The year stocks, bonds and cash went nowhere

The idea behind asset allocation is simple: When one market struggles, it's okay because an investor can jump into another that is thriving. Not so in 2015.

In fact, if you judge the past year by which the U.S. investment class generated the largest return, a case can be made it was the worst for asset-allocating bulls in almost 80 years, according to data compiled by Bianco Research LLC and Bloomberg. With three days left in 2015, the Standard & Poor's 500 index gained 2.2 per cent with dividends, cash is up less, while bonds and commodities show losses.

After embracing everything from U.S. Treasuries to high-yield bonds and technology shares amid seven years of zero-per-cent interest rates, investors found themselves with nowhere to run at a time when the U.S. Federal Reserve's campaign of stimulus drew to an end. Normally, it isn't like this. Since 1995, practically every year has seen some asset deliver returns exceeding 10 per cent.

"It's been challenging from the point of view that the equity market and bond market are probably more joined at the hip than normal," said Hayes Miller, the Boston-based head of multiasset North America who helps oversee $35.8-billion (U.S.) for Baring Asset Management LLC. "We've had high cash exposure relative to [the] norm because we felt cash provides one of the only good diversifiers against the risk-off trade."

Bianco Research keeps track of the S&P 500, 30-year U.S. Treasury bonds, three-month Treasury bills and the Thomson Reuters/CoreCommodity CRB commodity index to gauge performance in stocks, bonds, cash and commodities. The four are the most common asset classes considered by investors when an allocation strategy is designed, according to Jim Bianco, the founder.

While the depth of losses in equities and commodities is nowhere near as bad as in 2008, the correlation of declines highlights the challenge for money managers who seek to amplify returns by rotating among assets. Among other things it's a recipe for pain among hedge funds, according to Mr. Bianco. The industry is heading for its worst annual performance since 2011, with closings rising, data compiled by Bloomberg and Hedge Fund Research Inc. show.

"The Fed stimulus lifted all boats, and then the Fed withdrawing the stimulus is holding the boats down," Mr. Bianco said by phone. "If the argument is right that the economy is going into 2016 weak and earnings are negative, those conditions will continue and, therefore, on the asset allocation level, I don't expect anything to break out just yet."

With nothing going up, exchange-traded funds that invest in different asset types as a way to diversify risk have struggled. Among 35 such ETFs tracked by Bloomberg, the median loss for 2015 is 5 per cent. The iShares Core Growth Allocation ETF, which has a mix of 60 per cent in stocks and 40 per cent in bonds, has slipped 0.5 per cent, and the First Trust Multi-Asset Diversified Income Index Fund is down 7.4 per cent.

Uncertainty over the timing of the Fed's first interest rate increase in almost a decade and its potential impact on the economy weighed on markets throughout 2015, according to Michael Arone, the Boston-based chief investment strategist at State Street Global Advisors' U.S. intermediary business.

"The Fed has finally broken that cycle by beginning policy normalization, and hopefully this will provide the market some clarification and resolve in a more solid direction," Mr. Arone said by phone. "If the market feels comfortable at the pace of which the Fed moves interest rates and the economy is recovering, risk assets like stocks could perform well."