Asset Class Review: April Was a Great Month

The major asset classes had their best performance month in April since last October. Only TIPS and foreign developed market bonds suffered red ink last month, as our table below shows. On balance, April was the strongest monthly tally since the perfection of October 2007, when everything was in the black.

April fell short of the October standard, but not by much. Meanwhile, the leading performers were anything but subtle last month. Indeed, April's big winner was emerging market equities, which soared more than 9%. That's about as high a monthly rise as this corner of equities has ever posted.

In a strong second-place showing: REITs, up 6.4%, which is another performance that's rarely topped in any one month, based on the historical record.

Meanwhile, stocks across the board were up, and so were junk bonds and commodities. Let's just say that April was a success for investors with diversified portfolios. Unless you were loaded to the gills in inflation-indexed Treasuries and/or sovereign bonds issued by the major foreign governments, you almost certainly saw your portfolio's value rise last month.

Proving, if nothing else, that the link between sentiment on the economy and performance in the markets can be weak if not missing in action in the short run. As everyone now recognizes, the U.S. economy is challenged these days. As our post yesterday suggested, the economy may remain challenged for some time. Even so, don't assume that in any given month the capital and commodity markets will provide corroborating performance evidence in sympathy with what ails on a macro level.

Meantime, diversification across asset classes is still the only prudent game in town. Since we don't know what the future has in store for us, we're inclined to own everything. The value added (if any) comes by focusing on whether, and how much to deviate the weightings of the major asset classes relative to Mr. Market's weights, as per capitalization for stocks and bonds and an equivalent for commodities. But proceed cautiously. As we detailed last month, beating the global market portfolio is no mean feat. Most investors could do a lot worse than tapping into the passively allocated portfolio of all the world's major asset classes.

On that note, last month reminds again that the value of diversification endures, even if the details aren't always predictable in any given month. For example, it doesn't surprise to see foreign developed market bonds take a modest tumble last month. This, after all, is a prized asset class in part because of its low/negative correlation with equities and, yes, even domestic bonds at times. Case in point: foreign developed market bonds as an asset class posted gains during each month in this year's first quarter. That provided some much-needed ballast for portfolios that held stocks, an asset class that generally suffered in the first three months of 2008. But in the context of April's broad rebound, it's no wonder that foreign bonds slipped last month, which is in keeping with their low and negative correlations to almost everything else.

But let's not get too cute. Low and negative correlations may come in handy once more before the year's out. Details, however, are yet to be determined. Stay tuned.