nisiprius wrote: ↑Sat May 27, 2023 3:03 pm
burritoLover wrote: ↑Sat May 27, 2023 1:30 pm...Small cap growth tends to suffer from the lottery effect. Personally, I wouldn’t invest in small cap blend for that reason. That is the whole “control your junk” point made by someone earlier....
This is the standard narrative from the factor world. And yet...
1) The Vanguard Small Cap Growth fund and the Vanguard Small Cap Value fund have been virtually tied since inception.
Source
2) The
DFA Small Cap Growth and Small Cap Value portfolios, ditto:
Source
3) With the iShares S&P Small-Cap 600 Growth and iShares Small-Cap 600 Value, yes, there is a difference... but I don't think it is life-changing, particularly not with the amounts you would typically have in a portfolio. The average annual return was 8.51% for small growth, 9.23% for large value. But an 8.51% annual return is nothing to sneeze at.
Source
The pattern here is interesting. Value pulled far ahead during value's great shining moment in 2001-2002, but then gradually lost all of back... only to pull ahead in 2022.
Nisiprius, your point regarding the very similar performance of the Vanguard Small Cap Value Index fund compared to the Vanguard Small Cap Growth Index fund since inception made me realize that perhaps Lottery stocks were not included in the indexes. This started me on the concept of anti-factors, the
types of stocks that one should avoid. I realized the bogeyman of Lottery stocks just were not in the indexes hence I could never see the Small Growth black hole that the academics discussed.
Later on I thought about the so-called Value traps, stocks that are very cheap for very good reasons. Wasn't too much of a reach to say that even within a Small Cap Value index, that the more successful companies would have larger market caps than the less successful companies, hence a market cap weighted index would tilt away from the Value traps. I added Value traps to my list of anti-factors, so now the list is at two.
After that, reasoning that the best and most successful companies would dominate the US Total Stock
Market Index and the S&P 500, I reasoned that these two indexes would have a tilt towards quality. This is a bit controversial of a point because by definition these two indexes are the market and thus should have no tilt towards or away from any of the other factors than the Market factor.
My firm conviction is that one reason that indexing is so successful is that the Lottery stock anti-factor just doesn't show up and that market cap weighting minimizes the effect of the Value traps, the other anti-factor. Furthermore, I assert that any market cap weighted index would provide some sort of a quality tilt.
The S&P 500 and the Total Stock Market Index have a factor effect by screening out the very worst stocks or minimizing their effect by market cap weighting.
This might get me kicked out of the church of factors as a heretic but so be it. This might be one reason that factor premiums are harder to see with real life investors using real life investment products than academics using their research databases. The academic research doesn't reflect what average investors could have actually invested in way back when. The style index funds didn't come into existence until the late 1990's and actively managed no-load style funds focusing on Mid and Small Cap stocks started coming on investor radar screens probably in the early 1980's.
As I think about it, a counter argument to my points is that I am not accounting for the risk of Large companies failing. Enron, Washington Mutual, Lehman Brothers are examples of large companies that failed and not many folks saw the downfall of these companies beforehand. AIG almost failed but the US Government bailed them out but shareholders saw big losses. So having a Large market cap doesn't guarantee future success. What I will say is that larger companies have more resources to weather economic storms than smaller companies, so this gives larger companies an advantage.
A fool and his money are good for business.