Q4 Growth Drives 2010 Equity Returns: Ibbotson

U.S., small-cap, growth equities outperform other classes

Target maturity funds enjoyed their "second great year in a row," according to the Ibbotson Target Maturity Report for the fourth quarter of 2010. The average target maturity fund returned 7.1% in the fourth quarter, according to Ibbotson, beating the BarCap U.S. Aggregate Bond Index's decline of 1.3%.

Fourth-quarter equity asset classes drove performance for the year. The S&P 500 returned 10.8% in the fourth quarter; with third-quarter returns of 11.3%, the total return for 2010 was over 15%. The 12-month return for the averge target maturity fund was nearly 13%, less than the return for the Morningstar Lifetime Moderate Index (14.7%) or the S&P 500, but nearly double that of theBarCap U.S. Aggregate Bond Index, which returned 6.5%.

In describing equity asset class performance throughout the year, the authors wrote, "The first quarter saw mild, yet positive returns in global markets, followed by a second quarter in which equity markets plunged and fixed income markets experienced their strongest quarter of the year. The third and fourth quarters, though, took off and didn’t look back […] ."

Non-U.S. equities didn't fare as well. The report notes that they "rebounded well" as did most other asset classes in the third quarter, but "they have to be considered disappointments in 2010." Non-U.S. developed equity returned 8.2% in 2010, compared with an average annual return of 14.5% for the seven years prior, the report authors write. That seven year period includes a 43.1% loss in 2008. Likewise, emerging market equity performed well compared with other asset classes, but was a disappointment based on prior performance. In 2010, emerging market equity returned 19.2%, after averaging 30.7% annual returns for the seven years prior. Emerging markets lost 53.2% in 2008.

The report highlighted three main trends for the fourth quarter:

  • U.S. assets outperformed non-U.S.
  • U.S. small cap outperformed U.S. large cap
  • U.S. growth outperformed U.S. value

The top performer for the fourth quarter was U.S. small growth equity, which returned 17.1%. Large growth equity returned 11.8%. Value equity had slightly smaller returns: Small value returned 15.4, while large value returned 10.5%. Commodities were similarly successful, returning 15.8%. The report noted that while growth outperformed value for the quarter, in the long term investors should expect value to come out on top.

The difference between U.S. equity and non-U.S. equity is stark. Non-U.S. developed equity returned 6.7%, while emerging market equity returned 7.4%. Real estate showed similar returns at 7.4%.

"During the fourth quarter a weakening Euro depressed the performance of non-U.S. developed equity, leading the asset class to underperform both U.S. and emerging market equities," the authors wrote.

Overall, the second quarter is the only one in which equity asset classes experienced negative returns.The U.S. market fell a "horrendous" 37% in 2008 and rebounded 26.5% in 2009, before settling at 15.1% last year. "Though this is greater than we expect over the long-term, it was still much more of a return to normalcy."

Just as it did in the fourth quarter, growth outperformed value equity in 2010, and small cap outperformed large cap. Large growth equity returned 16.7%, and small growth equity returned 29.1%. Small value equity returned 24.5% and large value equity returned 15.5%.

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