The Coward's Update

In September's Coward's Update, I concluded that with the continued dominance of the S&P 500 things couldn't get much worse for the cowards. I was wrong. Although the last half of the year was a roller coaster for all global assets, the bumps were softer and the rebounds were better for everybody's favorite blue chips. Here's the bad news for the cowards for 3, 5, and 10 years:








For those of you unfamiliar with the cowards, take a look at the July 1997 update for a detailed description.

Over the past 3 and 5 years, the supposedly hapless professional global fund managers have bested our fearless automatons. The reason is not difficult to fathom: in the past decade every penny you invested outside big US growth stocks cost you dearly. Consider the following 3-year and 5-year returns for the index funds tabulated below:

Index	(Index Fund Sampled)	3 Yr. Return	5 Yr. Return
Continental Small Companies	DFA Continental Small Compny	15.15	11.13
Emerging Markets (Equally Weighted)	DFA Emerging Markets	-6.47	NA
Small Japanese Stocks	DFA Japanese Small Company	-26.00	-12.74
EAFE Index	DFA Large Cap International	9.88	9.57
Pacific Rim Small Companies	DFA Pacific Rim Small Compny	-18.78	-14.47
US Small-Medium Companies	DFA U.S. 6-10 Small Company	11.37	12.15
US Small Companies	DFA U.S. 9-10 Small Company	10.21	13.17
UK Small Companies	DFA United Kingdom Small Co	6.08	6.71
REITs	DFA/AEW Real Estate Secs	10.56	6.78
S&P 500	Vanguard 500 Index	28.16	23.96
Emerging Markets (Cap Weighted)	Vanguard Emerg Mkt Stk Idx	-7.60	NA
EAFE-Europe	Vanguard European Stock Idx	24.74	19.32
Precious Metals Stocks	Vanguard Gold & Precious Met	-16.48	-12.05
US Growth Stocks	Vanguard Growth Index	33.87	27.79
EAFE Pacific	Vanguard Pacific Stock Idx	-11.14	-4.01
US Value Stocks	Vanguard Value Index	21.91	19.79

It's not surprising that the global fund managers, favoring conventional portfolios heavy with Microsoft and Merck, have done so well. The worst performing automaton was the academic coward, with its heavy exposure to Japan and very small stocks. The best was the Tweedy Browne coward, which avoided these areas. Perversely, the more passively managed the coward, the worse it performed.

It's well to step back and consider some market history. Ten years ago the Japanese were buying up the crown jewels of American real estate and industry, fatuous novels were being written about a world controlled from Tokyo, and the Nikkei was the place to be. Twenty years ago? Real estate and gold. And thirty years ago? The one-decision big growthies of the Nifty Fifty. Sound familiar? In each case, capitulating to the era's asset class zeitgeist would have been a disaster.

On a more prosaic note, the last 5-year period the S&P 500 outperformed foreign stocks was 1979-84, with five year annualized returns of 17.27% and 10.06% (EAFE), respectively. The annualized return for the following five years was 20.41% for the S&P and 36.52% for the EAFE.

So, patience. The cowards will soldier on. You'll see them again next year.

copyright (c) 1999, William J. Bernstein