January market update – a month when diversifiers diversified

January (and the last 12-months) was the tale of two divergent real assets: global REITs and commodities. Global REITs continued on an upward trajectory through January, posting the best broad asset class return (represented by the FTSE EPRA/NAREIT Developed Real Estate Index, up 4.9% for the month) with support from a defensive market environment and further declines in interest rates. Overall, global real estate securities registered performance well ahead of the broader global equity market (represented by the Russell 3000® Index down -2.8%, Russell Developed ex-U.S. Large Cap Index down -0.4%, Russell Emerging Markets Index up 0.6%) . Commodites, on the other hand, continued on its downward trajectory through January, posting the worst broad asset class return (represented by the Bloomberg Commodity Index, at -3.3% for the month), driven by grains and energy. Despite continued expectations to the contrary, the yield on 10-year U.S. Treasury bonds declined over the month, helpful for real estate as mentioned earlier and fixed income (represented by the Barclays U.S. Aggregate Bond Index, up 2.1% for the month). On the equities front, in an about-face from previous months, while still negative, non-U.S. developed equities (represented by the Russell Developed ex-U.S. Large Cap Index) outpaced U.S. equities (represented by the Russell 3000® Index).  However, the gap between U.S. equities and non-U.S. equities over a 12-month period is still substantial (with U.S. equities outperforming non-U.S. equities by over 13%). Emerging markets had a relatively flat (but positive) month (represented by the Russell Emerging Markets Index), yet the 12-month return has shown strong positive signs of improvement (dropping off an abysmal January 2014 in the return calculation certainly helped). A hypothetical balanced index portfolio was only slightly negative, but had strong 12-month returns, reinforcing the benefit of diversification. Capital Market Returns Sources: U.S. Equity: Russell 3000® Index, Non-U.S. Equity: Russell Developed ex-U.S. Large Cap Index, Emerging Markets: Russell Emerging Markets Index, U.S. Bonds: Barclays U.S. Aggregate Bond Index, Global REITs: FTSE EPRA/NAREIT Developed Real Estate Index, Commodities: Bloomberg Commodities Index, Balanced: 30% U.S. Equity, 20% Non-U.S. Equity, 5% EM, 35% Bonds, 5% REITs, 5% Commodities

Asset Class Dashboard – as of January 31, 2015

Like last month, every asset class posted a return within its typical twelve month historical range with two exceptions: cash and commodities. The historically low interest rate environment has kept cash returns below normal for a number of years now and the recent pull back in oil prices led to a historically bad 12-month period for commodities. January Asset Class Dashboard Large cap U.S. equity: Russell 1000 Index, Large cap Defensive U.S. equity: Russell 1000 Defensive Index, Large cap dynamic U.S. equity: Russell 1000 Dynamic Index, Small cap U.S. equity: Russell 2000 Index, Non-U.S. Equity: Russell Developed ex-U.S. Large Cap Index, Global equity: Russell Developed Large Cap Index, Emerging markets: Russell Emerging Markets Index, Commodities: Dow Jones – UBS Commodity Total Return Index, Global infrastructure: S&P Global Infrastructure Index, Global real estate: FTSE EPRA/NAREIT Developed Index, Cash: Citigroup 3-Month U.S. Treasury Bill Index, Global high yield bonds: Bank of America Merrill Lynch (BofAML) Global High Yield Index, Emerging markets debt: JP Morgan Emerging Markets Bond Index Plus, U.S. bonds: Barclays U.S. Aggregate Bond Index. How do I read this chart? This dashboard is intended as a tool to set context and perspective when evaluating the current state of a sample of asset classes. The ranges of 12 month returns for each asset class are calculated from its underlying monthly index returns. The stated inception date is the first full month of an index's history available for the dashboard calculation. Here is how to read the graphic on this page: FOR EACH INDICATOR, THE HORIZONTAL BAR SHOWS FOUR THINGS A GRAY BAR shows the full range of historical rolling 12?month returns for a sample of asset classes. A BLUE COLOR BAND represents the typical range (one standard deviation away from the mean, i.e. 68% of historical observations) of rolling 12-month returns for these asset classes. AN ORANGE MARKER represents the most recent 12?month return of the asset classes. A WHITE LINE within the blue bar represents the mean of the historical observations.

The bottom line

What does this mean for investors? The divergence of asset class returns can be a good reminder for investors of the benefits of diversification. Although diversification cannot guarantee a profit or protect against loss, it has historically helped temper the impact of wide swings in asset class performance, making it easier for many investors to stick to their long-term plans and eventually meet their financial goals.
Strategic asset allocation and diversification do not assure profit or protect against loss in declining markets. Indexes are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment. The S&P 500® Index is a free-float capitalization-weighted index published since 1957 of the prices of 500 large-cap common stocks actively traded in the United States. The stocks included in the S&P 500® are those of large publicly held companies that trade on either of the two largest American stock market exchanges: the New York Stock Exchange and the NASDAQ. The Dow Jones – UBS Commodity Total Return IndexTM was renamed the Bloomberg Commodity Index, effective July 1, 2014. Bloomberg Commodity Index Total Return: Composed of futures contracts on physical commodities. Unlike equities, which typically entitle the holder to a continuing stake in a corporation, commodity futures contracts normally specify a certain date for the delivery of the underlying physical commodity. In order to avoid the delivery process and maintain a long futures position, nearby contracts must be sold and contracts that have not yet reached the delivery period must be purchased. This process is known as “rolling” a futures position. FTSE EPRA/NAREIT Developed Index is a global market capitalization weighted index composed of listed real estate securities in the North American, European and Asian real estate markets. Barclays U.S. Aggregate Bond Index: with income reinvested, generally representative of intermediate-term government bonds, investment-grade corporate debt securities and mortgage-backed securities. The Russell 2000® Index measures the performance of the small-cap segment of the U.S. equity universe. It is a subset of the Russell 3000® Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership. The Russell 3000® Index: Measures the performance of the largest 3000 U.S. companies representing approximately 98% of the investable U.S. equity market. The Russell Developed ex-US Large Cap Index offers investors access to the large-cap segment of the developed equity universe, excluding securities classified in the US, representing approximately 40% of the global equity market. This index includes the largest securities in the Russell Developed ex-US Index. Russell Emerging Markets Index: Index measures the performance of the largest investable securities in emerging countries globally, based on market capitalization. The index covers 21% of the investable global market. Russell Investments’ ownership is composed of a majority stake held by funds managed by TA Associates with minority stakes held by funds managed by Reverence Capital Partners and Russell Investments’ management. Copyright © Russell Investments 2015. All rights reserved. This material is proprietary and may not be reproduced, transferred, or distributed in any form without prior written permission from Russell Investments. It is delivered on an “as is” basis without warranty. RFS 14425
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