The top-performing (and worst) asset classes of the past year

Mercer's annual periodic table, which charts 17 major asset classes investment returns on an annual basis over the last decade, reveals that there's few reliable themes, except that greater risk tends to be rewarded by greater return.

Equity markets, nevertheless, took pole position last year. International equities unhedged - represented by the MSCI World ex-Australia index - topped the table with a 31.11% return.

Mercer global head of capital markets Harry Liem said equity markets delivered impressive performance last year, particularly through large-cap and growth-oriented companies.

Liem highlighted that the S&P 500 index delivered a "stellar" 25% return, buoyed by a resilient economy, corporate earnings growth and a favourable interest rate environment.

The dominance of the Magnificent Seven, which benefited from increased investment in AI, cloud computing, and digital transformation, was also significant, he noted.

Japanese equities also "performed robustly," aided by corporate governance improvements and the shift from a deflationary to an inflationary period, he said.

Most other regions produced double-digit returns, including emerging market equities, which were bolstered by strong showing of India and Southeast Asia.

Emerging markets, however, which returned 18% year over year, lagged developed markets, "as investors fretted over the potential impact of tariffs on exports."

European equity markets, in contrast, were "somewhat more subdued" as they experienced challenges related to the ongoing conflict in Ukraine, concerns regarding energy supply, and residual inflationary pressures.

Australian investors enjoyed higher returns from overseas assets last year, as the Aussie dollar weakened against the US dollar.

Australian equities, unaffected by currency fluctuations, pocketed an 11% return, catapulted forward by strong performance in the banking sector.

More defensive asset classes, meanwhile, had a "steady pace," last year, Liem said.

Fixed interest markets mounted a strong recovery heading into 2024, and to some extent this continued amid stabilising interest rates and an easing of monetary policies, he said.

Australian bonds benefited from this trend, recording a 3% return for the year, outperforming global bonds.

With the Reserve Bank of Australia "reluctant to reduce rates," cash returned 4.5%.

The property sector faced challenges last year, particularly in the office space segment.

The shift towards remote and hybrid work models continued to reshape demand; however, industrial and logistics sectors thrived, driven by an ongoing e-commerce boom, Liem said.

Global listed property returned a "modest" 4% for the year, while Australian direct property, which suffered due to lagged valuations, returned -6% - last year's poorest performing asset class.

Other defensive assets like global listed infrastructure and hedge funds yielded returns of 13% and 9%, respectively.