The Last Two Decades in Perspective

Jay D. Franklin CFA, CFP, FSA | Clarity Capital Advisors |

As we noted in our year-end summary, for US equities, the category of large growth dominated the quarter, year, and decade. In the tables below, the total market is represented by the Russell 3000 Index, and the large and small segments are based on MSCI Prime and MSCI Small indices, respectively.

                                    Annualized Return 1/1/2010 to 12/31/2019

Total US Market                                           13.4%

Large Growth                                               15.2%

Large Value                                                  11.9%

Small Growth                                               13.7%

Small Value                                                  11.2%

The pattern is clear—large caps beat small caps and growth beat value. Even if we put returns on a risk-adjusted basis by considering the standard deviation of returns, the same pattern prevails. Is large growth (or specifically technology) the place to be for the 2020s? Of course, nobody knows, but if you are feeling a compelling urge to load up on the FAANG stocks, you may be under the influence of the behavioral phenomenon of recency bias, the tendency to assign a larger weight to recent events relative to events of the more distant past. Speaking of which, here are the returns from the 2000s.

                                    Annualized Return 1/1/2000 to 12/31/2009

Total US Market                                           -0.2%

Large Growth                                               -4.7%

Large Value                                                   2.8%

Small Growth                                                1.9%

Small Value                                                   9.1%

Note that the pattern is the opposite—small beat large and value beat growth. Even though it was a “lost decade” for the overall market, investors who were overweight in small value and large value did OK. It's important to remember that this decade included two of the most significant downturns in market history, the Global Financial Crisis and the Dot-com bubble. At this point, you may be wondering what returns look like over the last two decades? Here they are.

                                    Annualized Return 1/1/2000 to 12/31/2019

Total US Market                                             6.4%

Large Growth                                                 4.8%

Large Value                                                    7.3%

Small Growth                                                  7.6%

Small Value                                                   10.1%

One key takeaway is that the overall return of the market (6.4%) was significantly lower than the long-term historical average through 12/31/1999 (about 10.7% over 72 years, based on the Fama/French Total US Market Research Index). This discrepancy may be partly attributed to the astronomically high valuations seen at the beginning of the century. Also, inflation during the past two decades was about 1% lower than in the prior 72 years, meaning that the difference in real returns for the period was about 3.3% rather than 4.3%. The pattern from the first decade of the century holds for both decades together—small beat large and value beat growth. Although small value emerges as the clear winner (even when using risk-adjusted returns), it’s important to understand that the margin of victory is entirely attributable to 2000-2002, the depths of the tech wreck or the bursting of the dot com bubble, whatever you want to call it. You may actually find it difficult to believe that the numbers below were all produced by different segments of the same financial market.

                                    Annualized Return 1/1/2000 to 12/31/2002

Total US Market                                           -13.7%

Large Growth                                               -25.8%

Large Value                                                    -4.3%

Small Growth                                                -15.3%

Small Value                                                      8.5%

The -25.8% annualized return of large growth turned a $1,000 investment into $409. After removing the impact of the first three years of the millennium, the last 17 years form a much tighter range than either of the two decades alone or both of them together.

Annualized Return 1/1/2003 to 12/31/2019

Total US Market                                           10.4%

Large Growth                                               11.4%

Large Value                                                    9.5%

Small Growth                                                12.3%

Small Value                                                   10.4%

From this, we see that the premium delivered by small value stocks over the last two decades essentially occurred in the first three years of that period. Indeed, this is truly the nature of factor-based investing in that return premiums occur in relatively short periods of time and can be separated by long periods (sometimes measurable in decades). Patience is more than a virtue—it’s an absolute necessity.

In closing, it would be helpful to look at foreign stocks vs US stocks over the last two decades. For this purpose, International Developed is represented by the MSCI EAFE Index, and Emerging Markets is represented by the MSCI Emerging Markets Index. Both are net of taxes on dividends received. Below are annualized returns for each decade and the whole 20-year period ending 12/31/2019.

                                              2000s             2010s             20 Years

Total US Market                   -0.2%              13.4%             6.4%

International Developed        1.2%                5.5%             3.3%

Emerging Markets                 9.8%                3.7%             6.7%


After the last decade, the temptation to abandon foreign stocks is quite strong (the recency bias at work again), but we would advise against it. One important consideration is that a dollar of future earnings costs about $18.70 for US stocks vs. $14.50 for international developed and $13.00 for emerging markets (based on the P/E ratios from Morningstar of VTSAX, VTMGX, and VEMAX). Within the U.S., the numbers are $26.10 for large growth (VIGAX) and $14.10 for small value (VSIAX). Note, a lower valuation does not always translate into a higher return, even for long periods (more than ten years), but the very long-term data (since 1928) shows that lower priced and smaller companies tend to outperform the overall market, especially when portfolios are constructed with consideration of a third factor, profitability.

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