Victims, Survivors and Winners

As of December 31, 2009, the average annual return for the S&P 500 Index 10 year period was -0.95%— labeling it the lost decade of investing. History shows this is not an unprecedented event. Investors in US Large Cap common stocks, as shown in the chart, experienced little to no return during multiple 10-year periods. It is easy to believe investors felt uncomfortable investing in stocks during—or after—any of those lost decades. In fact, in 1979 the media announced “the death of equities.” But after each one of these historically low time periods, stocks generated well above average returns over the next market cycle. In fact, the average annual return for the following 10 years was 13.3%! History shows that maintaining an allocation to stocks is critical to achieving a successful long-term investment strategy.

Sources: FactSet, The International Center for Finance at Yale, Ibbotson NYSE project return data from 1835 to 1923, S&P 500 Index from 1923-2009.

Past performance is not indicative of future results, which may vary. The graph illustrates 10-year rolling average annual total returns from 1835 to 2009. It identifies six market highs and six market lows and determines an average for each as stated. The data represents US large cap common stocks as measured by the Ibbotson New York Stock Exchange project return data from 1835 to 1923 and through the S&P 500 Index from 1923 to 2009 

Clearly, even in 2010, we are in a very difficult economic environment. Some companies have gone out of business and many struggle to maintain their growth. But some companies are still strong and will use this challenging environment to separate themselves from their competitors.

Looking at history, when there are big differences in the performance of individual stocks, active managers tend to outperform the general market. As the chart below illustrates, when economic growth is relatively stable and strong, such as in 1992-1996 and 2003-2006, most stocks tend to perform the same because many companies perform well.

But in periods of economic uncertainty, like most of 1997-2002 and 2007-2009, many companies become victims, survivors or winners, and stock performance varies widely. This environment creates the opportunity for active managers to outperform the general market if they can identify the winners and avoid the victims. In each of these periods, the majority of mid-cap growth mutual funds beat the Russell Mid Cap Growth Index, demonstrating the potential benefit of active management during unstable environments.

We believe the US economy should continue to experience slow growth and an unstable environment over the next few years, making it important for investors to work with money managers who can identify quality in a sea of victims, survivors and winners.

What this means for Mid Caps: Percent of Mid Caps: Percent of Mid Cap Growth mutual funds beating the Russell Mid Cap Growth Index

Source: FactSet for S&P 500 Index data and Morningstar for the Mid Cap Growth data.

The data represents past performance. Past performance does not guarantee future result.

Dispersion refers to the location of a set of values relative to a mean or average level. It measures the volatility. Returns with wide dispersions are generally seen as more risky because they have a higher probability of closing dramatically lower than the mean In practice, standard deviation is the tool that is generally used to measure the dispersion of returns. Volatility is measured by standard deviation. Standard deviation is the amount of dispersion (or deviation) of a portfolio's returns from their average return over a defined period. The higher the standard deviation, the greater the risk.

The Growth Team looks for quality companies that can actively take market share and sustain growth--in any market. The team has 16 portfolio managers and research analysts organized by industry--digging deep into under-researched small and mid-cap stocks, identifying both companies that dominate niche markets as well as those that may grow into large-cap companies over time.