Mark Hulbert, writing on MarketWatch on November 9, 2009, says the top-performing advisor in the Hulbert Financial Digest rankings, the "Closed-End Country Fund Report," produced an 11.5% annualized return over the past decade. That advisor wasn't an outlier either: The other advisors in the top five garnered 10.9%, 10.5%, 10.1% and 10%.
Hulbert concludes that these advisors won with a disciplined approach to investing. "Their strategies may not be particularly flashy, but their 'slow and steady wins the race' approaches came out ahead in an otherwise flat decade."
Hulbert also says that of the 86 advisory services that the Hulbert Financial Digest tracks, 71 of them outperformed the market. "So don't let your financial advisor excuse his poor performance with reference to the so-called lost decade," he writes. "A good advisor could have prevented that decade from leading to your loss, too."
Writing in the January 2010 issue of the Fundamental Index newsletter, Rob Arnott says the problem with the 2000s was overconfidence in the equity markets, which he compares to the overconfidence about the infallibility of the Titanic in 1912. The unshakeable faith in the equity risk premium, he writes, "caused the $8 trillion U.S. pension supertanker to charge ahead with massive equity allocations into a decade that did not reward equity investors."
Arnott says it was the worst decade in history for U.S. equity investors, worse than the 1850s and 1930s. In the first decade of the 21st century, the S&P 500 compounded at negative 1.0% per year, which was 3.6% below inflation. In the 1850s, it compounded by a positive 0.5% and in the 1930s by a negative 0.1%.
But not all investors suffered. Three asset classes enjoyed double-digit returns: emerging market bonds saw a 10.9% annual return, REITs enjoyed a 10.2% gain and emerging market stocks returned 10.1%.
Part of the problem is the cap weighting of equity portfolios, Arnott says. In 2000, tech and telecom represented 45% of the market cap but only 15% of the economy. In 2009, the sell-off in value stocks drove them to 22% of the S&P 500 index when they were cheap, despite the fact that they made up 38% of the economy.
In contrast, the Fundamental Index methodology "eliminates price from the portfolio weighting process," he says.
Arnott's portfolio was not the only winner. Vanguard brought in more new assets during the first decade of the 21st century than through the previous three decades combined. On January 1, 2000, Vanguard's total net assets in open-end funds, excluding ETFs, money market funds and funds-of-funds, was $422 billion, according to Morningstar's Falkof. By December 31, 2009, the company's assets had reached $1.07 trillion (making it the biggest fund family in the world). Of that increase, $440 billion was new investor money.
Falkof attributes Vanguard's success to its low costs, broad diversification and sober stewardship. Also, when market perceptions shifted, Vanguard was ready with another low-cost index fund-the Total Stock Market Index-which appealed to investors who wanted to index with something broader than the S&P 500. The company's low-cost bond funds, meanwhile, offered an attractive alternative in the income market, and the company's Treasury Inflation-Protected Securities funds, being the cheapest TIPS on the market, brought in investors worried about inflation.