The January 1998 Coward's Review contains no surprises. As in previous issues, we compare the risk/return characteristics of our automatons with the performance of the "multiasset global" and "asset allocation" funds in the Morningstar universe. To review, the 4 portfolios we have studied in the past are fixed mixes of the following indexes/funds, rebalanced quarterly:

The Coward's Portfolio (CEI)

• 20% S&P 500
• 20% US small stocks (DFA US 9-10 Portfolio)
• 15% EAFE-Europe
• 5%EAFE Pac. Ex Japan
• 5% Japan Large (MSCI Japan)
• 10% Continental Small (DFA Cont. Sm. Co. Portfolio)
• 5%UK small (DFA UK Sm. Co. Portfolio
• 5% Japan Small (DFA Jap. Sm. Co. Portfolio)
• 5% Pac. EX Japan small (DFA Pac. Rim Sm. Co. Port., before 1/93 EAFE Pac. X J)
• 10% Latin American (MSCI Lat. Am.)

(This portfolio is mixed with the DFA 1 year corporate bond fund to produce a risk/return curve for the past 3, 5, and 10 years.)

The Small Investor's Coward's Portfolio (SICEI)

• 20% Vanguard Index Trust 500
• 20% Vanguard Small Cap Index Fund
• 15% Vanguard European Index Portfolio
• 7% Vanguard Pacific Index Portfolio
• 8% Vanguard Emerging Markets Index Portfolio
• 5% Scudder Latin America Fund
• 12.5% Tweedy Browne Global Value Fund
• 12.5% Acorn International Fund

(This portfolio is mixed with the Vanguard Short Term Corporate Bond Fund to produce a risk/return curve for the past 3 years. )

The Academic Coward's Portfolio (ACEI)

• 25% DFA US Large Cap Value
• 25% DFA US Small Cap Value
• 25% DFA Int'l Value
• 25% DFA Int'l Small Cap Value

(This portfolio is mixed with the DFA 1 year corporate bond fund to produce a risk/return curve for the past 3 years. )

Lastly, in July I added a fourth entry, the Tweedy Coward, in attempt to see if a disclplined global Graham-and-Dodd approach can beat the robots. The fund which does this in the most rigorous fashion is the Tweedy Browne Global Value Fund, which is mixed with the Vanguard Short Term Corporate Bond Fund, to produce a return/risk spectrum accessible to the small investor.

Remember, the CEI and ACEI are meant as a benchmarks for institutional investors. The SICEI and Tweedy portfolios are provided as portfolios available to the small investor.

With all that out of the way, here are the results for 5 and 10 years (CEI only) and 3 years (all 4 indexes) I apologize for for the messiness of the 3 year graph. There are a lot of data points, and the Tweedy, CEI, and SICEI stock portfolios are located in the same place:

Once again, the cowards have done very well over the 5 and 10 year time frames, with only a few funds poking more than a percent above the curve (Income Fund of America for 5 and 10 years, and Pegasus Managed for 10 years.) Over the 5-10 year periods, the cowards provide risk adjusted return superior to greater than 80% of these funds. Over the 3 year time period the picture is not so pretty, with only the Tweedy Coward doing slightly better than average, the CEI and SICEI below average, and the ACEI near the cellar.

The reason for the poor 3 year showing is obvious -- over the past 3 years US stocks, large and small, have trounced foreign assets, particularly those in the Pacific Rim, Japan, and Emerging Markets. This is demonstrated in the below table:

Stock Asset Class	3 Yr Returns (%)	5 Yr Returns (%)	10 Yr Returns (%)
US Large	31.13	20.25	18.04
US Small	24.77	19.38	16.44
European Large	22.16	19.24	14.04
Continental Small	8.5	12.19	N/A
UK Small	14.17	15.17	6.81
Japan Large	-13.4	-0.021	-2.9
Japan Small	-30.43	-13.03	-7.05
Pacific Rim Large	-2.06	7.69	10.75
Pacific Rim Small	-13.68	1.73	N/A
Latin America	8.69	12.64	28.12
MSCI Non US	6.78	11.56	6.35

As you can see, over all 3 time periods the place to be has been the good old USA. This has been particularly true in the past 3 years. What is truly remarkable is that the cowards have done as well as they have. Pay particular attention to the difference in returns between the S&P 500 (first row) and the MSCI-Non US index (last row). Over the past 10 years foreign stocks have returned 11.69% less than the S&P on an annualized basis, with the gap being 8.69% for 5 years and an astonishing 24.35% for 3 years. Now consider that the average asset allocation/global multiasset fund contains more than 80% US equity, versus 15%-50% US equity for the cowards. Given the data, it is perfectly understandable that the cowards have underperformed for the 3 year time period, and truly astonishing that they have managed to beat nearly all of these funds over 5 and 10 years.

Over the 29 year period beginning January 1, 1969, when Morgan Stanley initiated the foreign EAFE index, the returns of the S&P 500 (12.16%) and the EAFE (12.12%) have been nearly identical. There is no reason to believe that US and non US returns should be that different. If foreign stocks are riskier, then their returns should in fact be higher. Certainly, we have no reason to believe that the US-foreign discrepancies of the past decade are a premanent phenomenon. In fact, history shows that the dominant asset over the previous 5-10 year period tends to underperform in the next period.

So, the cowards are slighly bloodied, but unbowed. In July 1998 5 year data will become available for the SICEI and Tweedy Cowards. Stay tuned.

copyright (c) 1998, William J. Bernstein