Get ready for a bump in 5-year return numbers

When I was mayor of the Township of North Brunswick (NJ: 2000-2003), I commented how I could envision the huge potential benefits that would accrue in 2010, when the town's debt obligations would drop significantly (the idea of offering a sizable tax decrease to the residents was exciting to me). Sadly, that didn't occur, as new debt was raised to replace the old (plus, I was long out of office, and had no influence on the budgeting).

Next year many asset managers will, as they've done for years, report their five year cumulative and annualized rates of return. The good news: 2008 won't be included! For many managers, 2008 was a disaster. But come 2014, the five-year numbers will include 2009, 2010, 2011, 2012, and 2013. The 2008 negative returns will, of course, appear in the 7- and 10-year returns (which many show), but drop off the 5-year statistics.

Many will see HUGE changes to these 5-year numbers. For example, one of our clients had returns in one of their strategies that were approximately 19% (2012), -11% (2011), 30% (2010), 10% (2009), and -46% (2008). The 5-year cumulative return is -18.22%. If this year's return is 0.00%, their 5-year return (with 2013 and without 2008) will jump to 51.45%; a swing (from negative to positive) of almost 70 percent!

What impact will this have on investors? Will investments in riskier assets grow, as ex ante measures forget about that prior history, and only look at the most recent and more buoyant times?

We're already witnessing an increased appetite for risk; in some cases, it's because individuals and institutions want to regain some of the money they lost; in other cases, it's probably the sheer desire to see the return of sizable double-digit returns. Regardless, seeing the hugely revised 5-year returns come 2014 will probably increase this interest. It'll be interesting, no doubt.