The Independent Adviser for Vanguard Investors
•
June 2014
•
13
FOR CUSTOMER SERVICE, PLEASE CALL
800-211-7641
funds faltered for different reasons, and
their minimal assets were absorbed by
other Vanguard funds many years ago.
Since then, sector investing has been
an indexing affair at Vanguard, start-
ing with REIT Index, introduced in
1996, and then continuing with 10
MSCI-index based sector funds opened
in 2004. Most recently,
Global ex-
U.S. Real Estate Index
, based on an
S&P benchmark, was introduced in
November 2010. Even as Vanguard’s
sector options have become more
index-based, Bogle has become more
and more critical of the trend, particu-
larly as they proliferate through the use
of exchange-traded funds.
But what do the performance num-
bers have to say? Earlier, I showed you
calendar-year returns to make a specific
point, but you know I prefer rolling
returns over point-in-time returns when
it comes to looking at performance. As
most of Vanguard’s sector index funds
have but a decade of real-world returns
under their belts, I used the historical
index data dating back through 1994
to provide us with about two decades’
worth of perspective. The table below
looks at that data for all 12 of the sector
indexes (11 from MSCI and one from
S&P), the Wilshire 5000 index, plus the
three active sector funds in Vanguard’s
stable.
Let’s try to winnow down the win-
ners from the losers. Six out of 12 sec-
tor indexes showed better rolling one-
year, three-year and five-year returns,
on average, than the market: Consumer
discretionary, consumer staples, ener-
gy, health care, industrials and REITs.
(Note that all three of the actively man-
aged funds also make the cut—more to
come on that.) So there’s been a 50-50
chance of picking a sector that gener-
ated market-beating returns over mul-
tiple rolling time periods. I’m looking
for better odds than that.
Additionally, don’t forget that returns
are only half the equation. Risk should
factor into the thinking as well. Every
sector has its time to shine, but as I’ve
discussed, if you are going to invest in
a sector for the long haul, you have to
be prepared to stick with it when the
clouds roll in. And some sectors have
experienced storms that would test any-
one’s conviction.
So, from the first cut of six, let’s talk
about REITs for a moment. The MSCI
REIT index’s worst 12-month loss was a
terrifying 59.1% decline. And over five-
year periods, the worst for the index was
one-and-a-half times that of the overall
stock market, a 9.0% decline versus the
market’s 6.0% annualized loss.
Or consider the MSCI Consumer
Discretionary index’s worst one-year
decline of 44.6%. Not as dreadful, but its
worst five-year return of -10.6% annual-
ized would test even the most resolved
investor’s patience. Flipping that around,
the MSCI Industrials index’s worst long-
term returns haven’t been much worse
than the broad market’s, but its worst
one-year loss of 52.7% probably would
have sent even the firmest believers run-
ning for the hills.
While the MSCI Energy index’s
worst 12-month loss of 43.4% is just
a touch worse than the market’s 43.2%
decline, the sector has tended to hold
up better over longer periods, so I’ll
give it a pass. That brings us down from
12 to just three sector indexes worth
considering as long-term investments:
Consumer staples, energy and health
care. That doesn’t mean I’d buy them,
but from a risk and return perspective,
they do survive a couple of cuts.
Painting a Chart
For those who are more visually
oriented, you know that I am also a fan
of relative-return charts. These charts
require little explanation, and quickly
round out the story told by the rolling
return table. The charts on the next page
compare the performance of each of the
12 sector indexes, as well as Vanguard’s
three active funds, against the Wilshire
5000 index. When the line is rising, the
sector fund or index is outperforming
the Wilshire 5000 index. When the line
is falling, it is trailing the market.
There are several things I want to
draw your attention to.
First, as I’ve said throughout, each
sector goes through periods of outper-
formance (rising lines) and underper-
formance (falling lines). Good luck
trying to make a trade before a rising
line begins to fall, or
vice versa
.
Second, I have held the scale con-
stant across the charts to highlight that
for many of the sectors, performance
tends to be fairly similar to the market
over time, while for others it is all
over the map. For instance, the line
comparing the MSCI Industrials
Rolling Through the Sectors
S&P Global
ex-U.S.
Property
One-year
Wilshire
5000
MSCI
Consumer
Disc.
MSCI
Consumer
Staples
Energy
MSCI
Energy
MSCI
Financials
Health
Care
MSCI
Health
Care
MSCI
Industrials
MSCI
Info. Tech.
Precious
Metals &
Mining
MSCI
Materials
MSCI REIT
MSCI
Telecom
MSCI
Utilities
Best
56.5% 82.2% 44.4% 66.8% 55.2% 85.1% 60.5% 54.9% 72.5% 113.3% 105.4% 73.3% 110.5% 72.7% 56.8% 80.2%
Average
10.7% 12.4% 11.3% 15.8% 14.6% 11.1% 16.3% 12.7% 11.9% 13.7% 11.0% 10.1% 13.7% 8.6% 9.9% 10.4%
Worst
-43.2% -44.6% -24.1% -47.8% -43.4% -64.0% -27.8% -30.2% -52.7% -66.1% -66.0% -54.0% -59.1% -57.2% -34.0% -59.8%
Three-year
Best
31.1% 39.0% 33.4% 45.7% 38.5% 44.1% 34.2% 37.1% 32.4% 66.2% 53.6% 31.4% 43.5% 42.2% 26.1% 41.3%
Average
7.9% 9.4% 9.0% 13.5% 12.1% 6.6% 13.7% 9.6% 8.3% 8.6% 9.9% 7.4% 11.1% 5.7% 8.2% 7.1%
Worst
-16.3% -19.6% -2.5% -8.0% -9.2% -32.5% -7.5% -9.2% -18.2% -38.9% -24.8% -13.1% -25.7% -36.2% -13.3% -20.3%
Five-year
Best
25.8% 33.8% 19.4% 35.3% 30.9% 25.8% 31.1% 27.6% 28.2% 50.6% 40.9% 24.8% 29.6% 31.2% 22.1% 32.6%
Average
5.8% 6.8% 7.5% 13.7% 11.5% 4.4% 12.3% 7.5% 6.7% 5.3% 12.0% 6.8% 10.2% 1.9% 6.8% 7.3%
Worst
-6.0% -10.6% -2.3% -3.9% -1.0% -18.3% -0.4% -3.5% -6.7% -20.1% -17.1% -5.0% -9.0% -18.2% -4.5% -7.6%
Source data: MSCI, S&P, Wilshire Assoc. Analysis: FFSA
>
