Checking Out the Callan


By Jeremy Office Special to The Pineapple In the finance industry, we are constantly exposed to charts that illustrate trends and statistics. One of the more interesting charts that we review every year is the Callan Periodic Table of Investment Returns. The “Callan” chart was first published in 1999 and resembles Mendeleev’s Periodic Table of Elements (think high school chemistry). The Callan chart shows relative returns for different asset classes and ranks them from best to worst over a given period. Our partners at J.P. Morgan put their own renditions together by including an asset allocation class. The “rankings” change every year and illustrate several key principles of investing: Diversification: The chart illustrates the importance of diversification across asset classes (stocks versus bonds), investment styles (growth versus value), capitalizations (large versus small) and equity markets (U.S. versus international). As no one has a crystal ball, by owning an asset-allocated portfolio with exposure to the entire market (all asset classes), you minimize the susceptibility to sharp changes in market variations. Past performance does not predict future performance: Just like high-waisted jeans made a splash in the ‘80s and have re-emerged today, asset classes go in and out of favor. One year emerging market equities are the top performing asset class and the next year they are the worst. Over the long term, asset class performance tends to revert to the mean: Asset classes have periods of strength and weakness. Mean reversion is the theory that suggests investments can trade above or below their long-term average returns for certain periods, but eventually they are likely to move back toward their average. Outperformance is followed by underperformance and vice versa. The problem is that those extended periods can be months or years. No one can accurately predict the duration of deviation from the mean. In recent years, we have seen a slowing China, the potential of higher interest rates and valuations that are slightly above historical averages. All of these factors have weighed on commodities and emerging markets. For the past three years, commodities have been the worst performing asset class. This has never happened in the past 15 years, although we have been on a bull run that would impress any market historian. This fuels the contrarians in us to believe that commodities may be due for a comeback. Unfortunately, with the bull market come the bears and the likelihood for markets to experience a significant correction. Markets cannot constantly go up without some sort of pause or consolidation. This reality along with growing pessimism has led to muted returns this year. The top performing asset class is up only 2.7 percent! Even in the worst financial crisis of our time, fixed income was able to return 5.2 percent. Is this a sign of further weakness to come? Should we expect muted returns in the future? Is this the new normal? Has the pendulum swung too far? The simple answer – we don’t know. In times of uncertainty and new normals, the best offense is a good defense. Maintaining a diversified portfolio, rebalancing and focusing on your long term goals will help you with the ups and downs. We must remain cognizant of the current market environment and invest strategically – and watch out, the mustache might be due for a comeback! Jeremy Office, Ph.D., CFP, CIMA, MBA, is Princi-pal of Maclendon Wealth Management in Delray Beach and specializes in portfolio construction, strategic asset and li-ability management, and long-term planning relating to financial matters as well as real estate, income tax, insurance and estate planning. He is also Managing Partner of SJO Worldwide, a ven-ture capital company.; 855.MAC.WEALTH