-time readers may recall the research that claimed it was the investors who checked their portfolios the least who saw the biggest gains – with the actually-dead doing best of all.

This house view hasn’t changed. I’m having fun on Moguls with some like-minded souls, but as our motto says Moguls is not for everyone. Me and TA overwhelmingly believe that until proven otherwise, passive investing will be the best approach for the vast majority of individuals. There may eventually be issues if everyone invests passively, but game theory says until then do what’s best for you.

And so this resistance to the supposed barbarian at the gate of the trust realm may really be a last alliance. A generation of likely older fuddy-duddies getting uppity about someone coming for their trusts – before the sector is flattened anyway by the inevitable victory of ETFs and index trackers.

Why fight it? They’re all doomed.

Well, maybe. But I’m an investing romantic and I was rooting for Gandalf and the gang outside the gates of Mordor. There’s room for everyone, and I’d miss these trusts were they to disappear.

One battle down. Six to go!

Have a great weekend.

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