Corentin Scavée
09 Apr 2024
Despite a sluggish 2022 on the markets, the index approach remains efficient in the long term
The year 2022 will not be a good memory for the investor. The results for the year are clear: -12,5% on the world stock market, due to a combination of unfavorable economic and geopolitical factors. But in this gloomy context, the index approach continues to stand out. It remains the most efficient approach in the long term and constitutes, for portfolios with a strong equity component, an excellent option even in times of crisis.
The index-approach is the most efficient in the long-term
For portfolios made up mostly of equities, the index approach comes out in pole or second position for all the investment horizons analyzed. And for investment horizons of 5 years or more, it performs best regardless of the risk profile. Short-term underperformance has thus little impact on the total return of index portfolios, which remain an excellent solution for the long-term investor.
Active management no better in times of crisis
For the equity investor, it seems clear that active management does not allow, in times of crisis, to generate better returns or limit losses. In 2022, the vast majority of active managers end the year with larger losses than a comparable index portfolio. This demonstrates once again that active management does not protect the investor from a market decline, which is however often put forward to justify high management fees. It seems therefore better to save on costs and aim for market returns.
Rate hikes hit bonds hard
2022 was a quite exceptional year on the bond markets. It was marked by the first rate hike by the European Central Bank in 11 years, in order to curb galloping inflation. Throughout the year, the rate hikes were numerous, sharp, and close in time, giving the bond investor little respite. This upward movement had indeed a considerable impact on the bond market, whose prices move in the opposite direction to interest rates. European bonds finally achieve their worst annual performance since the 1970s.
Bond portfolios strongly impacted in the short term
As a result, we see a poor performance of cautious and moderate index portfolios in 2022. This short-term poor performance is however completely erased in the medium and long term. For a cautious profile, the index approach is even the only one to offer a positive performance over 5 years. These performance differences are partly explained by the fact that the index portfolios here are made up of bonds with relatively long maturities, which are more sensitive to rate movements. Over the long term, this type of bond tends to perform better than bonds with shorter maturities.
The winners of 2022 are not the long-term winners
It is also interesting to note that the funds that stood out in 2022 are not necessarily those with the best long-term performance. As we could say, “even a blind squirrel finds a nut once in a while”. In other words, in a particularly complicated year, we cannot exclude the luck factor for a few players. On the other hand, the index approach is invariably the most efficient in the long term. This shows that short-term underperformance has little impact on the total return of index portfolios.
Attractive long-term returns
Over 10 years, index portfolios of all types offer exceptional returns: almost 8% per year for aggressive portfolios, 6% for moderate portfolios and 3,7% for defensive portfolios, and this while the economic climate is not favorable.
The index approach stands out over time
Over 10 years, the difference in return between the index approach and the worst-performing comparable offers is also significant: +4,4% for aggressive portfolios, +4,6% for moderate portfolios and +3,6% for defensive portfolios. Cumulatively, this represents between 42% and 72% additional return over the entire period. The index approach therefore largely dominates comparable alternatives over the long term, regardless of the investor's risk profile.
Methodology and sources
You will find more details regarding the non-speculative approach and the performance of the investment funds examined in the infographic below. The methodology and data sources used are also detailed there.