The S&P 500: 15 Years to Nowhere!

On November 30 1999, the S & P 500 Index was around 1,400, basking in the sunlight of what many analysts were calling the “No Value At All” or “Dot Com” Bubble. Roughly ten years later, December 31 2009, the Index was about 20% lower (@ 1,120) a mere ten months off a second major hit, the “Financial Crisis” bottom.

Most investors are intimately aware of these numbers, they lived through both major meltdowns and possibly a third way back in  October 1987… but they seem generally unfamiliar with S&P performance “backtesting” of companies it ranks “highest in fundamental quality” vs. the Index itself.

S&P backtesting shows that the higher quality companies have: less risk, lower debt levels, higher profit margins, and higher return on equity. They are also less likely to engage in accounting manipulations. AND, the highest quality ranked companies (B+ through A+) outperform the S&P Index itself. (research by K Gillogly, 2005)

What makes this especially interesting is the fact that the S&P 500 is representative of all sectors now mirrored by MPT birthed ETFs and conventional Mutual Funds… both of these investment (speculation?) vehicles ignore the S & P conclusions as they seem to make a concerted effort to avoid higher quality/lower risk possibilities… incom? What income.

In June 2005, S & P ranked just 1,100 companies “average” or above; less than half (518) were “above average”.

The November 1999 through December 2009 investment climate (the media dubbed “Dismal Decade”) was not so dismal at all, for investors who used S&P quality rankings in their equity investment strategy. In looking at this time frame, and studying investment portfolios containing only S&P B+ and higher ranked companies in their equity asset allocation, researches found an alternative investment performance universe.

The portfolios contained a “refined” collection of companies, tracked since 2007 as “The Investment Grade Value Stock Index” (IGVSI). In addition to the B+ or better S&P ranking, these companies were NYSE only, and dividend paying… fewer than 500 companies ever qualified, and portfolio management used several other risk minimizers in an active trading environment…

For “quality” comparison purposes, mutual funds contained in the most conservative of Target Return Funds now contain over 5,000 individual equities!

Additionally, the 55 separately managed portfolios in the study had an overall asset allocation of roughly 60% equity and 40% income purpose securities… and all asset allocation/diversification decisions were made using a “cost based” methodology called “The Working Capital Model”.

So for the ten years studied by the original researcher and two other entities, while the passive S & P 500 slid 20%, these actively managed portfolios grew between 18% and 253%… an average 72.5%, while NASDAQ fell 32% and the “Blue Chip” DJIA fell 4.5%.

So for analysis sake, lets superimpose the more recent 5 years of annual market value growth of the Investment Grade Value Stock Index and the S&P 500 on top of the performance of hypothetical $100,000 portfolios since November 30th 1999.

The S&P Portfolio fell to $80,000 from November ’99 through December 2009. Since then, it’s 69.2% gain produces a right now portfolio value of $135,392… a gain of roughly 2.36% per year. On the income side, the portfolio would have produced roughly 2% spending money per year.

The 60% IGVSI Equity + 40% income purpose securities portfolios rose to $172,500 through December 2009. The past 5 years have pushed the portfolio totals to roughly $271,843 while producing an income only cash flow in the 7% neighborhood.

So this hypothetical combination of supported research and educated estimation produce a quality equity +  40% income purpose based portfolio growth rate roughly five times the rate of the equity only S&P 500 Index… and this without even considering the compounding effect of higher income and 15 years worth of profit taking.

Yet in spite of all this evidence, 401k participants are not allowed access to such old fashioned programs… the “catch 22” of the “why” will amaze you. Plan investment policy statements preclude investments that have a limited track record, and or a small amount under management….

The program described above has been around longer than any ETF anywhere, longer than most of the Mutual Funds in the 401k space, and has been managed longer by the same person, in the same format, than (just guessing with 44 years of operation), than any other out there. Yet, a new package makes the product unacceptable….

As you think about the recent carnage in your 401k account balances (even if it proves to be temporary), shouldn’t you, your employer, your plan advisor, your plan fiduciary, have had the chance to say: “hey, high-quality dividend paying companies and 40% or more invested to grow my retirement income… makes sense to me!”