By Alex Dumortier, CFA, The Motley Fool
Filed under: Investing
The Dow Jones Industrial Average
is a popular index.
You knew this. But here’s something you might not be aware of:
The Dow Jones Industrial Average is actively managed.
That’s right — here’s is how S&P Dow Jones Indices describes the index inclusion criteria (my emphasis):
The Dow Jones Industrial Average is maintained by the Averages Committee. While stock selection is not governed by quantitative rules, a stock typically is added only if the company has an excellent reputation, demonstrates sustained growth, and is of interest to a large number of investors. Maintaining adequate sector representation within the index is also a consideration in the selection process.
Essentially, the Averages Committee is a bunch of middle-aged white guys (I’m not entirely sure of the demographics, but I think it’s a fair bet) who get together to talk and choose stocks once in a while. The best evidence that their process is non-systematic and sometimes produces odd results is the non-inclusion of Apple — I can’t think of many stocks that fulfill the three stated criteria better than the maker of the iPad.
I mention all this because 16 years ago to this day, the editors of The Wall Street Journal (the erstwhile Averages Committee) dropped four stocks from the Dow, namely Bethlehem Steel, Texaco, Westinghouse Electric, and Woolworth, and replaced them with Hewlett-Packard , Johnson & Johnson , Travelers, and Wal-Mart Stores . How have these stock picks fared, and what, if anything, does it say about their potential to outperform over the next 16 years?
Let’s look at the four stocks’ performance, benchmarked against the S&P 500, from their inclusion:
| Company |
% Return, |
% Return Including Dividends, |
|---|---|---|
| Wal-Mart Stores |
10.6% |
12.1% |
| Johnson & Johnson |
6.5% |
8.9% |
| Hewlett-Packard |
(1.4%) |
1.4% |
| Travelers |
N/A |
N/A |
|
S&P 500 |
4.3% |
6.2% |
Source: Author’s calculation based on data from S&P Capital IQ, S&P Dow Jones Indices, and the CBOE.
For additional context, the next table shows the stocks’ performance since the Dow’s Oct. 9, 2007, high (which is still the record nominal high for the S&P 500):
| Company |
% Return, |
% Return Including Dividends, |
|---|---|---|
| Wal-Mart Stores |
9.1% |
11.6% |
| Travelers |
8.3% |
11.3% |
| Johnson & Johnson |
3.3% |
6.9% |
| Hewlett-Packard |
(14.6%) |
(13.5%) |
|
S&P 500 |
(0.1%) |
2.2% |
Source: Author’s calculation based on data from S&P Capital IQ, S&P Dow Jones Indices, and the CBOE.
The big winner is retailing behemoth Wal-Mart, which has been a standout performer since it was added to the Dow. Note also that its average return over the past five and a half years — during which the broad market has been treading water in real terms — is remarkably close to that over the full period. Wal-Mart’s low-cost retailing model is profitable and well entrenched, but while investors can expect decent future returns from Wal-Mart, its size is an anchor and the stock is unlikely to put up similar numbers over …read more
Source: FULL ARTICLE at DailyFinance
