Small Cap Value heads Rejoice !!!

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
LazyOverthinker
Posts: 133
Joined: Wed Jun 08, 2022 5:03 am

Re: Small Cap Value heads Rejoice !!!

Post by LazyOverthinker »

rkhusky wrote: Thu Aug 11, 2022 6:01 pm One day means nothing. One year means next to nothing.
Yeah I figured, but given that AVUV has so much market beta I wasn't expecting to see days like this... mid-day, AVUV was up 2% while VOO was down 0.25%.

Deep down I know it means nothing, but I expected the tracking comparison to be more subtle in the day-by-day. Should I expect daily disparities even bigger than 2%~?
rkhusky
Posts: 17763
Joined: Thu Aug 18, 2011 8:09 pm

Re: Small Cap Value heads Rejoice !!!

Post by rkhusky »

LazyOverthinker wrote: Thu Aug 11, 2022 6:23 pm
rkhusky wrote: Thu Aug 11, 2022 6:01 pm One day means nothing. One year means next to nothing.
Yeah I figured, but given that AVUV has so much market beta I wasn't expecting to see days like this... mid-day, AVUV was up 2% while VOO was down 0.25%.

Deep down I know it means nothing, but I expected the tracking comparison to be more subtle in the day-by-day. Should I expect daily disparities even bigger than 2%~?
I don't know the probabilities involved, but it is certainly possible that AVUV could gain 2% more than the S&P 500 on a given day, or lose 2% more. I wouldn't expect it every day, but occasionally it could happen.

The market, size and value betas are 1.15, 0.78 and 0.75 respectively. So, when small value is doing better than the market, AVUV should substantially outperform. And when small value is doing worse than the market, AVUV should substantially underperform.
User avatar
drumboy256
Posts: 673
Joined: Sat Jun 06, 2020 2:21 pm

Re: Small Cap Value heads Rejoice !!!

Post by drumboy256 »

LazyOverthinker wrote: Thu Aug 11, 2022 5:48 pm I'm new to holding SCV - is AVUV going up 1.61% today while VOO stagnates at 0% uniquely strong, or does this happen all the time and mean literally nothing in the span of the yearly sample?
Name checks out…. :sharebeer
Meaningless.
Promise is one thing. Fulfilling that promise is quite another. - Sir Alex Ferguson | 20% IVV / 40% IBIT / 20% IXUS / 20% VGLT + chill
freyj6
Posts: 554
Joined: Thu Jun 19, 2014 2:09 am

Re: Small Cap Value heads Rejoice !!!

Post by freyj6 »

LazyOverthinker wrote: Thu Aug 11, 2022 6:23 pm
rkhusky wrote: Thu Aug 11, 2022 6:01 pm One day means nothing. One year means next to nothing.
Yeah I figured, but given that AVUV has so much market beta I wasn't expecting to see days like this... mid-day, AVUV was up 2% while VOO was down 0.25%.

Deep down I know it means nothing, but I expected the tracking comparison to be more subtle in the day-by-day. Should I expect daily disparities even bigger than 2%~?
Funds with different characteristics move differently on different days (and years and decades). VOO is basically a US large cap growth fund. Some days it will go up 2% and value or international funds will return significantly less. Other days the reverse will happen. Mostly this is noise, but sometimes it’s structural. For example, when the vaccines came out at the end of 2020, value stocks rallied for several months.

All that said, generally speaking, most funds go up on big positive days and most go down on big negative days. The fact that they’re often different is the whole reason that you’d own different kinds of funds — diversification.
LazyOverthinker
Posts: 133
Joined: Wed Jun 08, 2022 5:03 am

Re: Small Cap Value heads Rejoice !!!

Post by LazyOverthinker »

drumboy256 wrote: Thu Aug 11, 2022 10:31 pm
LazyOverthinker wrote: Thu Aug 11, 2022 5:48 pm I'm new to holding SCV - is AVUV going up 1.61% today while VOO stagnates at 0% uniquely strong, or does this happen all the time and mean literally nothing in the span of the yearly sample?
Name checks out…. :sharebeer
Meaningless.
I "think" :wink: I should be insulted by this, but I "feel" relieved. It's all very exciting to learn about and adopt something like SCV, but learning to forget about it and stop overthinking will be the biggest win.
:sharebeer
livesoft
Posts: 86075
Joined: Thu Mar 01, 2007 7:00 pm

Re: Small Cap Value heads Rejoice !!!

Post by livesoft »

Is it true that AVUV has gone UP almost 17% in the past 30 days?
Wiki This signature message sponsored by sscritic: Learn to fish.
folkher0
Posts: 912
Joined: Fri Dec 09, 2016 1:48 pm

Re: Small Cap Value heads Rejoice !!!

Post by folkher0 »

livesoft wrote: Wed Aug 17, 2022 8:04 am Is it true that AVUV has gone UP almost 17% in the past 30 days?
So has VTI, lol.
Apathizer
Posts: 2507
Joined: Sun Sep 26, 2021 2:56 pm

Re: Small Cap Value heads Rejoice !!!

Post by Apathizer »

rkhusky wrote: Thu Aug 11, 2022 8:56 pm
LazyOverthinker wrote: Thu Aug 11, 2022 6:23 pm
rkhusky wrote: Thu Aug 11, 2022 6:01 pm One day means nothing. One year means next to nothing.
Yeah I figured, but given that AVUV has so much market beta I wasn't expecting to see days like this... mid-day, AVUV was up 2% while VOO was down 0.25%.

Deep down I know it means nothing, but I expected the tracking comparison to be more subtle in the day-by-day. Should I expect daily disparities even bigger than 2%~?
I don't know the probabilities involved, but it is certainly possible that AVUV could gain 2% more than the S&P 500 on a given day, or lose 2% more. I wouldn't expect it every day, but occasionally it could happen.

The market, size and value betas are 1.15, 0.78 and 0.75 respectively. So, when small value is doing better than the market, AVUV should substantially outperform. And when small value is doing worse than the market, AVUV should substantially underperform.
So far its downside doesn't seem significantly higher compared to VBR which has less rigorous screens. Compared to large growth, 2020 was a bad year for SV. AVUV and VBR both returned ~6%. 2021 was great for SV. VBR returned ~28% while AVUV returned ~42%. So far this year SV hasn't lost as much as the total market. VBR is down ~7% while AVUV is only down about ~4%.

I know this isn't much of a track record, but is tentative evidence AVUV will have significant upside when SV does well and probably won't have significantly more downside when it does poorly. Only time will tell.
https://www.portfoliovisualizer.com/bac ... ion2_2=100
ROTH: 50% AVGE, 10% DFAX, 40% BNDW. Taxable: 50% BNDW, 40% AVGE, 10% DFAX.
rkhusky
Posts: 17763
Joined: Thu Aug 18, 2011 8:09 pm

Re: Small Cap Value heads Rejoice !!!

Post by rkhusky »

Apathizer wrote: Wed Aug 17, 2022 2:47 pm I know this isn't much of a track record, but is tentative evidence AVUV will have significant upside when SV does well and probably won't have significantly more downside when it does poorly. Only time will tell.
VBR has an alpha of -3.6%, while AVUV has an alpha of +0.9% for monthly returns (-3.4% vs +2.1%, respectively, for daily returns). Time will tell if that disparity continues.
Apathizer
Posts: 2507
Joined: Sun Sep 26, 2021 2:56 pm

Re: Small Cap Value heads Rejoice !!!

Post by Apathizer »

rkhusky wrote: Wed Aug 17, 2022 10:35 pm
Apathizer wrote: Wed Aug 17, 2022 2:47 pm I know this isn't much of a track record, but is tentative evidence AVUV will have significant upside when SV does well and probably won't have significantly more downside when it does poorly. Only time will tell.
VBR has an alpha of -3.6%, while AVUV has an alpha of +0.9% for monthly returns (-3.4% vs +2.1%, respectively, for daily returns). Time will tell if that disparity continues.
I'm guessing it will, but to a lesser degree. On a recent rational reminder podcast they discussed if Factor investing is worthwhile. As might be expected they think it is but they also expect the positive premiums to decrease as more investors incorporate them, ie arbitrage.

This is very much what I expect. And as I've said before I think that's sort of a built-in advantage of cap weight indexing. When a novel approached that seems to consistently beat the index becomes more well-known more investors incorporate it thus deluding the effect and making the total market even more efficient.

That's why probably all or the vast majority of investors would do just fine with a simple cap weight index approach, though I think diversified light to moderate Factor slants will probably modestly improve returns and consistency.
ROTH: 50% AVGE, 10% DFAX, 40% BNDW. Taxable: 50% BNDW, 40% AVGE, 10% DFAX.
donaldfair71
Posts: 1241
Joined: Wed Mar 06, 2013 3:15 pm

Re: Small Cap Value heads Rejoice !!!

Post by donaldfair71 »

Larry Swedroe said on Twitter last night that Bridgeway’s tax-managed small value fund (BOTSX) will convert from Mutual Fund to ETF some time next year.

My interest is piqued because he said that the cost will be cut to be more in line with other rules-based active funds, and that since it’s in an ETF wrapper, it will begin to converge with their flagship small value fund BOSVX (non tax managed small value fund).

Thoughts?
Angst
Posts: 2968
Joined: Sat Jun 09, 2007 11:31 am

Re: Small Cap Value heads Rejoice !!!

Post by Angst »

donaldfair71 wrote: Sat Aug 27, 2022 10:28 am Larry Swedroe said on Twitter last night that Bridgeway’s tax-managed small value fund (BOTSX) will convert from Mutual Fund to ETF some time next year.
I own BOTSX but hadn't heard that, so thanks for the heads up.
It's good news for SCV investors.
User avatar
drumboy256
Posts: 673
Joined: Sat Jun 06, 2020 2:21 pm

Re: Small Cap Value heads Rejoice !!!

Post by drumboy256 »

So what's the bumper sticker on BOTSX for taxable or tax-advantaged accounts? Also, doesn't look like its done a terrible job vs. the DFA / Avantis funds.
Promise is one thing. Fulfilling that promise is quite another. - Sir Alex Ferguson | 20% IVV / 40% IBIT / 20% IXUS / 20% VGLT + chill
Random Walker
Posts: 5561
Joined: Fri Feb 23, 2007 7:21 pm

Re: Small Cap Value heads Rejoice !!!

Post by Random Walker »

Angst wrote: Sat Aug 27, 2022 10:45 am
donaldfair71 wrote: Sat Aug 27, 2022 10:28 am Larry Swedroe said on Twitter last night that Bridgeway’s tax-managed small value fund (BOTSX) will convert from Mutual Fund to ETF some time next year.
I own BOTSX but hadn't heard that, so thanks for the heads up.
It's good news for SCV investors.
As a mutual fund, I think it was only accessible through an advisor. As an ETF, it will be available to everyone? Does that create any capacity problems? Will it be harder to have the strong tilts to size and value if more people have access / more money to invest? Thanks,

Dave
Abalyon
Posts: 51
Joined: Tue May 10, 2022 6:11 pm

Re: Small Cap Value heads Rejoice !!!

Post by Abalyon »

Anyone know the answer to this question? Today’s large caps are usually harmed by a strong dollar due to a large amount of their revenue being outside of the US, globalization and all that. But I keep hearing a strong dollar benefits small caps. Why is that? I k know small cap revenues tend to be more domestic, but why would a strong dollar impact them at all compared with a weak dollar?
User avatar
grabiner
Advisory Board
Posts: 35307
Joined: Tue Feb 20, 2007 10:58 pm
Location: Columbia, MD

Re: Small Cap Value heads Rejoice !!!

Post by grabiner »

Abalyon wrote: Sat Aug 27, 2022 8:29 pm Anyone know the answer to this question? Today’s large caps are usually harmed by a strong dollar due to a large amount of their revenue being outside of the US, globalization and all that. But I keep hearing a strong dollar benefits small caps. Why is that? I k know small cap revenues tend to be more domestic, but why would a strong dollar impact them at all compared with a weak dollar?
A strong dollar helps importers and hurts businesses which compete with importers; likewise, it helps exporters and hurts businesses which compete with exporters. US corporations which import supplies from other countries but sell in the US with little foreign competition will benefit from a strong dollar; the strong dollar decreases their expenses but does not affect their revenue.
Wiki David Grabiner
SadCryingValiant
Posts: 15
Joined: Fri Aug 07, 2020 11:32 am

Re: Small Cap Value heads Rejoice !!!

Post by SadCryingValiant »

I wonder if swapping some AVUV for AVDV makes sense right now with the dollar being strong recently. AVDV has underperformed by ~20% this year, which is pretty much how much the USD has outperformed other currencies.
Phyneas
Posts: 336
Joined: Tue Apr 27, 2021 9:10 pm

Re: Small Cap Value heads Rejoice !!!

Post by Phyneas »

Apathizer wrote: Wed Aug 17, 2022 10:45 pm
rkhusky wrote: Wed Aug 17, 2022 10:35 pm
Apathizer wrote: Wed Aug 17, 2022 2:47 pm I know this isn't much of a track record, but is tentative evidence AVUV will have significant upside when SV does well and probably won't have significantly more downside when it does poorly. Only time will tell.
VBR has an alpha of -3.6%, while AVUV has an alpha of +0.9% for monthly returns (-3.4% vs +2.1%, respectively, for daily returns). Time will tell if that disparity continues.
I'm guessing it will, but to a lesser degree. On a recent rational reminder podcast they discussed if Factor investing is worthwhile. As might be expected they think it is but they also expect the positive premiums to decrease as more investors incorporate them, ie arbitrage.

This is very much what I expect. And as I've said before I think that's sort of a built-in advantage of cap weight indexing. When a novel approached that seems to consistently beat the index becomes more well-known more investors incorporate it thus deluding the effect and making the total market even more efficient.

That's why probably all or the vast majority of investors would do just fine with a simple cap weight index approach, though I think diversified light to moderate Factor slants will probably modestly improve returns and consistency.
William Bernstein made a point along these lines as well in one of his excellent books, i.e. that once a novel approach is widely-adopted it ceases to out-perform. Judging by how many people I see on various investment forums (taken as a sample, though with some selection bias admittedly) moving to the approach of splitting 50/50 between TSM/SCV, it makes me think the same will happen here, unfortunately.
60% AVGE | 20 Year TIPS LMP | 5% Cash
SadCryingValiant
Posts: 15
Joined: Fri Aug 07, 2020 11:32 am

Re: Small Cap Value heads Rejoice !!!

Post by SadCryingValiant »

Even if it stops working as a premium, we wouldn't assume it underperforms the rest of the market, so you might as well go all in.
Maximum_Profit
Posts: 7
Joined: Wed Mar 11, 2020 4:11 pm

Re: Small Cap Value heads Rejoice !!!

Post by Maximum_Profit »

The value premium will never die given enough economic stability. It may not show up during our lifetime, or the economy may get hit hard so many times that our SCV never can properly recapitalize and the risk we knowingly took didn't pay off and we are forever doomed to lose to TSM/S&P/etc.

1. The risk will always exist

Even if humans were perfectly rational creatures and never suffered behavioral biases, I think SCV would still outperform barring a series of economic recessions/depressions that would cause the economic waves to be so choppy that SCV never fully recovers. This is the risk you are taking when you own SCV, and I believe that people will continue to be willing to pay a VERY high premium for MSFT level earnings and AAPL level balance sheet. This risk of SCV never goes away, even with perfect arbitrage of prices they should always trade at a discount to growth. That's where the expected return comes from.

2. Behavioral reasons.

Shiny thing syndrome and recency bias. Fund managers and most retail are short sighted, after this statistically almost improbable (better than 99%(?) of statistical 10 year monte carlo simulations) recent run in the S&P, they are now allocating more money to domestic stocks than international than they have in the last 8 years.

A bunch of investors holding SCV doesn't change much. Trading is what sets prices, not holding it. Most traders for some reason aren't bidding up the price of SCV, at least relative to how much they're bidding up the price of LCG. Unless the risk of SCV has increased percipitously, which given current RoE, debt levels, etc. compared to LCG they don't look riskier than historically. So (possibly naively based on metrics alone) we should not be seeing a continual divergence in the common valuation metrics between SCV, LCG, TSM, etc.

Most DIY retail people are buying Nasdaq 100 or S&P 500, we "informed" investors are a VERY small part of the retail market. Most people don't understand how to budget for a $400 emergency expense, don't expect them to understand anything beyond past returns for picking funds, if they pick funds at all. I'd argue SCV exposure is an advanced allocation for most investors. Most people have market exposure but have no idea what they're buying, or what they're paying for, a little more advanced people are buying total market/S&P 500 index funds, an even smaller percentage know about or even want SCV allocation.

Considering how other styles have had extreme multiple expansion (looking at you large cap growth) and small cap value hasn't had any multiple expansion at all, the fact that small cap growth recently had that HUGE run (before the recent crash) it looks like small cap value premium either exists and is getting larger because of behavioral biases or risk just doesn't get compensated anymore, something I don't believe will continue and have my money where my mouth is.

Recently with interest rates rising this has started to shift, but as Cliff Asness keeps seeing with his data, the value spread is very real compared to historical valuations.
65% AVUV | 27% AVDV | 4% AVES | 4% SLYV | 40+ years till retirement
Gaston
Posts: 1220
Joined: Wed Aug 21, 2013 7:12 pm

Re: Small Cap Value heads Rejoice !!!

Post by Gaston »

Maximum_Profit wrote: Mon Aug 29, 2022 3:54 pm The value premium will never die given enough economic stability.
As Drs. Bill Sharpe and Brad Cornell have noted, this assumes the market is non-stationary. Otherwise, all bets are off.
“My opinions are just that - opinions.”
Apathizer
Posts: 2507
Joined: Sun Sep 26, 2021 2:56 pm

Re: Small Cap Value heads Rejoice !!!

Post by Apathizer »

Phyneas wrote: William Bernstein made a point along these lines as well in one of his excellent books, i.e. that once a novel approach is widely-adopted it ceases to out-perform. Judging by how many people I see on various investment forums (taken as a sample, though with some selection bias admittedly) moving to the approach of splitting 50/50 between TSM/SCV, it makes me think the same will happen here, unfortunately.
I doubt this forum is representative of most investors. Most of us here are finance investing geeks to some degree, so we pay more attention to the details and minutiae.

Most investors are probably along the lines of set it and forget it index investors who use funds like Target date and life strategy. That's one of the reasons I expect the SV premium to persist to some degree.
ROTH: 50% AVGE, 10% DFAX, 40% BNDW. Taxable: 50% BNDW, 40% AVGE, 10% DFAX.
JohnFromPNW
Posts: 194
Joined: Tue Apr 26, 2022 11:58 pm

Re: Small Cap Value heads Rejoice !!!

Post by JohnFromPNW »

A couple questions, which may or may not be stupid (I'm too stupid to know), and I really am just curious about these questions, not insinuating anything nor trying to make a point, but trying to get my head around a couple things:

1. In response to the comments about 'SCV premium going away since everyone know': in a world where all that existed was LCB and SCV, if everyone split their portfolio 50/50 between the two, the market cap of this world would be 50% LCB and 50% SCV (and I guess would mean everything is mid cap blend/value) with, in theory, enormous P/E multiples on the SCVs and tiny P/E multiples on the LCBs. But the market today (as measured by VTI) has only a tiny amount comparatively in SCV or Small at all with P/Es that are different, but not wildly different. So, everyone knowing about SCVs historic outperformance hasn't, at least yet, increased its overall market cap significantly?

2. Although, as an add on to 1, perhaps 3% SCV weight should have been 1.5% before 'everyone knew about SCV outperformance' and actually SCV is weighted more heavily already than it 'should be' in accordance with those companies' potential?

3. It seems to me that the goal of buying a small cap stock would be that it turns from selling books from a garage to dominating many industries and being one of the biggest companies in the world. But given that SCV (or any small fund) have cap size limits, by selecting only SCV, don't you miss out on the growth that company continues to have once it exceeds the SCV size cap?
User avatar
Forester
Posts: 2400
Joined: Sat Jan 19, 2019 1:50 pm
Location: UK

Re: Small Cap Value heads Rejoice !!!

Post by Forester »

If SCV outperformance was a widely held belief - and this knowledge acted upon by many investors - then the valuation spread between the cheap "bucket" and TSM (or the rich bucket) would not be so wide.
Amateur Self-Taught Senior Macro Strategist
Maximum_Profit
Posts: 7
Joined: Wed Mar 11, 2020 4:11 pm

Re: Small Cap Value heads Rejoice !!!

Post by Maximum_Profit »

JohnFromPNW wrote: Fri Sep 02, 2022 1:28 pm
1. In response to the comments about 'SCV premium going away since everyone know': in a world where all that existed was LCB and SCV, if everyone split their portfolio 50/50 between the two, the market cap of this world would be 50% LCB and 50% SCV (and I guess would mean everything is mid cap blend/value) with, in theory, enormous P/E multiples on the SCVs and tiny P/E multiples on the LCBs. But the market today (as measured by VTI) has only a tiny amount comparatively in SCV or Small at all with P/Es that are different, but not wildly different. So, everyone knowing about SCVs historic outperformance hasn't, at least yet, increased its overall market cap significantly?

2. Although, as an add on to 1, perhaps 3% SCV weight should have been 1.5% before 'everyone knew about SCV outperformance' and actually SCV is weighted more heavily already than it 'should be' in accordance with those companies' potential?
1. and 2. I would argue you wouldn't see the market cap change significantly, but you WOULD see a more tight valuation between growth and value especially (and to a smaller extent small vs large) than is currently observed on basic ratios (P/E, P/FCF, P/B). It would show that investors are pricing in that extra premium and willing to bid it up to the point of non-existence, when in reality it's gotten larger recently. This may be due to factors that none of us see that explains it, but I'm still holding out for it to be a premium.
JohnFromPNW wrote: Fri Sep 02, 2022 1:28 pm 3. It seems to me that the goal of buying a small cap stock would be that it turns from selling books from a garage to dominating many industries and being one of the biggest companies in the world. But given that SCV (or any small fund) have cap size limits, by selecting only SCV, don't you miss out on the growth that company continues to have once it exceeds the SCV size cap?
3. Yes, but good funds have a "buffer zone" where they can capture most of that then release the stock into the wild where the premium (they suspect) has mostly been eaten up, or at least there's another company that the money would be better invested in to capture it's premium. Obviously none of this capture will ever be perfect, but the point is to get exposure to small cap value, not newly minted mid cap core.
Forester wrote: Fri Sep 02, 2022 1:34 pm If SCV outperformance was a widely held belief - and this knowledge acted upon by many investors - then the valuation spread between the cheap "bucket" and TSM (or the rich bucket) would not be so wide.
Agree. I believe this is driven by recency bias of LCG especially and risk preferences.
65% AVUV | 27% AVDV | 4% AVES | 4% SLYV | 40+ years till retirement
musicandarts
Posts: 3
Joined: Wed Sep 07, 2022 5:17 pm

Does small cap value add more diversification?

Post by musicandarts »

[Thread merge into here --admin LadyGeek]

On the boglehead reddit forum, there is a lot of discussion on adding small cap value funds from DFA and Aventis to portfolios. These comments typically say that SCV improves the return through diversification of the total market portfolio.

This is contrary to what I learnt in my Finance courses in my MBA. Is there any truth to such claims? Are the SCV advocates fund managers pushing actively managed funds? My understanding is that total stock market is the most diversified collection of stocks out there. Adding any other pile of stocks to it is going to make it less diversified, and will bring the Sharpe ratio down.

These SCV enthusiasts post many publications as evidence for small cap premium. Unfortunately, I cannot access these studies and read them. As a regular working stiff, I don't have the time to scrutinize these papers in detail. Plus, most of them seem to be written by fund/asset managers. I have been believing that there is no small cap premium, taking most of the arguments from Aswath Damodaran's post on this topic (below)

https://aswathdamodaran.blogspot.com/20 ... n-and.html
https://www.financierworldwide.com/a-qu ... xU6SC2B1QI

Is there any good data on the existence of small cap value premium as opposed to small cap premium?
User avatar
LadyGeek
Site Admin
Posts: 95686
Joined: Sat Dec 20, 2008 4:34 pm
Location: Philadelphia
Contact:

Re: Small Cap Value heads Rejoice !!!

Post by LadyGeek »

musicandarts, Welcome! I merged your thread into the ongoing discussion.
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.
SadCryingValiant
Posts: 15
Joined: Fri Aug 07, 2020 11:32 am

Re: Does small cap value add more diversification?

Post by SadCryingValiant »

musicandarts wrote: Wed Sep 07, 2022 5:32 pm [Thread merge into here --admin LadyGeek]

These SCV enthusiasts post many publications as evidence for small cap premium. Unfortunately, I cannot access these studies and read them. As a regular working stiff, I don't have the time to scrutinize these papers in detail. Plus, most of them seem to be written by fund/asset managers. I have been believing that there is no small cap premium, taking most of the arguments from Aswath Damodaran's post on this topic (below)

https://aswathdamodaran.blogspot.com/20 ... n-and.html
https://www.financierworldwide.com/a-qu ... xU6SC2B1QI

Is there any good data on the existence of small cap value premium as opposed to small cap premium?
Nobody is doing research on a small cap discount are they? If a small cap premium doesn't exist, my expected return becomes the market. I don't have any incentive to speculate on the broad market when I get a free option that maybe the small cap premium does exist, or that some other unknown factor makes a greater appearance in small cap value funds.
User avatar
Anon9001
Posts: 1884
Joined: Fri Dec 20, 2019 8:28 am
Location: بھارت

Re: Small Cap Value heads Rejoice !!!

Post by Anon9001 »

Looks like US SCV had excellent performance risk adjusted from 2003-2010 but after then risk adjusted returns wise it has been lackluster. The Sharpe Ratios I computed for the chart below are computed from log returns. Source.

Image
Land/Real Estate:89.4% (Land/RE is Inheritance which will be recieved in 10-20 years) Equities:7.6% Fixed Income:1.7% Gold:0.8% Cryptocurrency:0.5%
User avatar
grabiner
Advisory Board
Posts: 35307
Joined: Tue Feb 20, 2007 10:58 pm
Location: Columbia, MD

Re: Small Cap Value heads Rejoice !!!

Post by grabiner »

Anon9001 wrote: Fri Sep 09, 2022 4:26 am Looks like US SCV had excellent performance risk adjusted from 2003-2010 but after then risk adjusted returns wise it has been lackluster. The Sharpe Ratios I computed for the chart below are computed from log returns. Source.

Image
Sharpe ratio is not the right criterion for comparison of investments that are only part of your portfolio. If the additional risk of small-cap value is not perfectly correlated with the market risk, then a combination of total-market and small-cap value may have a better Sharpe ratio than either alone.

I confirmed this on Portfolio Visualizer; 70% Total Stock Market and 30% DFA Small-Cap Value had the highest Sharpe ratio (using 1993-2022 data). And if international stock is added as 40% of the portfolio, then a 50/50 split between Total Stock Market and DFA Small-Cap Value had the highest Sharpe ratio (using 1996-2022 data).
Wiki David Grabiner
musicandarts
Posts: 3
Joined: Wed Sep 07, 2022 5:17 pm

Re: Small Cap Value heads Rejoice !!!

Post by musicandarts »

I am still trying to grapple with a basic concept. Does adding SCV to a total market make the portfolio more or less diversified?
User avatar
Anon9001
Posts: 1884
Joined: Fri Dec 20, 2019 8:28 am
Location: بھارت

Re: Small Cap Value heads Rejoice !!!

Post by Anon9001 »

grabiner wrote: Fri Sep 09, 2022 7:48 am I confirmed this on Portfolio Visualizer; 70% Total Stock Market and 30% DFA Small-Cap Value had the highest Sharpe ratio (using 1993-2022 data).
I don't think you realize how apples to oranges this is. I am computing sharpe ratio using monthly log returns and I am also doing Rolling Sharpe Ratios whereas PV is doing Trailing Returns Sharpe ratio computed using monthly simple returns. Anyway here is a chart below comparing 70 Total Stock Market 30 DFSVX to 100% VFINX and 100% DFSVX. The 70 30 Portfolio is rebalanced annually. No big difference.
Image
Land/Real Estate:89.4% (Land/RE is Inheritance which will be recieved in 10-20 years) Equities:7.6% Fixed Income:1.7% Gold:0.8% Cryptocurrency:0.5%
CletusCaddy
Posts: 2678
Joined: Sun Sep 12, 2021 4:23 am

Re: Small Cap Value heads Rejoice !!!

Post by CletusCaddy »

musicandarts wrote: Fri Sep 09, 2022 8:03 am I am still trying to grapple with a basic concept. Does adding SCV to a total market make the portfolio more or less diversified?
Definitely more.

Market beta is one source of return

Value factor is another independent source of return
km91
Posts: 1388
Joined: Wed Oct 13, 2021 12:32 pm

Re: Small Cap Value heads Rejoice !!!

Post by km91 »

CletusCaddy wrote: Fri Sep 09, 2022 9:37 am
musicandarts wrote: Fri Sep 09, 2022 8:03 am I am still trying to grapple with a basic concept. Does adding SCV to a total market make the portfolio more or less diversified?
Definitely more.

Market beta is one source of return

Value factor is another independent source of return
What are the characteristics of the value factor that make it independent and distinct from beta?
CletusCaddy
Posts: 2678
Joined: Sun Sep 12, 2021 4:23 am

Re: Small Cap Value heads Rejoice !!!

Post by CletusCaddy »

km91 wrote: Fri Sep 09, 2022 12:13 pm
CletusCaddy wrote: Fri Sep 09, 2022 9:37 am
musicandarts wrote: Fri Sep 09, 2022 8:03 am I am still trying to grapple with a basic concept. Does adding SCV to a total market make the portfolio more or less diversified?
Definitely more.

Market beta is one source of return

Value factor is another independent source of return
What are the characteristics of the value factor that make it independent and distinct from beta?
There is an explanation from business fundamentals as well as an explanation from investor behavior, take your pick. The fact remains that excess returns from value has been quantitatively proven.
Random Walker
Posts: 5561
Joined: Fri Feb 23, 2007 7:21 pm

Re: Small Cap Value heads Rejoice !!!

Post by Random Walker »

Anon9001 wrote: Fri Sep 09, 2022 4:26 am Looks like US SCV had excellent performance risk adjusted from 2003-2010 but after then risk adjusted returns wise it has been lackluster. The Sharpe Ratios I computed for the chart below are computed from log returns. Source.

Image
I think that what this graph shows is that S&P500 had a crazy lucky good decade with great returns and amazingly low volatility. Don’t think we should expect either in the future.

Dave
zie
Posts: 1094
Joined: Sun Mar 22, 2020 4:35 pm

Re: Small Cap Value heads Rejoice !!!

Post by zie »

CletusCaddy wrote: Fri Sep 09, 2022 2:01 pm
km91 wrote: Fri Sep 09, 2022 12:13 pm
CletusCaddy wrote: Fri Sep 09, 2022 9:37 am
musicandarts wrote: Fri Sep 09, 2022 8:03 am I am still trying to grapple with a basic concept. Does adding SCV to a total market make the portfolio more or less diversified?
Definitely more.

Market beta is one source of return

Value factor is another independent source of return
What are the characteristics of the value factor that make it independent and distinct from beta?
There is an explanation from business fundamentals as well as an explanation from investor behavior, take your pick. The fact remains that excess returns from value has been quantitatively proven.
I'm not sure Fama and French would necessarily agree with this statement anymore. Though I guess you said "has been" not expected to continue, so you aren't technically wrong, though what's the point if excess returns are not necessarily expected anymore.
Ken French wrote: “The short answer is you pretty much can’t say anything.”
Article: https://www.institutionalinvestor.com/a ... sappearing

Academic Paper:https://papers.ssrn.com/sol3/papers.cfm ... id=3525096
Whether rich or poor, a young woman should know how a bank account works, understand the composition of mortgages and bonds, and know the value of interest and how it accumulates. -Hetty Green
trickshot
Posts: 18
Joined: Mon Jun 08, 2015 4:11 pm

Re: Small Cap Value heads Rejoice !!!

Post by trickshot »

musicandarts wrote: Fri Sep 09, 2022 8:03 am I am still trying to grapple with a basic concept. Does adding SCV to a total market make the portfolio more or less diversified?
If you have half an hour to spare, there's a good overview of factor investing on a recent Rational Reminder podcast episode (Ep. 213) starting at the 32:30 minute mark which also touches on the significance of the size premium.
rkhusky
Posts: 17763
Joined: Thu Aug 18, 2011 8:09 pm

Re: Small Cap Value heads Rejoice !!!

Post by rkhusky »

CletusCaddy wrote: Fri Sep 09, 2022 9:37 am Market beta is one source of return

Value factor is another independent source of return
But hardly anyone invests in the value factor (HmL). Typical value and small value funds have high correlation with the market, so they are not independent.
rkhusky
Posts: 17763
Joined: Thu Aug 18, 2011 8:09 pm

Re: Small Cap Value heads Rejoice !!!

Post by rkhusky »

musicandarts wrote: Fri Sep 09, 2022 8:03 am I am still trying to grapple with a basic concept. Does adding SCV to a total market make the portfolio more or less diversified?
You need to define what you mean by diversified. The market contains all the SCV stocks, so you aren't adding any new investments. In that sense, adding SCV has no effect on diversity.

However, consider a portfolio of 99% Apple stock and 1% Total Stock Market. Even though you own most all the stocks in the US market, most would say your portfolio is not diversified. How far from the market can you be and still be diversified?

If adding SCV to TSM increased diversity, then adding SCG to TSM (or adding LCG or LCV) would also increase diversity.
Random Walker
Posts: 5561
Joined: Fri Feb 23, 2007 7:21 pm

Re: Small Cap Value heads Rejoice !!!

Post by Random Walker »

rkhusky wrote: Sat Sep 10, 2022 7:19 am
CletusCaddy wrote: Fri Sep 09, 2022 9:37 am Market beta is one source of return

Value factor is another independent source of return
But hardly anyone invests in the value factor (HmL). Typical value and small value funds have high correlation with the market, so they are not independent.
I don’t think this is quite accurate. It’s a question of exposure to the factor. It’s certainly true that the pure academic definition of the factor is a long short portfolio with no net exposure to the market factor. But just because most of us invest in long only funds does not mean we don’t invest in the value factor. We invest in long only funds that typically have full exposure to the market factor and lesser exposure to the size and value factors.

Dave
Nathan Drake
Posts: 6234
Joined: Mon Apr 11, 2011 12:28 am

Re: Small Cap Value heads Rejoice !!!

Post by Nathan Drake »

rkhusky wrote: Sat Sep 10, 2022 7:27 am
musicandarts wrote: Fri Sep 09, 2022 8:03 am I am still trying to grapple with a basic concept. Does adding SCV to a total market make the portfolio more or less diversified?
You need to define what you mean by diversified. The market contains all the SCV stocks, so you aren't adding any new investments. In that sense, adding SCV has no effect on diversity.

However, consider a portfolio of 99% Apple stock and 1% Total Stock Market. Even though you own most all the stocks in the US market, most would say your portfolio is not diversified. How far from the market can you be and still be diversified?

If adding SCV to TSM increased diversity, then adding SCG to TSM (or adding LCG or LCV) would also increase diversity.
Investing in growth isn't a risk premium.

To diversify sources of a returns, you must diversify across sources of risk premiums.
20% VOO | 20% VXUS | 20% AVUV | 20% AVDV | 20% AVES
rkhusky
Posts: 17763
Joined: Thu Aug 18, 2011 8:09 pm

Re: Small Cap Value heads Rejoice !!!

Post by rkhusky »

Nathan Drake wrote: Sat Sep 10, 2022 11:37 am
rkhusky wrote: Sat Sep 10, 2022 7:27 am
musicandarts wrote: Fri Sep 09, 2022 8:03 am I am still trying to grapple with a basic concept. Does adding SCV to a total market make the portfolio more or less diversified?
You need to define what you mean by diversified. The market contains all the SCV stocks, so you aren't adding any new investments. In that sense, adding SCV has no effect on diversity.

However, consider a portfolio of 99% Apple stock and 1% Total Stock Market. Even though you own most all the stocks in the US market, most would say your portfolio is not diversified. How far from the market can you be and still be diversified?

If adding SCV to TSM increased diversity, then adding SCG to TSM (or adding LCG or LCV) would also increase diversity.
Investing in growth isn't a risk premium.

To diversify sources of a returns, you must diversify across sources of risk premiums.
Growth stocks are not risky?
rkhusky
Posts: 17763
Joined: Thu Aug 18, 2011 8:09 pm

Re: Small Cap Value heads Rejoice !!!

Post by rkhusky »

Random Walker wrote: Sat Sep 10, 2022 8:46 am But just because most of us invest in long only funds does not mean we don’t invest in the value factor.
Yes it does. The value factor is HmL. Investing in a long-only value fund is investing in value stocks, not the value factor.
Nathan Drake
Posts: 6234
Joined: Mon Apr 11, 2011 12:28 am

Re: Small Cap Value heads Rejoice !!!

Post by Nathan Drake »

rkhusky wrote: Sat Sep 10, 2022 9:22 pm
Nathan Drake wrote: Sat Sep 10, 2022 11:37 am
rkhusky wrote: Sat Sep 10, 2022 7:27 am
musicandarts wrote: Fri Sep 09, 2022 8:03 am I am still trying to grapple with a basic concept. Does adding SCV to a total market make the portfolio more or less diversified?
You need to define what you mean by diversified. The market contains all the SCV stocks, so you aren't adding any new investments. In that sense, adding SCV has no effect on diversity.

However, consider a portfolio of 99% Apple stock and 1% Total Stock Market. Even though you own most all the stocks in the US market, most would say your portfolio is not diversified. How far from the market can you be and still be diversified?

If adding SCV to TSM increased diversity, then adding SCG to TSM (or adding LCG or LCV) would also increase diversity.
Investing in growth isn't a risk premium.

To diversify sources of a returns, you must diversify across sources of risk premiums.
Growth stocks are not risky?
They are the worst kind of risk, uncompensated risk

There’s no premium for growth in aggregate
20% VOO | 20% VXUS | 20% AVUV | 20% AVDV | 20% AVES
rkhusky
Posts: 17763
Joined: Thu Aug 18, 2011 8:09 pm

Re: Small Cap Value heads Rejoice !!!

Post by rkhusky »

Nathan Drake wrote: Sat Sep 10, 2022 10:28 pm There’s no premium for growth in aggregate
Depends on the time period. Growth has had a premium over the last 20+ years. And 3, 5 and 10 years. Value has had a premium over the last 1 year period.
Random Walker
Posts: 5561
Joined: Fri Feb 23, 2007 7:21 pm

Re: Small Cap Value heads Rejoice !!!

Post by Random Walker »

rkhusky wrote: Sat Sep 10, 2022 9:29 pm
Random Walker wrote: Sat Sep 10, 2022 8:46 am But just because most of us invest in long only funds does not mean we don’t invest in the value factor.
Yes it does. The value factor is HmL. Investing in a long-only value fund is investing in value stocks, not the value factor.
Maybe we are just playing semantics. Yes, when one is invested in say a combination of long only TSM and SV funds, he does indeed have some net exposure to the size and value factors.

Dave
CletusCaddy
Posts: 2678
Joined: Sun Sep 12, 2021 4:23 am

Re: Small Cap Value heads Rejoice !!!

Post by CletusCaddy »

rkhusky wrote: Sun Sep 11, 2022 7:34 am
Nathan Drake wrote: Sat Sep 10, 2022 10:28 pm There’s no premium for growth in aggregate
Depends on the time period. Growth has had a premium over the last 20+ years. And 3, 5 and 10 years. Value has had a premium over the last 1 year period.
Outperformance =/= premium
Random Walker
Posts: 5561
Joined: Fri Feb 23, 2007 7:21 pm

Re: Small Cap Value heads Rejoice !!!

Post by Random Walker »

rkhusky wrote: Sat Sep 10, 2022 9:22 pm Investing in growth isn't a risk premium.
Growth stocks tend to be successful companies. They are likely safer businesses to own. Less risk implies lower expected return. That being said, people tend to overpay for growth, and that can place the stocks of those companies at risk for fast declines.

Dave
Nathan Drake
Posts: 6234
Joined: Mon Apr 11, 2011 12:28 am

Re: Small Cap Value heads Rejoice !!!

Post by Nathan Drake »

rkhusky wrote: Sun Sep 11, 2022 7:34 am
Nathan Drake wrote: Sat Sep 10, 2022 10:28 pm There’s no premium for growth in aggregate
Depends on the time period. Growth has had a premium over the last 20+ years. And 3, 5 and 10 years. Value has had a premium over the last 1 year period.
Those that studied factors were looking over much longer periods of time to come to their conclusion in defining them as a risk premium.

"High Minus Low" is a premium that has shown consistenty over time and has led to higher expected returns. If you were to do the opposite, "Low Minus High" you would receive negative expected returns over time, even though some periods may show a positive return.
20% VOO | 20% VXUS | 20% AVUV | 20% AVDV | 20% AVES
Locked