Portfolio considerations

Sub-asset classes that may outperform amid rising real rates

March 23, 2022

Rare conditions prompt action
1. Certain sub-asset-classes have consistently outperformed, and some have consistently underperformed.
Prolonged and persistent periods of real rate increases favor some sub-asset classes
This chart shows the historical performance of 13 sub-asset classes during recent periods when real interest rates rose. High-quality value, international equities, emerging markets, value stocks, U.S. equities, and small-cap stocks tended to perform above high-quality growth, the median-returning asset class. Growth stocks, high-yield bonds, home prices, commodities, low-quality growth, and U.S. aggregate bonds all underperformed the median.
2. Rising real rates hedge inflation.
3. The growth environment is not a distinguishing factor.
Economic conditions don’t matter for most sub-asset classes when real rates rise
This chart shows that for most sub-asset classes, there is no relationship between economic conditions and sub-asset class performance. This was the case for the following sub-asset classes: international equities, value stocks, U.S. equities, small-cap stocks, high-quality growth, growth stocks, high-yield bonds, home prices, low-quality growth, and U.S. aggregate bonds. The only outliers were emerging markets, commodities, and high-quality value.
The real interest rate environment is a key determinant of sub-asset class performance
This chart shows that for most sub-asset classes, there is a clear relationship between sub-asset class performance and rising real rate environments. This was the case for the following sub-asset classes: international equities, emerging markets, value stocks, U.S. equities, small-cap stocks, high-quality growth, growth stocks, high-yield bonds, home prices, commodities, and U.S. aggregate bonds. The only outliers were high-quality value and low-quality growth.

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