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2009 Asset Performance

How did various assets perform last year?

Here is my regular run down of key assets I like to watch. New for this year, residential real estate will be tracked from now on. I came to the conclusion that home prices are important because it is a large opportunity cost for most people. Whether one ties up capital in their home or not, will likely have a major immpact on the final investment performance over their life. For America, I'm planning to track the widely known S&P Case-Shiller Home Price Index (I'm going with the broader one with the most cities.) For Canada I'm planning to track the GTA (Greater Toronto) home price that is reported by the Toronto Real Estate Board. Barring a move, I suspect I'll live in Toronto for the rest of my life so that's what I chose to track.

Looking at the final numbers is kind of like looking at the ending of a movie without knowing how the movie played out. This year, especially, is one where the plot mattered a great deal. Money was made or lost in a few critical moments and I think there were two key periods:

(i) Start of the year: The market collapsed in the first few months and if you were invested in the wrong assets, you probably got killed and never made it back. This is especially true for those panicking and selling as the market was plunging.

(ii) The trough: Depending on what asset you look at, anyone that nailed the bottom, roughly around March/April/May, made a fortune. If you were leveraged or were concentrated, you made an absolute killing if you bought anywhere near the bottom. People heavily going long made more returns in two months than a typical person makes in 10 years.

I hope most of you made the right decisions. No one is perfect but hopefully your major decisions turned out to be correct. As for me, I severely underperformed the market this year but I didn't really do much so it's not a surprise (as usual, I'll post my results soon.)

Anyway, let's see how various assets ended the year.

US Asset Performance by Style and Size

The following list shows US asset performance by style and size. I'm going with the Standard & Poors segmentation system:

It was very hard to lose money this year—unless you were investing in UNG ;). Almost all the indexes went up this year.

The S&P 500 finished the year with a total return of 26.46%. This is a very strong return and most (long) investors recouped some of their losses from the prior two years.

The small-caps underperformed the S&P 500 this year (ususally the little ones do well off a bottom) while the mid-caps outperformed. I suspect the S&P 500 held its ground against the small caps due to the spectacular rallies in a lot of distressed large-cap financials, energy, and materials companies.

In terms of style, growth beat value across all the size categories. The strongest performer was mid-cap/growth while the weakest was large-cap/value.

Equal Weighting Destroys Market Cap Weighting

In the passive investment camp, which I am not a member of, there is a debate over equal-weighted indexes. Some argue that equal-weighted indexes are better than market-cap-weighted indexes. Well, the equal-weighted S&P 500 won by a landslide this year. I can't believe that it posted 46.31% this year. Wow. That's even better than the S&P 400 or S&P 600.

Think about that for a second. Smaller companies such as those in the mid-cap S&P400 or small-cap S&P600 tend to be riskier but many expect the returns to be higher (yes, I realize value investors don't believe in the risk-return correlation : ). Yet, investors were able to generate strong returns by staying within the large-cap S&P 500. All they had to do was to overweight the laggards (which is what equal weighting sort of does.) The question is whether this is a fluke or something that will repeat in the future.

If you are a passive investor, you should read up on the debate over equal-weighting, as well as fundamental indexing—fundamental indexing is when you weight by sales, number of employees, and the like, rather than market cap—and see if you can gain anything by changing your strategy.

Select Global Asset Performance

Let's look at several key global markets:

Not surprisingly, the two superstar performers were Latin America and Asia. Latin America generated a spectacular 97% while Asia returned 61% (all in US$ terms.) If you assume the stock market returns around 10% per year, overloading on these regions last year meant that you generated 6 to 10 years worth of returns in one year.

The strong rally in Latin America looks good but keep in mind that many of their companies are very cyclical and vulnerable to currency implosions (especially if there is a political crisis.) The important country to watch is Brazil and it remains to be seen how they perform now that 'Lula', their left-leaning leader responsible for stabilizing the country, is replaced with some unknown.

As for Asia, I am not sure of anything. I am too nervous about various potential bubbles that may be developing over there. Good luck to anyone successfully navigating Asia but I'm very cautious.

Continuing the, what seems like, perpetual descent into hell, the Japanese TOPIX 150 posted a return of 7%. I haven't looked up the Yen vs US$ change last year but it wouldn't surprise me if the TOPIX actually posted a negative return in Yen terms. If Japan were to be judged on an investment beauty contest, I think it would end up with the 'ugly' title. No other way to say it. Posting a 7% return when nearly the whole world generated 25%+ return is not a pretty sight.

S&P 500 Sector Performance

This section deals with the various sectors in the S&P 500:

The S&P 500 stands with a market cap of $9.9 trillion. A little over $2 trillion in capital gains wealth was created last year (just for S&P 500.) Several hundread billion more in welath were likely paid out in dividends.

The S&P 500 posted an overall return of 26.46% but that is very deceptive. Only 3 sectors returned more than the overall average! Most of the sectors returned below 20%. The three big winners were information technology, materials, and consumer discretionary.

Information technology, with its heavy weighting, contributed greatly to the overall return. Info tech also didn't get killed as much during the crash (relatively speaking) so tech investors are a happy bunch these days. I'm curious to see how much of this gain is real and how much is unsustainable. On the one hand, a lot of tech companies appear overvalued, with Amazon and Apple being the poster boys of expectations taken to the moon, and it's not clear if profits can satisfy investor expectations. On the other hand, one of the theories I have floated, based on Gary Shilling's thinking, is that certain technology companies will do well during deflationary periods. As an added bonus, a lot of info tech companies are not directly entangled in the housing/debt bust and don't depend on financial profits (although they will still be impacted indirectly.)

Materials sector, which consists of mining firms, and consumer discretionary rallied strongly due to the improving economy. Market was pricing in a gloomy scenario before but many have come around to the think that consumer spending is improving. The big question mark now is to figure out where the new level of spending will be.

Financials ended the year with a 14.8% return. This is an amazing return if you think back to their fate in the first few months of last year. Financials were sold off sharply earlier in the year, with questions of nationalization hanging over their heads. Many financial company shares were down 20% to 50% within 3 months and things looked very dangerous. Fortunately for shareholders of financial companies, world governments, particularly the US government, decided to socialize the losses and transferred hundreads of billions from taxpayers to shareholders and bondholders. What seemed like a disasterous investments ended up being decent in the end. To get that 14.8% return, financials had to go through a lot and I'm not sure if anyone wants a repeat of that.

Worst performing sector was telecom services with a return of 2.63%. No big surprise here. Safe sectors do poorly when the market rallies strongly.

Performance of Bonds, Commodities, Real Estate

Moving away from stocks, I think important assets worth reviewing are bonds, commodities, and real estate:

Government bonds were not the place to be in 2009. The US long bond posted a terrible -21.4% return last year. If you assume the long bond has a long term return of 5%, it lost 4 years worth of gains in one year. It gave back most of the gains from last year. Shorter duration government bonds also ended up negative.

The star in the bond markets (at least the mainstream bond markets—not sure about mortgage bonds or other non-retail stuff) has to be junk bonds. Posting a 58.21% return with better claim on corporate assets during bankruptcy than shares (usually bondholders have stronger claim on a corporation than shareholders) this is almost a dream investment. Not making any junk bond investment was the biggest mistake of omission I made in the last 2 years :( I don't care much about missing the stock market rally (because I think some of it is speculative and doesn't fit my macro outlook) but I was so close—and bullish—yet didn't pull the trigger on several junk bonds. A huge mistake on my part :(

Moving on to commodities, the broad S&P GSCI commodity index underperformed the stock market and only generated a return of 13.48%.

Gold continues its 9 year streak with a 23.95% return. Gold slightly underperforms stocks this year. I am still not sold on gold and think it is closer to a top than the bottom. I am waiting for it to hit US$1500 or $2000 and then will consider shorting it.

Oil gained 77.9% in 2009. A huge gain that invigorated the energy complex. I remain (mildly) bearish on oil but any key bearish development will come from China so watch China closely. Setting a price target for oil is very difficult and I wouldn't bet serious money on that. Oil is heavily manipulated by cartels and various governments and it's hard to predict anything. For instance, OPEC has huge control over the price but at the same time, countries like USA also have huge control with their influence of the House of Saud.

I have inserted the S&P Case-Shiller index change for this year. The year-over-year number, up to October of 2009, comes in at -7.3%. Many real estate analysts expect housing in America to stabilize but a lot depends on government actions. Due to my personal job situation, I haven't been following business news much but I think the GSEs are still absorbing huge losses. If so, it will come down to what happens with them. If the US government orders Fannie Mae and Freddie Mac to tighten their operations, housing can continue to fall. It remains to be seen how much longer the GSEs can provide a cushion.

As for Toronto, the housing boom continues unabated. People are still lining up to buy condominums in Toronto at prices only professionals and higher ups can afford. Overall, home prices increased 4% in Toronto last year. The average price of home in Toronto (includes suburbs) was $395,460. I just started following this metric so I'm not sure if this refers to stand-alone homes or wehther it also includes condominums, townhomes, and so forth.


If you were cheering for the bulls or were one yourself in 2009, life was good... if you were a bear, well, there is always another year to flex your paws...

Oh, this is probably one of the few years when pigs also won. Rarely does anyone betting blindly on any asset ever make a lot of money but 2009 was such an year...perhaps the governments dropping money out of helicopters had something to do with that ;)

In my opinion, 2009 is very similar to 1933... new president... unthinkable government intervention... huge stock market rally... economy starts its slow climb out of the valley...


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