Graphic: Time is on the side of U.S. equities, high-yield bonds

Last year was one many traditional money managers would like to forget. However, while the past doesn’t guarantee future results, it’s worth noting that U.S. equities and U.S. high yield historically have the highest risk-adjusted returns, and the slide in 2022 still may give some long-term investors reason for optimism based on certain valuation metrics.

Rough year: Persistent inflation, increased interest rates, supply chain shocks and the war in Ukraine conspired to present challenges in 2022. U.S. equities, as measured by the Russell 3000 index, posted a -19.2% return, worse than all but emerging markets.

2022 index returns

Better long term: Over 10 years through Dec. 31, the Russell 3000’s 12.1% annualized return bested the MSCI World ex USA and MSCI Emerging Markets indexes. On a risk-adjusted basis, the Russell 3000’s 0.79 Sharpe ratio was much higher than both MSCI indexes.

Equity index risk/reward

Not junk: Over 10 years ended Dec. 31, high-yield bonds’ annualized return topped the U.S. and global investment-grade markets and had a much higher Sharpe ratio. The U.S. high-yield index’s yield to worst more than doubled in 2022.

Bond index risk/reward

Tracking flows: For the first nine months of 2022, collective investment trusts focused on U.S. and international equities had net inflows of $24.2 billion and $35.2 billion, respectively. CITs investing in taxable bonds had net inflows of $7.5 billion for the period, but this includes net outflows of $3.8 billion in the third quarter.

CIT flows (billions)

Sources: Bloomberg LP, FTSE Russell, MSCI Inc., Morningstar Inc.

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