10-year retrospective: Investing in the future with specialist funds

This post is one of a series looking at returns in the decade after the financial crisis.

Prognosticators did a roaring trade back in 2009. Predictions are never so believable as when our world is falling apart. And a decade ago the ETF industry was increasingly ready to put our money where those forecast-peddling mouths were, via a burgeoning range of specialist ETFs.

What links the trackers featured in today’s article is they all offered exposure to a plausible growth trend that had been widely identified by 2009.

Let’s see how well backing your crystal ball-gazing turned out, compared to investing in the MSCI World (the black line A below, with all graphs sourced from Trustnet):

You didn’t need to be a visionary in 2009 to spot that the digital economy was expanding like a red giant. The smartest companies were already busy removing annoying, expensive humans from the equation.

Convinced? Then you might have expressed your view through Invesco’s Nasdaq 100 ETF with its big tech bent. (That’s green line G lording it over the graph like Zeus.)

You’d now be sitting on the biggest heap of corn grown by any of the trackers I’ve included in this ten-year review. You’d have smashed the S&P 500. You’d be rolling like Demi Moore on a bed of spondoolicks feathered by 21% annualised returns – or a 574% cumulative return over the decade.

Of course back then I’d just completed my efficient market module that said all known information was already in the price. Everyone knew that Apple, Google, and Amazon et al were the future, so what were the chances of raking in outsized returns on growth stocks that looked expensive even in 2009?

I cry myself to sleep every night.

There was also a demographics story. Aging global populations required expanding health spending and that meant a bright future for big pharma and other medical companies. Hmm, yes, well everybody knows that, so what’s the point? 15.1% annualised returns over a decade is the point. See grey-blue line H on the graph and score another win for the future-gazers who took a position in L&G’s Global Health & Pharmaceuticals Index Trust.

The iShares Global Water ETF twins the population growth theme with the spectre of climate change. The advance of developing economies and environmental pressures meant this idea was a surefire winner, surely? Well, yes, it sure was. The 13.1% annualised returns of this ETF (ticker IH2O) pushed it just ahead of the plain ol’ World index tracker – see the blue line D vs the black line A.

Still climate change wasn’t all good news as iShares Global Clean Energy props up the bottom of the table. Ticker WTF? How did this one lose 1.7% every year since 2009 given all those graphs in The Guardian about the growth of wind and solar? Maybe predicting the future isn’t so easy, after all.

One idea I very nearly bought into was timber. Call it pulp fiction but the theory as I recall it was wood stocks were supposed to enjoy low correlations with common stocks because their profits were influenced more by the weather and political factors. Supposedly, if timber prices fell then you could leave your trees to keep growing and reap greater rewards in the future.

Whatever the truth of timbernomics, you can see from lines A (world equities) and C (world wood) on the graph that the iShares Global Timber & Forestry ETF is no diversifier.1 The world tracker and the timber ETF see-saw in unison, but ultimately the log shows that branching out into wood sapped your returns with a 10.3% annualised result vs 12.1% annualised for MSCI World.

Infrastructure was another tall tale constructed from one-part economic stimulus (remember all the talk about how shovel-ready projects could stoke demand post-GFC?), one-part emerging market expansion (more airports and bullet trains), and one-part public-private-partnership regeneration. Once again you were better off sticking to MSCI World.

That leaves gold miners.

I could just say the gold miners lost 0.8% annualised per year (blue line F) and move on. But there is a genuine diversification story here if you’ve got the stomach for it.

The thesis is that the long-term returns of precious metal equities are far higher than physical gold and on a par with broad market equities. The reason these equities might be precious to us portfolio constructors though is that they’ve historically enjoyed low correlations with the rest of the stock market according to Bill Bernstein.

The problem is precious metal equities are more volatile than bungee jumping.

Bernstein warned:

…since 1963, the precious metals equity (PME) series has lost more than 35% five different times and, on one occasion, nearly 70%.

Between October 1980 and August 1998, it lost a total of 53.8%, or 4.2% annualized—a 7.7% annualized loss after inflation.

For the more than 24 years between October 1980 and December 2004, the real return of PME was –0.3%.

Bernstein suggested that investors with large portfolios could theoretically put a few percent into precious metal equities (such as gold miners) and earn a chunky rebalancing bonus by buying when the sector is in free-fall and selling when it soars.

But would you have the iron discipline to rebalance your precious metal equities against the run of play?

Bernstein didn’t think so:

What percentage of investors has the discipline to stay the course with an asset capable of withering away for an entire generation before reverting to its mean? (If indeed the past 41.5 years have given us a realistic picture of its mean.)

I wouldn’t even venture a guess, but I’m pretty sure that the answer is not too far above zero.

Back in 2009 I placed myself among the zero per cent camp and you should know that the articles I’m quoting above are more than 20-years old. Bernstein was still a believer in precious metal equities in 2015, though. As was Allan Roth in 2016, but Ben Carlson delivered a sanity check in 2014.

Trustnet’s numbers scarcely matter when arrayed against the wealth of data mustered by Bernstein, Roth, and Carlson but they do bring the story up-to-date. Trustnet provides discrete annual returns for each of the last five years. In every single one of those years the L&G Gold Mining ETF was either the best or worst performer when ranged against the other ETFs in my table above.

You can see how wild the ride is by pitting the precious metal equity ETF versus the MSCI World:

Year	L&G Gold Mining ETF return (%)	iShares MSCI World ETF return (%)
2018-19	-35.8	0.7
2017-18	133	24.3
2016-17	-5.5	19
2015-16	-26.3	11.9
2014-15	67.4	8.8

Source: Trustnet

Of all the sector investing ideas in this section, gold equities is the only one I’d place any store in for the future. The trouble is only Vulcans and sociopaths are likely to pull it off.

Don’t try it if you can’t afford to lose everything you put into this sector or you doubt your ability to withstand double digit losses year in, year out.

In other words… what Bill Bernstein said.

Take it steady,

The Accumulator

We’ll continue to gaze back 10 years to see how several other passive-friendly strategies have fared. Subscribe to get all the posts.

1. Note from The Investor: One issue with this ETF is on a look-through basis it’s only partly exposed to trees in the ground. Lots of the companies in the index it tracks are invested in wood processing facilities and similar ‘down forest’ activities. [↩]