But the punchline is the relative ranking of the asset class groups. Below I've plotted the full-year graphs for 1997 and 2000:

As you can see, in 1997 indexing large caps (the lg, lb, and lv data points) worked better in general than indexing small caps (the sg and sb data points); this certainly did not occur in 2000 when small-cap stocks outperformed large. So good-bye "Core and Explore." In fact, to the extent that there's a small-cap premium, indexing small caps should actually work better than large caps. And, to add insult to injury, indexing foreign stocks in 2000 also rebounded: DFA's large-cap foreign and value portfolios ranked in the 37th and 6th percentiles of all foreign funds, respectively, and its long-suffering international small and small value strategies ranked at the 14th and 9th percentiles. To complete the picture, here's the plot for the past five years:

Finally, the phenomenon of "percentile compounding" shows up well in this sample: for the 120 monthly data points in 2000, the average index fund percentile rank was 46th. But over the whole year, the 10 asset classes averaged out to 40th. (So much for the bromide that "indexing didn't work in 2000.") And for the past five years, the average performance of the indexes was 30th percentile.

Out of habit, I'll probably continue this study another year, but given the stunning statistical significance of the above results, I'm probably just amusing myself. Oh yes, and send a memo to the folks at Schwab: Forget about exploring; stick to coring.

01/29/2001

This article was originally published on Efficient Frontier, and is reproduced by permission.

<<Previous