Note: I've added more analysis to this post - thought it would be useful to have all the examples in one place.
Swensen stresses the diversifying power of US treasuries in his books – including protection against financial crises.
“No other asset type comes close to matching the diversifying power created by long-term, non-callable, default-free, full-faith-and-credit obligation of the US government.”
My impression in that he views diversifying power as downside risk protection rather than mean-variance efficiency.
Here are the returns of various funds during three shorter term 'crises' and the great depression.
- - 1998 Asian financial crisis (6 month returns from April to Sept. 1998).
- 1987 'Black Monday' (1 month returns - October)
- 1990 S&L and banking crisis (12 month returns Oct 1989 to Sept. 1990)
- 1929-32 Great depression (34 month returns Sept 1929 to June 1932)
Code: Select all
Returns from April to September 1998 [%]
Vanguard Long-Term Treasury 12.7
Vanguard Intermediate Treasury 9.8
Vanguard Long-Term Inv. Grade 7.7
Vanguard Intermediate Term Investment Grade 6.9
Vanguard Total Bond Mkt 6.6
Vanguard Short-Term Treasury 5.5
Vanguard Long-Term Tax-exempt 4.6
Vanguard Short-Term Corp 4.5
Vanguard Int. Term Tax-exempt 3.9
DFA Two-Year Global 3.1
Vanguard Limited Term Tax-exempt 2.9
Vanguard High Yield Corp -0.1
Vanguard Europe Index -9.6
Vanguard Total Stock Mkt -10.5
DFA Intl Large Co. -12.5
Vanguard Value Index -12.5
Vanguard REITs -14.2
Vanguard International Value -16.3
DFA US Large Value -17.5
Oppenheimber Real Asset (Commodities) -17.7
DFA Intl Small -19.8
DFA Intl Small Value -20.6
Vanguard Pacific Index -21.4
Vanguard Small Cap Index -24.2
DFA US Small Value -25.3
DFA US Micro cap -26.9
Fidelity New Markets Fund (Emerging Market Bond) -34.2
Vanguard Emerging Market Index -35.4
2. Aftermarth of Black Monday [Performance during October 1987]
Code: Select all
Returns - October 1987 [%]
Vanguard Long-Term Treasury 5.8
Vanguard Long-Term Inv. Grade 3.7
Vanguard Total Bond Market 3.5
LB Intermediate Treasury 3.0
LB 1-3yr Government 2.0
Vanguard Short-Term Inv. Grade 1.6
DFA One-Year 1.2
Vanguard Int. Term Tax-exempt 1.1
Vanguard Long-Term Tax-exempt 0.8
Vanguard HY Corp -3.5
DJ Wilshire REIT -14.2
MSCI Pacific -15.3
Vanguard International Value -17.7
MSCI EAFE -18.5
Russell 1000 Value -20.2
Vanguard 500 Index -21.7
Russell 3000 -22.4
MSCI Europe -23.6
Russell 2000 Value -28.3
DFA US Micro -29.2
Vanguard Small Cap Index -32.1
3. US S&L and banking crisis (Performance from Oct. 1989 - September 1990)
Code: Select all
Returns - October 1989-September 1990 [%]
LB 1-3yr Government 9.3
Vanguard Short-Term Inv. Grade 9.0
DFA One-Year 8.9
LB Intermediate Treasury 8.5
Vanguard Total Bond Market 7.3
Vanguard Limited Term Tax-exempt 6.5
Vanguard Int. Term Tax-exempt 6.3
Vanguard Long-Term Tax-exempt 3.5
Vanguard Long-Term Inv. Grade 2.8
Vanguard Long-Term Treasury 1.6
Vanguard HY Corp -9.3
Vanguard 500 Index -9.4
Vanguard International Value -12.4
Russell 3000 -12.6
Russell 1000 Value -15.3
Vanguard Small Cap Index -27.8
DJ Wilshire REIT -28.3
DFA US Micro -28.0
Russell 2000 Value -28.2
MSCI EAFE -33.4
MSCI Europe -33.4
MSCI Pacific -41.8
4. Great depression [performance from Sept. 1929–June 1932]
Code: Select all
Cumulative returns from September 1929–June 1932 [%]
[Period of greatest cumulative equity mkt loss is used]
Long-term Treasury 14.3
Intermediate Treasury 12.5
Long-term Corporate 8.7
T-bills 6.0
Total Market -83.3
Small cap -83.8
Large Value -88.4
Small Value -88.4
Micro caps [CRSP10] -89.1
Equity asset class returns are the Fama-French Benchmark portfolios and the CRSP10 [lowest decile by size].
Lessons (at leat to the me).
1. Risks do show up and when they do market declines can accumulate rapidly
2. High quality bonds provided more protection against equity market declines than low quality bonds (e.g. HY and EM bond)
3. Long-term treasuries provided greatest protection during periods when there were signficant market declines - but this is not always the case (as in 1990 when short-term bonds outperformed).
Hope the numbers are useful. I’ve been meaning to post this for a while – but just got around to it (From the Four Pillars – “During the good times it is important to remember that things can go to hell in a hand basket with brutal dispatch.”)…
Robert
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