How have S&P 500 firms performed over the past two decades, in aggregate and individually, relative to reasonable investor expectations? In their February 2011 brief entitled “Shareholder Value Creators in the S&P 500: 1991-2010”, Pablo Fernandez, Javier Aguirreamalloa and Luis Corres tabulate the creation of value by major U.S. firms for long-term shareholders relative to a rationally constructed required rate of return for an equity investment. Using stock prices and capital flows for 644 firms assigned to the S&P 500 Index in 2004 or 2010, along with 10-year Treasury note (T-note) yields and equity risk premium estimates over the period 1991 through 2010, they find that:
- Even though the aggregate market value of S&P 500 components grows from $2.8 trillion in 1991 to $11.4 trillion in 2010, these firms underperform reasonable investor rate of return requirements (T-note yield plus a modest equity risk premium) by $4.5 trillion.
- The 2000-2010 subperiod exhibits a strong reversal of 1991-1999, with the former (latter) underperforming (outperforming) reasonable investor rate of return requirements by $9.6 trillion ($5.1 trillion).
- Of the 644 firms in the S&P 500 in either 2004 or 2010, only 41% outperformed reasonable investor rate of return requirements during a 1993 through 2010 subperiod. During this subperiod:
- The best outperformances are: Apple ($212 billion), Exxon Mobil ($86 billion), IBM ($78 billion), Altria Group ($70 billion) and Chevron ($67 billion).
- The worst underperformances are: American International Group (-$217 billion), Pfizer (-$188 billion), General Electric (-$183 billion), Bank of America (-$170 billion), Citigroup (-$169 billion) and Time Warner (-$130 billion).
In summary, evidence indicates that reasonable rate of return expectations are not sufficient for formulating lifetime investment strategies.
