| Ten-Year
Risk and Return of Equity Asset Classes by
Index
By John Spence
March 5, 2002 |
|
Most of the experts will tell you that a diversified equity portfolio
is comprised of funds from the various asset classes, which are
separated in terms of size and style. The idea is to build a broad
base of funds that will hold up over the long haul and endure
the market's fickle tastes as styles fall in and out of favor.
Sounds simple enough, but as we know this is easier said than
done.
Using Morningstar's classification system, the fund universe
is broken down into 9 different asset classes, or "style
boxes" to use the Morningstar parlance. Now, there are no
hard and fast rules about how much should be allocated to each
asset class - that depends on each investor's unique profile.
Also, some investors like to keep it simple and hold fewer funds,
whereas asset allocation junkies prefer a bigger lineup of funds
to cover each class individually. There are advantages and disadvantages
that go along with each strategy in terms of taxes and flexibility,
for instance.
The process of picking funds is somewhat easier for indexers
because they're not looking for the best manager. Instead, they
pick up the index fund or ETF that covers the asset class and
move on. However, there are several well-known indexes that cover
each asset class, so there is some judgment involved.
Although there is considerable debate on this point on our discussion
boards, many investors believe it is reasonable to look at past
index returns and volatility as a guide for making asset allocation
decisions. So let's do that.
Morningstar keeps track of 10-year annualized returns and standard
deviation, and we added 15-year annualized returns for further
reference. Standard deviation tells an investor how widely the
index returns fluctuated over the 10-year period. A higher standard
deviation implies more volatility and risk.
| Large Cap Indexes |
| Index |
Std. dev. - 10 yrs. |
10 yr. ret. |
15 yr. ret. |
| Barra Large Cap Growth |
18.19 |
12.70% |
13.09% |
| Barra Large Cap Value |
15.50 |
12.79% |
11.82% |
| Dow Jones Large Growth |
22.32 |
10.18% |
11.20% |
| Dow Jones Large Value |
14.12 |
13.01% |
12.35% |
| Nasdaq Composite |
31.46 |
12.05% |
- |
| Russell 1000 |
15.96 |
12.85% |
12.53% |
| Russell 1000 Growth |
20.46 |
10.87% |
11.86% |
| Russell 1000 Value |
14.63 |
14.05% |
12.6% |
| Standard & Poor's 500 |
15.80 |
12.97% |
12.67% |
| Wilshire Large Cap 750 |
16.18 |
12.48% |
12.34% |
| Wilshire Large Growth |
20.06 |
10.74% |
11.65% |
| Wilshire Large Value |
15.17 |
12.98% |
12.14% |
*Source: Morningstar data as of 1/31/2001
| Mid Cap Indexes |
| Index |
Std. dev. - 10 yrs. |
10 yr. ret. |
15 yr. ret. |
| Barra MidCap Growth |
24.30 |
14.32% |
- |
| Barra MidCap Value |
16.47 |
14.88% |
- |
| Dow Jones Midcap Growth |
28.30 |
11.05% |
10.78% |
| Dow Jones Midcap Value |
14.98 |
13.03% |
12.86% |
| Russell Midcap Growth |
26.05 |
10.64% |
11.59% |
| Russell Midcap Value |
14.62 |
14.24% |
12.76% |
| Standard & Poor's Midcap 400 |
18.75 |
14.74% |
15.01% |
| Wilshire 4500 |
21.77 |
10.06% |
10.27% |
| Wilshire Mid Cap 500 |
18.95 |
13.52% |
12.80% |
| Wilshire Midcap Growth |
26.35 |
10.63% |
11.27% |
| Wilshire Midcap Value |
15.61 |
14.61% |
13.12% |
*Source: Morningstar data as of 1/31/2002
| Small Cap Indexes |
| Index |
Std. dev. - 10 yrs. |
10 yr. ret. |
15 yr. ret. |
| Dow Jones Small Growth |
30.62 |
10.85% |
10.90% |
| Dow Jones Small Value |
14.70 |
13.75% |
13.20% |
| Russell 2000 |
20.14 |
10.53% |
9.87% |
| Russell 2000 Growth |
26.95 |
5.99% |
7.02% |
| Russell 2000 Value |
14.79 |
14.34% |
12.19% |
| Standard & Poor's Smallcap 600 |
19.88 |
12.87% |
10.29% |
| Wilshire Small Cap 1750 |
20.25 |
11.81% |
10.86% |
| Wilshire Small Growth |
27.47 |
7.25% |
8.12% |
| Wilshire Small Value |
15.91 |
14.36% |
12.19% |
*Source: Morningstar data as of 1/31/2002
Finally, here's similar data for two broad total market indexes,
as well some numbers for a REIT index and an international index
- the broad MSCI EAFE.
| Index |
Std. dev. - 10 yrs. |
10 yr. ret. |
15 yr. ret. |
Russell 3000
|
15.85 |
12.58% |
12.27% |
Wilshire 5000
|
16.14 |
12.16% |
12.00% |
Wilshire REIT
|
14.01 |
11.01% |
7.76% |
MSCI EAFE
|
15.13 |
4.76% |
3.55% |
*Source: Morningstar data as of 1/31/2002
So there's some index data to chew on when you're making your
asset allocation calls, although there are a few caveats. The
first is that these numbers are based on past returns, and as
such they're no guarantee of future results, as they say. However,
most investors use past performance as a guide to form reasonable
expectations when making portfolio allocation decisions - the
alternative is to make like the ostrich. But it should be duly
noted that the 1990s showed us one of the most exuberant bull
markets in U.S. history.
