2022: Not all years are equal for investment returns

James McManus


read 6 min

A year of poor returns so far in 2022 has left investors with few places to hide across global financial markets, but while portfolios may be down, investors should heed the lessons of the past when thinking about their longer-term financial goals 

So far 2022 has been, and continues to be, a tough environment for investors globally. As of the end of September, global equity markets had declined around -25% year-to-date, with Brazil standing alone in the global marketplace as the only major market delivering positive returns.  

During the same period, the world’s largest stock market, the US S&P 500 delivered losses close to -24% (see Chart 2), while the tech heavy Nasdaq index, home to some of the world’s most recognisable growth companies – such as Microsoft, Amazon and Tesla – lost over -30% of its value. 

And while some markets such as the UK’s FTSE 100 and Japan’s Tokyo Stock Exchange held up better than peers, this in part can be traced to losses in their domestic currencies and the effect this has in magnifying overseas earnings. Pound sterling weakened against the dollar by -17.5%, and the Japanese Yen by -25.8% against the dollar in the first nine months of this year. For currency investors outside of the dollar, it has been a difficult year.  

Investors turning to traditional ‘safe havens’ will have also found little in the way of respite. Government bonds have suffered steep losses as central banks across developed markets have raised interest rates in response to inflation.  

As of the end of September, UK government bonds had lost just over -25% of their value at the main index level (see Chart 2), while their US counterparts have also seen significant double-digit losses. Even assets typically thought of as inflation hedges have performed poorly, with the price of gold declining over -9% through to the 30th September.  

Against this backdrop, broad commodities markets have fared relatively well, yet the complexity of these assets means they typically form only a small proportion of an investor’s portfolio. Crude oil, for example, remains in positive territory yet that performance should not disguise the volatility seen in oil prices in the first nine months of 2022, as prices have oscillated between approximately $80 and $125 per barrel.   

Taken collectively, this means that 2022 has been one of the poorest years in the past three decades for investment returns across a broad range of risk levels. How investors react to these market losses will be critical in defining their success towards meeting future investment goals, but history can serve as a useful guide as to how we should approach a challenging investment landscape. 

A year unlike any other for bond markets 

While equity volatility is a key feature of financial markets, government bonds markets have historically been more stable sources of investment returns with lower volatility characteristics. Interest rates in developed markets have been anchored near record lows for much of the past decade. This has provided little in the way of income returns to investors, but has offered stability for diversified portfolios given the typically negative correlation with equity markets: that is, when equities have fallen, bond prices have tended to rise.  

2022 has seen a shift in correlations, and government bonds have offered little in the way of compensation for diversified investors as correlations have shifted positive: that is, bonds and equities have tended to move together. This has been a significant change in the investment landscape and helps explain why 2022 has been a challenging year for investment returns, no matter how diversified your investment portfolio.  

The magnitude of negative returns in government bonds so far in 2022 is also difficult to sugar-coat. After years of stability, underpinned by vast quantitative easing programs that made developed market governments large owners of their own debt, the core investment assets have seen a sharp reversal in fortune as interest rates have been raised to combat inflation. In the case of UK government bonds, this has meant the worst annual return since 1998 and the largest drawdown (peak to trough decline in value) on record.  

Chart 1: UK government bonds: one-year rolling returns 

Chart 1: UK government bonds: one-year rolling returns 

Source: Nutmeg, Macrobond, FTSE 31/12/98- 30/09/22 

The importance of portfolio diversification  

Asset allocation refers to the mix of different investment assets in a portfolio and relies on the notion that not all investment assets perform in the same way at the same time. It is closely related to the concept of diversification – the spreading of risk across a broad range of investment assets.  

Across the full range of Nutmeg portfolios, we hold 23 developed and 24 emerging markets globally. Our fixed income exposure in portfolios consists largely of UK government bonds and sterling-denominated corporate bonds from a range of issuers globally, alongside dollar-denominated high-yield corporate bonds and emerging market sovereign debt.  

Global diversification is a feature that underpins all Nutmeg investment portfolios, and in today’s market environment it continues to prove its worth, despite the recent falls in portfolios. By investing in a broad range of equity markets, as well as a diversified range of bond assets, our portfolios have still protected investors from the full extent of market losses year to date.  

Recognising the value of diversification can be difficult when portfolios have delivered losses, yet this core pillar of our investment approach ensures that portfolios are not overly exposed to any one risk factor and offers some stability in a time of broad based market volatility.  

Chart 2: 2022 investment returns  

Chart 2: 2022 investment returns

Source: Nutmeg, Macrobond (31/12/21 – 30/09/22). Returns in local currency. Nutmeg portfolio returns net of fees.  

One bad year does not spoil the long-term journey  

While this year has been a poor one so far in terms of returns, how investors react to market downturns is critical to their long-term investment success. Experiencing negative returns is an unpleasant experience – even as professional investors facing losses it is an uncomfortable experience. Investing in financial markets requires a long-term perspective and the exercise of patience, but it may also require us to reassess our investment timeframes in light of market movements, given no investment journey is linear in terms of returns.  

History informs us however that there are brighter days ahead, even as the global economic picture remains mixed. In the history of financial markets, investors who held steady through periods of turmoil have never failed to recover their capital in typical diversified, balanced risk investment portfolio. However, please remember that past performance is not a reliable indicator of future performance.  

Chart 3: Historical loss and recovery of Nutmeg Fixed Allocation Balanced Risk (60% equity)  

Chart 3: Historical loss and recovery of Nutmeg Fixed Allocation Balanced Risk (60% equity)

The returns above are simulated and do not reflect the return of a live portfolio. Returns are calculated using data from 01/06/94 to 30/09/22. Source: Macrobond, Nutmeg. Returns are in GBP and gross of fees. Simulated past performance is not a reliable indicator of future performance. 

2022 has witnessed a once-in-a-generation move in bond markets, but these assets now reflect much better value for investors than they did in the previous decade with the return of higher income returns for bonds. Equity markets meanwhile have had their appeal dented by higher interest rates; though major indices have already fallen sharply to reflect this with valuations below the five and 10-year averages.  

To illustrate the point, the following table shows the average returns generated from a range of different investment assets in the one, three and five years following significant losses, over the past 20-years. We also compare this to the average yearly return for these assets overtime. 

Table 1: Performance in the years after major drawdowns tends to be above average 

Table 1: Performance in the years after major drawdowns tends to be above average 

Source: Nutmeg, Macrobond. Total returns in local currency between 31/12/1999 and 30/09/2022

The table demonstrates the reasons for investors to be optimistic about the years ahead for financial markets, despite 2022 performance. While the current environment remains challenging, history informs us that financial assets typically deliver above average returns in the years following large losses, and investors should therefore exercise discipline through periods of market turmoil. 

If you’d like to discuss your financial goals, our team of experts are here to support you. They can provide guidance tailored to your individual goals and questions. Better still, expert guidance is available at no extra fee for Nutmeg clients. Book a call  to see how we can help you.  

Risk warning      

As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past performance is not a reliable indicator of future performance. 

James McManus
James is chief investment officer at Nutmeg, having joined in 2015 from Coutts & Co. A self-confessed ETF geek, James is regularly quoted in the national and industry press and has been voted one of Private Asset Manager’s ‘Top 40 under 40’ in each of the last three years. James holds a BSc in International Business from Nottingham Business School, the CFA UK Investment Management Certificate, and the CFA Certificate in ESG Investing. He can be found tweeting @j_a_mcmanus

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