Week Ending 4/27/12 Performance Data For S&P, Asset Classes & Sectors

Weekly performance data ending 4/27/12:

S&P 500 Index	1.82%
Asset Classes		Sectors
Domestic Large Cap Value	1.60%	Technology	1.93%
Domestic Mid Cap Value	1.94%	Consumer Discretionary	2.22%
Domestic Small Cap Value	2.29%	Financials	1.88%
Foreign Large Cap Value	1.01%	Telecom	1.75%
Foreign Small/Mid Value	0.84%	Industrials	2.10%
Domestic Large Cap Growth	1.98%	Utilities	1.69%
Domestic Mid Cap Growth	2.05%	Natural Resources	1.91%
Domestic Small Cap Growth	2.48%	Real Estate	2.29%
Foreign Large Cap Growth	0.56%	Health Care	1.36%
Diversified Emerg Markets	0.06%	Energy	1.90%
Gold & Precious Metals	1.74%	Consumer Staples	0.71%
Real Estate	2.29%
Broad-Basket Commodities	1.31%

Historical Sector and S&P Analysis For May

Perhaps lending support to the theory to "go away in May", there are no serious sector standouts in the month of May over the last twenty-five years.  That being said, it has not exactly been a month that has provided negative returns.  The S&P 500 has finished in positive territory for the month of May eighteen times in the past twenty-five years, with a mean return of +1.57%.

With no sectors showing an obvious dominance in the month of May, I thought it would be more helpful to provide statistical data for my readers, that you may or may not be able to derive some ideas.  If you subscribe to the mean reversion theory, which I do, then you may want to take a look at Natural Resources and Energy specific ETFs.  The average natural resources mutual fund has finished in positive territoty nineteen times over the past twenty-five years in the month of may.  Of the eleven sectors analyzed, natural resource funds have provided one of the highest returns on investment with a compounded average annual return of  25.45%.  Also note, the higher return has come with a higher level of volatility.

Energy ETFs are also catching my eye going into May.  There are few reasons why I would consider a long position in this area.  The first being that the sector, as a whole, has provided the most bang for your buck in the month of May over the last twenty-five years.  The average energy mutual fund has provided a compounded average annual return of 34.54%.  Again, with the higher return comes a higher standard deviation when compared to the rest of the sectors and the S&P 500.  That is why I like energy stocks going into May.  Not only has the average energy mutual fund finished in negative territory the last two years in the month of May, but it is also coming off a month, which at this point has not been fruitful.  This April's performance has been a complete divergence from energy's historically strong performance in the month.  With energy prices still near all-time highs, and strong earnings reports coming in from the likes of ExxonMobil (XOM), I expect a positive move back towards the mean.

I hope my readers are able to find something useful in the data I have shared.  Based on my analysis of the historical data, and current market conditions, I will be establishing a long poistion in the SPDR S&P Global Natural Resources ETF (GNR) and holding my long position in the Energy Select Sector SPDR (XLE).  There are still a few trading tradings left in the month and thus far my bet on the energy sector has not paid off as the XLE sits slightly below where it began the month, and has performed much more in line with the entire market in April. 

Thank you and good luck everyone!

Jon R. Orcutt, founder of Allocation For Life, is an asset allocation strategist and author of “Master the Markets with Mutual Funds: A Common Sense Guide To Investing Success”

www.allocationforlife.com

MAY	Cons Disc	Health Care	Energy	Financials	Cons Staples	Technology
1987	1.52%	0.89%	5.67%	-1.02%	-0.63%	0.41%
1988	-2.39%	-0.80%	-3.39%	0.63%	0.75%	-3.88%
1989	5.53%	3.15%	1.93%	4.20%	6.17%	6.94%
1990	10.52%	12.23%	9.42%	6.71%	8.71%	12.78%
1991	5.96%	4.40%	1.46%	5.22%	3.66%	3.13%
1992	0.57%	3.16%	5.67%	3.13%	0.89%	1.16%
1993	6.49%	5.07%	4.07%	-1.03%	3.15%	8.62%
1994	-2.27%	0.56%	1.92%	4.25%	-0.73%	-2.02%
1995	1.72%	1.16%	2.33%	5.13%	3.59%	3.65%
1996	3.82%	1.77%	1.62%	1.99%	3.69%	3.35%
1997	7.15%	10.34%	10.42%	5.46%	3.40%	12.43%
1998	0.27%	-3.52%	-6.36%	-2.40%	0.69%	-6.72%
1999	-2.75%	-0.12%	-2.59%	-3.49%	-1.63%	-0.98%
2000	-2.44%	1.49%	11.52%	5.50%	3.89%	-11.58%
2001	3.11%	4.22%	0.55%	4.03%	2.57%	-4.12%
2002	-0.45%	-3.67%	-2.72%	0.03%	0.50%	-5.80%
2003	5.87%	8.95%	12.68%	6.18%	6.44%	12.27%
2004	-0.16%	-0.70%	-1.09%	1.95%	-1.08%	5.62%
2005	5.71%	2.70%	3.98%	2.62%	3.21%	9.25%
2006	-3.39%	-3.25%	-3.87%	-3.82%	-0.31%	-8.17%
2007	3.29%	1.30%	7.80%	2.45%	1.53%	4.29%
2008	1.18%	2.52%	7.86%	-2.79%	1.10%	5.85%
2009	0.72%	5.67%	17.26%	10.96%	6.41%	4.45%
2010	-6.75%	-7.79%	-12.69%	-9.72%	-6.91%	-7.01%
2011	0.17%	2.14%	-4.30%	-2.85%	1.30%	-1.56%
Compounded Avg Ann Ret	21.17%	26.01%	34.54%	21.10%	25.75%	18.80%
# of Times Finished Up	17	18	17	17	19	15
Mean Return	1.72%	2.07%	3.48%	1.73%	2.01%	1.69%
Standard Deviation	4.02	4.42	6.40	4.42	3.22	6.81
MAY	Telecom	Natural Res	Real Estate	Utilities	Industrials	S&P 500
1987	2.42%	1.05%	-1.36%	-1.27%	1.51%	0.87%
1988	1.95%	-1.81%	-1.08%	3.62%	-1.61%	0.86%
1989	5.91%	0.46%	1.31%	4.42%	3.50%	4.05%
1990	8.43%	7.60%	0.88%	4.58%	6.82%	9.75%
1991	0.75%	3.07%	1.07%	0.20%	5.72%	4.31%
1992	-0.65%	3.91%	3.21%	1.95%	-0.22%	0.49%
1993	3.30%	3.56%	-0.69%	0.28%	4.39%	2.68%
1994	-0.22%	1.69%	1.28%	-2.50%	-1.88%	1.64%
1995	2.49%	1.65%	4.00%	3.74%	1.67%	4.00%
1996	2.85%	1.18%	2.55%	0.74%	1.39%	2.58%
1997	9.91%	8.02%	2.90%	4.81%	7.88%	6.09%
1998	-4.39%	-7.48%	-1.15%	-1.36%	-2.93%	-1.72%
1999	-0.53%	-3.90%	2.28%	2.51%	-1.42%	-2.36%
2000	-8.97%	7.99%	1.19%	-1.06%	-3.64%	-2.05%
2001	-4.96%	0.86%	2.02%	-1.84%	3.64%	0.67%
2002	-1.52%	0.27%	1.42%	-3.46%	-0.67%	-0.74%
2003	9.52%	10.56%	5.54%	0.30%	4.22%	5.27%
2004	0.73%	0.66%	6.34%	1.72%	2.08%	1.37%
2005	5.42%	2.48%	3.15%	0.73%	4.86%	3.18%
2006	-6.81%	-3.39%	-2.81%	-0.16%	-2.91%	-2.88%
2007	7.14%	5.97%	0.59%	3.41%	5.77%	3.49%
2008	5.24%	6.98%	0.08%	3.67%	2.30%	1.30%
2009	7.87%	15.98%	3.06%	6.13%	4.25%	5.59%
2010	-5.47%	-10.68%	-5.25%	-6.69%	-8.40%	-7.99%
2011	-0.17%	-4.16%	1.36%	0.30%	-2.56%	-1.13%
Compounded Avg Ann Ret	18.92%	25.45%	15.69%	11.75%	16.12%	19.31%
# of Times Finished Up	15	19	19	17	15	18
Mean Return	1.61%	2.10%	1.28%	0.99%	1.35%	1.57%
Standard Deviation	5.16	5.76	2.51	2.99	3.90	3.60

S&P 500 vs. Equity Mutual Funds - The Real Data

Throughout my career I have always heard that the average managed equity mutual fund does not outperform the S&P 500 Index.  I still seem to hear this about once a week on CNBC.  Though the words are strong, I have actually never had anyone show me the data to support, what has become, a generally accepted investing principle.  Naturally I am writing to share the data.  The problem is, the factual data I have collected does not support the theory that the average managed equity mutual fund lags the performance of the S&P 500.

Before I share the data with you I want to preface that I am an S&P 500 fan.  The fact is I want the S&P 500 Index to skyrocket every year.  If that happens, I do not care what is lagging or outperforming the index.  In an environment like that everyone should be enjoying a tremendous amount of prosperity.  However, that is not reality and that is why it is important to make sure that statements are accurate and the correct information is being presented.

I decided to compare the performance of the S&P 500 index to the average performance of mutual funds covering thirteen different identifiable equity asset classes.  Those asset classes are as follows:  Domestic Large Cap Value, Domestic Mid Cap Value, Domestic Small Cap Value, Foreign Large Cap Value, Foreign Mid/Small Cap Value, Domestic Large Cap Growth, Domestic Mid Cap Growth, Domestic Small Cap Growth, Foreign Large Cap Growth, Diversified Emerging Markets, Gold & Precious Metal, Real Estate and Broad-Basket Commodities.

Everyone seems to have a different definition of what duration the “long-term” covers.  When we live in a world where the average non-leveraged ETF is held for only 16 days and the average mutual fund is held for around one year, then I think it is safe to refer to looking back over the last twelve years (this century) as the “long-term”.  That is 12.3 years to be exact, or 147.67 months, or 4,494 days.  That time period is January 1, 2000 thru the markets close on Friday April 20, 2012, and is the time frame I chose to compare the total return performance of the S&P 500 Index to the total return performance of the average mutual fund.  Here is the return data:

January 1, 2000 - April 20, 2012	Total Return
S&P 500 Index	17.81%
Mutual Funds
Domestic Large Cap Value	46.52%
Domestic Mid Cap Value	139.57%
Domestic Small Cap Value	179.88%
Foreign Large Cap Value	36.13%
Foreign Small/Mid Cap Value	90.04%
Domestic Large Cap Growth	-8.98%
Domestic Mid Cap Growth	20.64%
Domestic Small Cap Growth	37.35%
Foreign Large Cap Growth	3.77%
Diversified Emerging Markets	147.49%
Gold & Precious Metals	534.78%
Real Estate	309.72%
Broad-Basket Commodities	41.39%

As you can see from the data, only two of the above asset classes have not outperformed the total return of the S&P 500 over the last 12.3 years.  We are talking about the average performance of thousands of mutual funds.  The only asset classes that have lagged the total return of the S&P 500 for the time period examined were domestic large cap growth and foreign large cap growth mutual funds. 

My theory as to why large cap growth funds are the only asset class to lag the S&P 500 over the last 12.3 years is based on laziness and ignorance.  There’s a reason why there are a much greater number of large cap growth funds in the market when compared to the number of offerings of other asset classes.  When an institution wants to roll out a new fund and make some money managing assets, large cap growth is considered a no-brainer.  Heck, how hard could it be?  You buy a little Microsoft (MSFT), a little Intel (INTC), a little Home Depot, and you hold on.  All the other asset classes mean committing time and resources, and well that just seems like a lot of work.  Value managers have to dig deep into financial statements and determine if earnings rates and current dividend yields are sustainable.  Large cap growth fund managers can buy any big name growth stock and not worry about current or projected growth rates.  They always have the rationale of buying things based on “future” growth.  Sadly, most large cap growth managers did not buy Apple (APPL), even by accident, as a part of their no-brainer strategies. 

So the next time a financial “expert” passingly tells you that the average equity mutual fund lags the S&P 500, please make sure you ask them to clarify and quantify their position.  It is not that difficult to find the performance data.  It is all available on Morningstar’s webpage.  Up until recently I actually believed that theory, but after I stopped being lazy and dug a little deeper into the data, I was able to come up with some theories of my own based upon factual data.  What was the lesson I learned?  Stop believing everything you hear and do the work yourself.

Thank you and good luck everyone!

For a more recent view of the average mutual funds performance versus the the S&P 500 Index, please visit the following post:

http://allocationforlife.blogspot.com/2013/01/10-yr-trailing-s-500-and-mutual-fund.html

Jon R. Orcutt, founder of Allocation For Life, is an asset allocation strategist and author of “Master the Markets with Mutual Funds: A Common Sense Guide To Investing Success”

www.allocationforlife.com