Understanding risk and diversification in your portfolio is essential, says Barings

Research into the best and worst performing asset classes over the past seven years shows that European equities, the top performer in 2012, continued to outperform in 2013.

However, North American equities reached the top spot, which has been driven by continued economic growth in the US with good employment data, stronger retail sales, a recovery in house prices and improvement in consumer confidence, Barings Asset Management says.
The research also reflects the improving environment in Europe; however, volatility remains in a number of major asset classes, with many of the best and worst performing assets changing dramatically from one year to the next.
The study provides one explanation why multi-asset investing with an unrestricted mandate to dynamically move into and out of asset classes has found favour with investors looking to achieve their targeted returns with less volatility than investing in equities alone.
Andrew Cole, manager of the Baring Multi Asset Fund, says: “Returns in both North America and Europe in 2013 were boosted by investors being prepared to pay higher multiples for the given level of earnings. They have been prepared to do this as confidence about the economic outlook on both sides of the Atlantic improved even though actual earnings for 2013 were constantly revised lower.
“The story in Japan is a little different where earnings expectations were constantly revised higher, though the market derated through that process as nervousness about the economic outlook in Japan impacted valuations. We are more optimistic on the economic outlook for Japan than the consensus, although we note the market’s concerns about the rise in the consumption tax. We expect to see an upgrade to earnings and further intervention from the Bank of Japan. We will be watching the data carefully over the next quarter. Not surprisingly, gold was the worst performer last year and we feel investors will need to become much more fearful before we see this particular commodity return to favour.
“Currently we continue to see ongoing growth in the developed world and expect these economies to grow at or above trend in 2014, which means that inflationary pressures should be abated for the moment. Equities remain our preference and we expect them to perform better than other asset classes but not at the same levels as we witnessed in 2013.”

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