A front page article in Friday’s Wall Street Journal, titled “Investors Sour on Pro Stock Pickers,” revisits what is now becoming a familiar theme: investors continue to flock in droves to index funds and ETFs and away from traditional, actively managed mutual funds. To which we ask: why wouldn’t they? Index funds continue to outperform the average mutual fund year in and year out. And following a strong performance in 2012 by our indexes, and particularly by the Barron’s 400 (owned by Dow Jones & Co., powered by MarketGrader), we can’t argue with this trend. In fact, we expect to become indirect beneficiaries of it once the Barron’s 400 finally makes its official debut as an ETF in 2013 (more on this in later posts). But before we get into that, to its 2012 results.
The Barron’s 400 Index closed 2012 up 13.8% (price-only return), beating the S&P 500 Index, with a return of 13.4%, by a nose. Closing at 365.89 on December 31st, the index is now up over 153% from its March 2009 bottom following the 2008 market swoon. On a five-year annualized basis, which encompasses all of 2008 through the end of 2012, the Barron’s 400 is up 3% per year, compared to -0.6% for the S&P 500, -0.2% for the Dow Jones Industrial Average and even surpassing the Nasdaq Composite’s 2.6% per year gain. It has also outperformed the broader market as a whole as measured by the Dow Jones U.S. Total Stock Market Index, which has returned 0.1% annually in the last five years.
More impressively, we think, the Barron’s 400 has outperformed the S&P 500 by 5.4 percentage points (540 basis points) per year in the last ten years, based on a 10-year annualized return of 10.3% to the S&P’s 4.9%. When comparing it against the Equal Weighted version of the S&P 500, B400 still outperformed it by 200 basis points per year, based on the S&P 500 EW 10-year annualized return of 8.3%. In other words, B400 outperformed the equal weighted version of its benchmark by a higher margin than what the 10-Year Treasury currently pays per year (1.9%).
Despite having an average market cap of $15.8 billion across its current 400 components and a float adjusted market cap median of $3 billion (which means that half of its components have a float adjusted market cap above $3 billion), some would argue that a better benchmark for the Barron’s 400 would be small cap or mid cap index. Thus, for their benefit (and ours) we also like to compare its performance to that of the S&P 400 Mid Cap and the S&P 600 Small Cap Indexes. While B400 did not surpass the 16.1% return of the S&P 400 Mid Cap or the 14.8% of the S&P 600 Small Cap in 2012, it does lead them by 130 and 100 basis points, respectively, per year in the last decade.
Others would argue that the Barron’s 400 also has a value “tilt,” since its selections are made based on the strength of the underlying companies’ fundamentals, as graded by MarketGrader, of course. In our analysis, it should be noted, value indicators only make up a quarter of our 24 fundamental metrics (by count, not by weight). A pure “value” play with no growth and poor profitability and cash flow is very unlikely to make it into the index. Nevertheless, to indulge the value tilt crowd, we also like to compare the performance of the Barron’s 400 to that of the Value Line Index (performance published daily in the Market Data section of The Wall Street Journal). Here the story is little different. The Value Line Index trailed the Barron’s 400 by 230 basis points in 2012. That index has returned, through December 31st 2012, 3.4% per year in the last decade, 690 basis points per year less than the Barron’s 400; or seen another way, it has underperformed the B400 by a larger amount than the return of the Dow Jones U.S. Total Stock Market Index per year (price return) in the last decade.
Finally, one last index worth comparing against the Barron’s 400 is the FTSE RAFI U.S. 1000 Index. It actually out-gained the B400 14.4% to 13.8% in 2012. However, it trails B400 by 350 basis points per year over the last decade.
In summary, while indexes of different stripes, or tilts, do outperform the Barron’s 400 from time to time, whether it be a small cap or a mid cap index or another fundamentally oriented index, none seems to do so consistently over a long period of time. It is such consistency in the performance of the Barron’s 400 Index that we like to highlight when we present its results. And it is this consistency what makes it, we believe, a core investment strategy based on a sound and transparent foundation that was designed to reward companies that consistently create shareholder value in the long run. We look forward to seeing a tradable version that investors can benefit from, in the market, in the near future.
Please click here to download the Barron’s 400 Factsheet.