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Are the Returns for IBD’s New America Index for Real?

| | Posted in: Fundamental Valuation

A reader asked whether IBD’s New America Index, which IBD claims has trounced that of the S&P 500 index by over 160% since late 1998 is “for real.” There is little publicly available information on the New American Index. Using what we can find, we conclude that:

“The New America Index tracks companies profiled in ‘The New America,’ an Investor’s Business Daily feature that identifies entrepreneurial companies changing the way we live or do business. These innovators often lead the next stock market advances.

“The editors of ‘The New America’ screen for companies that show robust year-over-year increases in earnings and revenue. Their stocks must be outperforming the general market, and are usually priced above $10 a share. In some cases, the company has just recently turned profitable or is rebounding out of a business slump. New America story candidates usually have an innovative new product or service or are benefiting from a major new industry trend.

“The New America Index tracks the stocks of all companies covered in ‘The New America’ for six months. The stocks that comprise this index will change slightly each day, as newly profiled stocks are added, and stocks that we reported on exactly six months ago are removed. We don’t publish a full list of the stocks tracked, as the stocks included change daily.” [Underlining added.]

IBD indicates that the New America Index (through 7/25/06):

  • Is down 0.6% year-to-date;
  • Underperformed the S&P 500 index by 1.2% over the past 12 months; and,
  • Outperformed the S&P 500 index by 171% since 10/2/98.

Investing in the New America Index would require holding many stocks with daily buying and selling, a difficult proposition for individual investors and small funds. Available information does not indicate: (1) whether all the stocks are liquid enough that a fund could consider them; (2) how IBD determines the buy-sell prices; or, (3) how IBD accounts for transaction costs.

Validation would be a big job requiring an extensive historical stock price database that encompasses non-surviving firms.

For comparison, the Russell 2000 Index gained 99% from 10/2/98-7/25/06. And, here are cumulative returns for a few top-performing mutual funds of various styles over 1/1/99-6/30/06 (via the Morningstar fund screener):

Several of these funds had very strong years in 1999 and 2003 that drive their performances over the period, as apparently did the New America Index. A rigorous study would test for robustness by checking performance over several different periods.

In summary, the claimed past performance of the New America Index is probably overstated with respect to realistic expectations for actual trading of the stocks in it.

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