The Lost Decade? Not for Some Asset Classes

|
Includes: DGS, DLS, EEM, GWX, IWN, VBR, VWO
by: Jacob Wolinsky

This past decade has been titled by many the "Lost Decade" partially due to the low returns of stocks. While the decade is not over yet, as of Sept. 30, 2009, the Total Stock Market Index has an annualized return of -.79%. $10,000 invested on January 1,2000 would be worth only $9,103 almost ten years later. Although by December 31, 2009 that number may turn slightly positive, this decade has been one of no market gains. As the decade comes to a close, I decided to compile data on the performance of various asset classes. It turned out that while as a whole "The Lost Decade" is an appropriate term, for some stock categories it has been far from being a lost decade. I used Index Fund Advisors (IFA) Data for all the data presented below.

(I used data from January 1- Nov. 30, 2009, However some asset classes only had data leading up to Sept. 30, 2009 - the end of quarter 3)


Asset Class Rank Growth of $10,000 Annualized Return
Emerging Markets Value

1
$32846.21

12.86%

International Small Value

2
$28600.73

11.28%

Emerging Markets Small Cap

3
$28594.61

11.28%

Us Small Value


4
$23900.65

9.27%

Emerging Markets

5
$22580.65

8.64%

International Small Cap

6
$22468.86

8.58%

International Large Cap

7
$10799.26

7.99%

International Value

8
$18316.59

6.35%

US Micro Cap

9
$16976.69

5.63%

IFA Five-Year Government Fixed Income

10
$16447.93

5.19%

Five-Year Global Fixed Income

11
$15986.91

4.89%

US Small Cap

12
$15697.4

4.69%

One Year Fixed Income

13
$14387.27

3.77%

US Large Value Index

14
$14174.09

3.61%

US Large Cap

15
$8371.37

-1.79%

US Small Growth

16
$7047.66

-3.55%

US Large Growth

17
$6012.97

-5.13%

Nasdaq

18
$5028.34

-6.75%


Bonds had decent returns. This is not surprising because bonds tend to perform well when stocks are not. The five Year Government Note index had a return of 5.19. This is a satisfactory return in light of the low inflation rates throughout this decade. Inflation averaged 2.5% per year, which resulted in a real return of 2.69%. Nothing to write home about but much better than a negative return on stocks, while taking much lower risks to achieve this return.
I think the most important data is not the bond returns rather, it is the return of various stock classes throughout the decade. As the data shows international stocks and emerging markets in particular had very satisfactory gains. No doubt some of the superiority of international stocks was due to the large decline of the dollar throughout the decade. Small cap stocks especially international ones had very good returns. However, I think the most important data is the data showing the exceptional performance of value stocks versus growth stocks. Value stocks in nearly every size, and country far outperformed growth stocks. This is not surprising since value stocks over long periods of time - 10, 20 years - nearly always trump growth stocks. This occurs in stocks in the US and internationally. The reason value stocks outperform is simply because humans are emotional creatures. Investors overreact and bid up companies with exciting and high growth prospects. When these companies do not perform as well as anticipated they are quickly dumped by investors. Value stocks on the other hand have so much negative news already priced in that any positive news which occurs (as usually does due to mean regression) causes the share price to increase significantly. The advantage of value stocks over growth stocks are even more pronounced in small cap stocks. Small cap value stocks had an annualized return of 9.27% versus a -3.55% annualized loss for small cap growth stocks.
Growth stocks came into this millennium roaring. $10,000 invested in the Nasdaq on January 1, 1999 grew into $20,855 by March 3, 2000 a mere 15 months later. Cisco, Yahoo, Amazon, and other large technology companies were the hot craze then, they were part of the "New economy", the old economy Phillip Morris, Procter & Gamble, Exxon Mobil were not the place to invest, so said the self-proclaimed "experts". The decade has proved this completely wrong. The Nasdaq was the worst performer on the list. A $10,000 investment in the Nasdaq on Jan 1, 2000 was worth nearly half that amount by the end of the decade. The boring old economy (large cap value) stocks produced a respectable 3.65% annualized gain and a $10,000 investment grew to over $14,000 by decade end, all during a period when the market was flat.
In the past there was little way to get exposure to these asset classes besides direct stock ownership. Due to the explosive growth of ETFs you can get a broad based, low cost ETF that will allow you to own these superior asset classes.
Below a list of some of the decade's top performing asset classes and their corresponding ETFs:
1. International Small Value: GWX, DLS
2. Emerging Market Small Cap: DGS
3. US Small Value: IWN, VBR
4. Emerging Markets: VWO, EEM
There currently is no ETF for the highest performing class - an emerging market value ETF. However there will likely be one in the future. There are ETFs for the other high performing other classes. Even though these asset classes are historically the top performers, this does not guarantee they will outperform over every single time period. In the late 1990s growth stocks outperformed value stocks by wide margins. However in the long run due to investor overraction value stocks will always outperform growth stocks. I think this decade has taught some valuable lessons to investors. An astute investor should take note for the future.
Disclosure: Long PG and XOM.