The total return investment strategy aims to maximize the total return, including both capital gains and income. It is widely used by investment managers to pursue higher returns. As an example, the S&P 500 index is often used as the benchmark to evaluate an active investment manager’s performance.
The core of a total return investment strategy is to invest in assets like stocks and bonds to realize price appreciation and earn dividend or interest income over time. Unlike value or growth investment strategies focusing more on either side, it emphasizes the overall investment outcome. Professional investment managers need to outperform the market benchmark to demonstrate their stock selection skills.
S&P500 represents the overall stock market performance
The S&P 500 index covers 500 large US companies, representing over 80% of the total market capitalization. It is considered the best proxy of the overall stock market performance. Investment managers pursuing a total return strategy often use S&P 500 as the benchmark. If the portfolio return exceeds S&P 500 over a certain period, then the manager’s stock picking skills add value. Otherwise, the manager fails to beat the market.
Various total return mutual funds and ETFs available
There are many total return mutual funds and ETFs available to investors. For example, the Fidelity Total Return fund seeks both capital appreciation and current income by investing in various asset classes like stocks, bonds, short-term instruments etc. Its benchmark is also set as S&P 500 index. For investors looking to implement a total return strategy by themselves, choosing such total return focused funds is a simple and convenient approach.
Actively rebalancing asset allocation is essential
A key in total return investing is to actively rebalance the asset allocation instead of rigidly sticking to a pre-set policy. When stock valuations get too high, investment managers should trim equity exposure and rotate into fixed income for better risk-adjusted returns. Such flexibility allows investors to navigate different market environments for consistently strong performance over long horizons.
In summary, utilizing market indexes like S&P500 as benchmarks to evaluate investment manager skills in stock selection is instrumental in total return investing. Flexibility in asset allocation also helps investors achieve excess returns across business cycles through different investments like stocks, bonds and cash.