The Cowards' Update

In last year's update, we surveyed the improving condition of the cowards' portfolios, which had been battered by several years of S&P 500 dominance. In 2000, the asset-class scene had reversed course, with many "unconventional" assets outperforming the S&P 500. This happy trend continued in 2001.

The graphs shown below continue to reinforce an important point—even during periods when U.S. large market outperforms, a globally diversified asset-class-based strategy will do reasonably well. And when the S&P 500 does not perform well, as it has not these past three years, then the global approach truly shines. Take a look at the current plots for three, five, and ten years, below; but first, for those of you unfamiliar with the cowards, the July 1997 update has a detailed description of these portfolios and the methodology used.

With the reversal in asset-class behavior, the cowards' performance has also reversed: now five- and ten-year performance has slipped, while three-year performance is nothing short of spectacular. And with the revival of value investing in 2000-2001, the academic cowards are looking smarter by the month.

The behavior of each asset class over the past three and five years is shown in the table below:

Index	Index Fund Sampled	3 Yr. Return	5 Yr. Return
Continental Small Companies	DFA Continental Small Co.	-3.40	3.78
Emerging Markets (Equally Weighted)	DFA Emerging Markets	4.28	-3.59
Small Japanese Stocks	DFA Japanese Small Company	-4.89	-14.70
EAFE Index	DFA Large Cap International	1.77	4.21
Pacific Rim Small Companies	DFA Pacific Rim Small Company	11.67	-8.18
U.S. Small-Medium Companies	DFA U.S. Small Cap	13.19	11.19
U.S. Small Companies	DFA U.S. Micro Cap	15.38	11.82
U.K. Small Companies	DFA United Kingdom Small Co.	7.16	2.50
REITs	DFA Real Estate Securities	12.51	7.54
S&P 500	Vanguard 500 Index	-1.06	10.66
Emerging Markets (Cap Weighted)	Vanguard Emerg Mkt Stk Idx	4.37	-4.99
EAFE-Europe	Vanguard European Stock Idx	-5.15	6.44
Precious Metals Stocks	Vanguard Gold & Precious Met	12.20	-3.68
U.S. Growth Stocks	Vanguard Growth Index	-4.46	11.08
EAFE-Pacific	Vanguard Pacific Stock Idx	-4.93	-8.14
U.S. Value Stocks	Vanguard Value Index	1.68	9.35

The dominance of the Tweedy Browne Global strategy continues to annoy the efficient marketeer (because, after all, it is an actively managed fund with a fairly high expense ratio). Tweedy Browne employs a highly diversified, disciplined value strategy which is nation-blind. As such, the authors of "What Has Worked in Investing" and "10 Ways to Beat an Index" seem to be fulfilling their promise. However, their portfolio is hedged and largely European. The hedging is key; it gave them approximately an additional 3% of annualized performance over the past five years and 5% additional annualized performance over the past three years. Subtract that from their returns and their advantage disappears. I keep waiting for the currencies to rally, but the market gods have not obliged yet. As Ralph Cramden used to say, "One of these days Alice..."

Copyright © 2002, William J. Bernstein. All rights reserved.

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