A Decade in Review
At New Years’ Eve in 2009, the mood was somber yet cautiously optimistic as the S&P500 had rebounded halfway from its bottom in the Great Recession and “Boom Boom Pow” by the Black Eyed Peas topped the pop music charts. Twitter just turned two years old, smart phones were beginning their growth, and Barack Obama served half of his first term as President of the United States. Warren Buffet was also two years deep into his winning bet that the S&P 500 would outperform a basket a hedge funds for the next decade. In this quarter’s KnowRisk Report, we’ll take a deeper look at some of the winners (and losers) of the past decade.
The chart above shows the performance of eleven different index funds over the past ten years. Unsurprising to many, the Russell 1000 Growth Index has claimed the lead, returning 312% for the decade, followed closely by other US Equity indexes (including Value, Small/Mid Cap, and Real Estate specific indexes). International Equities lead the middle cohort returning 79%, with Emerging Markets earning 49%, the US Aggregate Bond Index returning 44% (with a much smoother ride to the finish), and diversified Fund of Funds returning 31%. The losers of the decade include Commodities down -43% with Crude Oil alone down -25%. The most abrupt movement in the chart is with Crude Oil at the end of 2014, showing the big impact US shale has had on the asset class.
On a year by year basis, the twenty-teens were largely good to risk assets with most years delivering positive returns. Commodities and the Emerging Market Index (which includes many countries with commodity-based economies) had the most volatile time with 5 positive and 5 negative years.
As for Warren Buffet, he won easily as at the end, the S&P 500 index fund annualized 7% while the diverse basket of hedge funds his opponent selected annualized a measly 2%. Buffett attributed his victory to the low costs of active funds. His opponent, Ted Seides of Protégé, blamed the diversification of hedge funds, pointing out that the MSCI All Country World Index has performed almost exactly in line with the hedge funds in the bet. “It was global diversification that hurt hedge fund returns more than fees,” Seides concludes.
A look-back to previous decades also illustrates some interesting trends. Many of the equity indexes saw big disruptions in the decade of the early 2000’s as the dot-com bubble burst, returning small gains or even small losses. In this category Growth and Value have trended back and forth in terms of outperforming each other each decade. In Fixed Income, the Aggregate Bond Index displayed decreasing returns in each successive decade corresponding to the steady decline in interest rates since Volker’s aggressive moves to calm inflation in the late 1970’s. The most recent decade proved to be uncharacteristically bad for commodities.
Beyond asset class performance in isolation, an examination of fundamental factors can help shed light on the current state of the market. The chart on the next page displays the forward Price Earnings Ratio of the S&P 500, which compares stock prices to the projected earnings of the underlying companies. Historically, the Forward P/E ratio has trended between 13x and 19x. The market started the decade cautiously at the lower side of this range, and has ended with optimism nearing the top side of the range.
The above graph shows that on a forward P/E basis, stocks are approximately in line with their 25-year average through 2018 — a period that includes at least one bubble and two crashes. Add in the strong 2019 from this graph, and the forward P/E is slightly above the average at 18.4.
This is far from the frothy peak when the dot com bubble hit 27, and way above when the great recession trough hit 10. Although the trough happened percipitously, it took years to build up to dot com peak. The last 5 years of the 1990s yielded a 20%+ return each year for the S&P. How many investers stayed in through that run? Of the investors who sold out, how many bought back in at the trough of 2002? More often, it is common for investors to enter during the euphoric times like the late 1990s, and sell out during the fearful times of the early 2000s.
One of the hardest parts of the investment business is knowing when to hold ‘em, and knowing when to fold ‘em. Professional money managers struggle with this also. The growing trend of passive investing is now aproximately 50% of the market. Passive investors believe the active investors cannot beat the market. The statistics say Yes and No: there is a cyclicality to the market which creates a cyclicality to the these two styles of investing.
This Morningstar graph shows this cycle very clearly. At some points the market is in the 80th percentile of the US Equity Funds universe, and at other points the index is in the 20th percentile. The 80th percentile means that 80% of the active funds beat the index. The 20th percentile means that only 20% of the active funds beat the index.
Historically, active and passive investment approaches have cycled through periods in and out of favor. Although in this current market cycle, the benefits of passive may seem obvious, in the past 62 years, the passive investing outperformed the active investing about half of the time. When the market is rising and volatility is low, passive investing tends to outperform active investing. Conversely, when volatility is high, active investing shows its value with risk management through stock picking, trading, and cash management.
In 2002, Equitas Capital Advisors, LLC was established as a unique company that blends the resources of a large global corporation with the flexibility of a small boutique firm. The registered service mark of Equitas Capital Advisors is Engineering Financial Solutions® and the purpose of Equitas is to design, build, and deliver investment solutions to meet the goals and objectives of our investors. Equitas Capital Advisors, LLC located in New Orleans, has over 200 years of combined investment management consulting experience providing professional investment management services to investors such as foundations, endowments, insurance companies, oil companies, universities, corporate retirement plans, and high net worth family offices.
Disclosures and Disclaimers:
Above information is for illustrative purposes only and has been obtained from reliable sources but no guarantee is made with regard to accuracy or completeness. It is not an offer to sell or solicitation to buy any security. The specific securities used are for illustrative purposes only and not a recommendation or solicitation to purchase or sell any individual security.
Equitas Capital Advisors, LLC is registered as an investment advisor with the U.S. Securities and Exchange Commission (“SEC”) and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the advisor has attained a particular level of skill or ability.
Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author on the date of publication and are subject to change. This publication does not involve the rendering of personalized investment advice.
Charts and references to returns do not represent the performance achieved by Equitas Capital Advisors, LLC, or any of its clients.
Asset allocation and diversification do not assure or guarantee better performance and cannot eliminate the risk of investment losses.
All investment strategies have the potential for profit or loss. There can be no assurances that an investor’s portfolio will match or outperform any particular benchmark. Past performance does not guarantee future investment success.