Morningstar Advisor - August/September 2009 - 51

Hoover: I was there for 1974, which was a long, drawn-out downdraft. This crisis was different because it happened very suddenly. Coming out of 1974, the smaller stocks did very well for a decade, and I think that could be the case this time as well. The government has learned from its errors, and officials really worked hard to create confidence in the basic viability of the financial markets. Once the government took steps, you could have that confidence—at least I did—that things were going to start to improve. Royce: There’s no perfect comparison with this crisis. Everybody seems to think that the 1930s are something we should all be focusing on. The 1930s were deflationary. There was almost no government intervention for a while, and we had all sorts of other issues. In the 1970s, it was high inflation, and there were political issues, also. Honestly, I don’t think any one event offers the perfect road map here. Small caps have their own trajectory. It’s one reason I like them. They might play in the macro universe, but, in many cases, they can grow fast regardless. Irene Hoover Royce: We don’t spend a lot of time on the macro thing. It’s a very exciting time to sit around and argue about the macro events, but at the end of the day, we’re stock-pickers. I think small caps are less impacted by the government’s intervention than other stocks, so they have a more favorable environment. But frankly, it doesn’t enter into exactly what we’re doing very much. Hoover: I agree that the small caps have their own trajectory. It’s one reason I like them. They might play in the macro universe, but, in many cases, they can grow fast regardless. Hughes: Going forward, what expectations should small-cap investors have? companies and they dip because of some macro issue, you should feel confident adding, because you’re not adding to something that is going to be collapsing forever. It’s going to turn around and go back up. Royce: The big question is will equities ever give you the kinds of returns that historically were present to preserve wealth or increase wealth? Or has the world changed so dramatically because of last year? I come out on the former—that this was just a big bump in a long road. It did not change the dynamic that a well-managed corporation can compound wealth better than a fixedincome instrument. Hughes: Does the current environment remind In the end, we want to know: Can equities overcome these issues over time? Can we feel confident in the 10-year returns? I think we can. K Bridget B. Hughes, CFA, is an associate director of mutual fund analysis with Morningstar. Hoover: They should adopt a long-term time you of any past period you’ve faced as an investor? frame, and their expectations should be for reasonable growth. If you own high-quality MorningstarAdvisor.com 51

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Morningstar Advisor - August/September 2009

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