How Much of the Smallcap Effect Could Mutual Fund Investors Have Got?

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secondopinion
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Re: How Much of the Smallcap Effect Could Mutual Fund Investors Have Got?

Post by secondopinion »

nisiprius wrote: Mon May 29, 2023 5:27 pm Long-term comparisons between two portfolios often involve leapfrogging, with one fund alternately leaping and lagging the other. The leaps often last five, ten, fifteen or more years. The total for a time period, even a long time period, is endpoint sensitive, and which portfolio outperforms depends on whether the time period caught two leaps and one lag or two lags and one leap, etc. The total for very long time periods typically involves a difference that look small when CAGRs are compared, but large when dollars are compared.

There don't seem to be generally-accepted robust tools for determining if the difference is "significant."

There is a psychological test, but unfortunately it's hard to perform and involves concealing information from the subject, or even deceiving them. The test is to show them the performance comparison without their knowing the nature of the portfolios. Or, to be deceptive, claiming that the underperforming fund was passive and the outperforming fund is active. Ask the subject to imagine that they hold the underperforming fund and ask if the outperformance of the other fund is large enough, consistent enough, and robust enough to induce them to switch.

I did something like this in 2011, in a thread originally and falsely titled An imaginary active fund: good enough to make you switch?
nisiprius wrote: Sat Oct 01, 2011 5:57 amHere's the trick. It's really about small-cap tilting, not active management. Portfolio A is 60/40 large-cap stocks and bonds. Portfolio B is one with a small-cap tilt that has had bond allocation increased to give it exactly the same standard deviation as A. The dishonest thing I did was to poison everyone against portfolio B by calling it "active."

I wanted to see if the merits of the small-cap tilt are large enough and convincing enough to overcome the prejudice I created. And I wanted to show the very-long-term 0.33% benefit within the context of two-decade-long periods of 1%, 2% performance differences.

As i write this, the poll results stand at:

Yes, $13.8 million instead of $10.9 million speaks for itself: 1
No, 9.58% average annual return isn't that much more than 9.25% to be convincing: 7
Yes, for some other reason: 0
No, for some other reason: 10
I can't answer honestly because I see through your trick: 3
Other: 1
(This comes from the days before the forum disabled the "poll" feature. The data were the SBBI large-company, small-company, and intermediate-term government bond series. Regrettably, the image hosting service I used then vanished, the images were lost, and I didn't keep backups).

The relevance here is that people did not think the difference created by a small-cap tilt was enough to justify switching--if they were falsely told that the difference was created by active management.
Probably a useful survey right now is whether people would hold small-cap if there was no extra expected returns for doing so. I wonder how many people are holding small-cap for extra expected returns only.
Last edited by secondopinion on Mon May 29, 2023 6:01 pm, edited 5 times in total.
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Beensabu
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Re: How Much of the Smallcap Effect Could Mutual Fund Investors Have Got?

Post by Beensabu »

nisiprius wrote: Mon May 29, 2023 5:27 pm The relevance here is that people did not think the difference created by a small-cap tilt was enough to justify switching--if they were falsely told that the difference was created by active management.
Perception.
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Re: How Much of the Smallcap Effect Could Mutual Fund Investors Have Got?

Post by nisiprius »

Beensabu wrote: Mon May 29, 2023 5:59 pm
nisiprius wrote: Mon May 29, 2023 5:27 pm The relevance here is that people did not think the difference created by a small-cap tilt was enough to justify switching--if they were falsely told that the difference was created by active management.
Perception.
Sure, we'll believe a small difference matters if it confirms our bias, but it takes a much larger one to overcome our bias.
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Re: How Much of the Smallcap Effect Could Mutual Fund Investors Have Got?

Post by Beensabu »

nisiprius wrote: Mon May 29, 2023 6:06 pm
Beensabu wrote: Mon May 29, 2023 5:59 pm
nisiprius wrote: Mon May 29, 2023 5:27 pm The relevance here is that people did not think the difference created by a small-cap tilt was enough to justify switching--if they were falsely told that the difference was created by active management.
Perception.
Sure, we'll believe a small difference matters if it confirms our bias, but it takes a much larger one to overcome our bias.
Yes. And perceptions and biases are exploitable.
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Re: How Much of the Smallcap Effect Could Mutual Fund Investors Have Got?

Post by unwitting_gulag »

nisiprius wrote: Mon May 29, 2023 5:27 pm Long-term comparisons between two portfolios often involve leapfrogging, with one fund alternately leaping and lagging the other. The leaps often last five, ten, fifteen or more years. The total for a time period, even a long time period, is endpoint sensitive, and which portfolio outperforms depends on whether the time period caught two leaps and one lag or two lags and one leap, etc. The total for very long time periods typically involves a difference that look small when CAGRs are compared, but large when dollars are compared.

There don't seem to be generally-accepted robust tools for determining if the difference is "significant." ...
The "leaps" look small when plotted with log-ordinate, but are very substantial on linear coordinates. Of course, how we perceive these matters very much depends on time-frame, starting/ending point, and psychology. If the world ended in October 2007, and our souls all assembled in financial-heaven for a hearty round table discussion, we'd probably agree, that though the market has been tumultuous, on the whole it's rewarded us handsomely. Had the world instead ended just 18 months later, our souls would be having a very different discussion, and many of our bodies would have been buried outside of the churchyard, if you know what I mean. Thus about the market overall... and also, about the small-medium-large-mega comparison too.

To your point about 5-10-15 year duration of leaps, I can't disagree, but am nonetheless dismayed. 15 years is a long time, even for elderly people. 15 years ago, my life was very different. Lots has transpired since them. To now be looking at a trend that's held for 15 years, I am inclined not to regard it as a leap, which is eventually followed by a counter-leap, but rather, as an enduring law of nature. Am I wrong? Well, probably. But as you note about psychology, or rather, if you allow me to extrapolate from what you wrote about psychology, what matters most is how we FEEL about our investments, and not what we actually achieve! Looking at so many years of small-cap underperformance, I have a sick feeling in my stomach, and am very much mired in regret, for having dabbled in small-caps. Whether this is stupid or not, I can not vouch. But it FEELs like a really dumb decision that I regret having made. In other words, I regret having deviated from 100% S&P 500, 100% of the time.
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Re: How Much of the Smallcap Effect Could Mutual Fund Investors Have Got?

Post by nedsaid »

SimpleGift wrote: Mon May 29, 2023 3:26 pm
nedsaid wrote: Sun May 28, 2023 10:34 am The Morningstar article from a ways back mentioned specifically that a screening for companies that have earnings caused the Small-Cap premium to return with a vengeance. They used the S&P 600 Small-Cap Index as an example of this. Can't remember if they mentioned the Quality factor.
Looking more closely at the outperformance of Vanguard’s S&P Small Cap 600 Fund (Tax-Managed) since its inception in 1999, it appears that most of this lifetime outperformance was achieved during the Tech Crash in 2000, and in the years immediately following (chart below). Which make sense, since any company that was showing stable earnings and profitability (i.e., quality) during this period was attractive to investors.

Image
Source: PV

Since that time, the performance of S&P’s Small Cap 600 Index, Vanguard’s Small Cap Index and its S&P 500 Fund appears to have been pretty much the same.
Thank you. I really appreciate you taking time to address the issue.
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Re: How Much of the Smallcap Effect Could Mutual Fund Investors Have Got?

Post by McQ »

nedsaid wrote: Mon May 29, 2023 10:17 am
McQ wrote: Sun May 28, 2023 9:48 pm
3. And then things started to change, until by the mid-1980s one could find whales that were no-load—or whales that continued to have a load. Somewhat later there were ETFs, and no ETF ever had or could have a load, as far as I can tell. Loads have become rare today, and those that remain are way smaller than the 8.5% that became traditional by the 1970s.
Professor McQ:

To the contrary, after the no-load revolution of the 1980's and 1990's, many formerly no-load mutual fund companies either went to load status themselves or sold themselves to mutual fund companies that went load. This happened in the aftermath of the Tech Crash of 2000 and many former do-it-yourself investors rushed to Advisors. The no-load revolution went into reverse and now I can think of four major fund companies that offer their funds no-load directly to the public: Vanguard, Fidelity, T Rowe Price, and American Century. Dodge & Cox, a boutique value shop, is no load. Can't think of any others off the top of my head. Fortunately, ETFs filled the void left by the implosion of the no-load mutual fund industry.

Are loads rare? I don't know about that. They are alive and well in the Broker-Dealer world and there are still lots of Advisors who sell loaded shares to the public. Ameriprise and Edward Jones still sell load funds to their clients.
...
I stand corrected, nedsaid. Perils of extrapolating from personal experience (I have never bought a fund through a broker). You are right, prominent load funds do remain, most notably the American funds from Capital Group.

BH needing a frisson of horror to jolt them awake can look at this page for the American funds, showing funds where loads of 5.75% continue to be charged :shock:

https://www.capitalgroup.com/individual ... icing.html
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Re: How Much of the Smallcap Effect Could Mutual Fund Investors Have Got?

Post by secondopinion »

McQ wrote: Tue May 30, 2023 5:01 pm
nedsaid wrote: Mon May 29, 2023 10:17 am
McQ wrote: Sun May 28, 2023 9:48 pm
3. And then things started to change, until by the mid-1980s one could find whales that were no-load—or whales that continued to have a load. Somewhat later there were ETFs, and no ETF ever had or could have a load, as far as I can tell. Loads have become rare today, and those that remain are way smaller than the 8.5% that became traditional by the 1970s.
Professor McQ:

To the contrary, after the no-load revolution of the 1980's and 1990's, many formerly no-load mutual fund companies either went to load status themselves or sold themselves to mutual fund companies that went load. This happened in the aftermath of the Tech Crash of 2000 and many former do-it-yourself investors rushed to Advisors. The no-load revolution went into reverse and now I can think of four major fund companies that offer their funds no-load directly to the public: Vanguard, Fidelity, T Rowe Price, and American Century. Dodge & Cox, a boutique value shop, is no load. Can't think of any others off the top of my head. Fortunately, ETFs filled the void left by the implosion of the no-load mutual fund industry.

Are loads rare? I don't know about that. They are alive and well in the Broker-Dealer world and there are still lots of Advisors who sell loaded shares to the public. Ameriprise and Edward Jones still sell load funds to their clients.
...
I stand corrected, nedsaid. Perils of extrapolating from personal experience (I have never bought a fund through a broker). You are right, prominent load funds do remain, most notably the American funds from Capital Group.

BH needing a frisson of horror to jolt them awake can look at this page for the American funds, showing funds where loads of 5.75% continue to be charged :shock:

https://www.capitalgroup.com/individual ... icing.html
That is, if you do not add more to begin with...

But yes, that is bad.
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Re: How Much of the Smallcap Effect Could Mutual Fund Investors Have Got?

Post by nedsaid »

McQ wrote: Tue May 30, 2023 5:01 pm
nedsaid wrote: Mon May 29, 2023 10:17 am
McQ wrote: Sun May 28, 2023 9:48 pm
3. And then things started to change, until by the mid-1980s one could find whales that were no-load—or whales that continued to have a load. Somewhat later there were ETFs, and no ETF ever had or could have a load, as far as I can tell. Loads have become rare today, and those that remain are way smaller than the 8.5% that became traditional by the 1970s.
Professor McQ:

To the contrary, after the no-load revolution of the 1980's and 1990's, many formerly no-load mutual fund companies either went to load status themselves or sold themselves to mutual fund companies that went load. This happened in the aftermath of the Tech Crash of 2000 and many former do-it-yourself investors rushed to Advisors. The no-load revolution went into reverse and now I can think of four major fund companies that offer their funds no-load directly to the public: Vanguard, Fidelity, T Rowe Price, and American Century. Dodge & Cox, a boutique value shop, is no load. Can't think of any others off the top of my head. Fortunately, ETFs filled the void left by the implosion of the no-load mutual fund industry.

Are loads rare? I don't know about that. They are alive and well in the Broker-Dealer world and there are still lots of Advisors who sell loaded shares to the public. Ameriprise and Edward Jones still sell load funds to their clients.
...
I stand corrected, nedsaid. Perils of extrapolating from personal experience (I have never bought a fund through a broker). You are right, prominent load funds do remain, most notably the American funds from Capital Group.

BH needing a frisson of horror to jolt them awake can look at this page for the American funds, showing funds where loads of 5.75% continue to be charged :shock:

https://www.capitalgroup.com/individual ... icing.html
You will find that the vast majority of mutual fund companies are load-fund companies. Even American Century and Fidelity, which offer no-load funds directly to the public, sell "A" shares with up front commissions through certain Advisory channels.

Advisors who operate in the Broker-Dealer world sell loaded mutual funds, mostly the "A" shares with the upfront sales charge. "C" shares don't have an upfront sales charge but charge a higher expense ratio (sometimes 1% more a year) than "A" shares and after so many years will convert to "A" status. Advisors get their commissions up front through "A" shares or over a period of time with "C" shares. Depending upon the contract the Advisor has with their affiliated firm, the Advisor may or may not receive the annual 12(b)1 fees, often 0.25% a year. 12(b)1 fees are part of the annual expense ratio.

Advisors who operate in the Registered Investment Advisor world receive an Assets Under Management fee from their clients, often 1% a year. The clients will be invested in share classes with discounted expense ratios, often Institutional class shares. You will most often see clients invested in I, Y, Advisor, or F2 shares.

Some American Funds can be purchased no-load through brokerages such as Fidelity but investors still pay the same annual expense ratio as the "A" shares.

It is no exaggeration to say that the no-load mutual fund industry collapsed in the aftermath of the 2000-2002 bear market. Formerly do-it-yourself investors, who had never experienced a deep bear market, rushed to Advisors desperate for help and thus many formerly no-load fund companies either sold themselves to load firms or converted on their own.
This goes to show what a tiny minority that Bogleheads are compared to the universe of do-it-yourself investors. We truly are an elite group. Many individuals invest exclusively through Advisors.

Fortunately, the discount brokerages and the ETF industry came to the rescue. There is no need for an investor to pay a sales load ever again.
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Re: How Much of the Smallcap Effect Could Mutual Fund Investors Have Got?

Post by McQ »

nedsaid wrote: Wed May 31, 2023 9:05 am ...
You will find that the vast majority of mutual fund companies are load-fund companies. Even American Century and Fidelity, which offer no-load funds directly to the public, sell "A" shares with up front commissions through certain Advisory channels.

Advisors who operate in the Broker-Dealer world sell loaded mutual funds, mostly the "A" shares with the upfront sales charge. "C" shares don't have an upfront sales charge but charge a higher expense ratio (sometimes 1% more a year) than "A" shares and after so many years will convert to "A" status. Advisors get their commissions up front through "A" shares or over a period of time with "C" shares. Depending upon the contract the Advisor has with their affiliated firm, the Advisor may or may not receive the annual 12(b)1 fees, often 0.25% a year. 12(b)1 fees are part of the annual expense ratio.

Advisors who operate in the Registered Investment Advisor world receive an Assets Under Management fee from their clients, often 1% a year. The clients will be invested in share classes with discounted expense ratios, often Institutional class shares. You will most often see clients invested in I, Y, Advisor, or F2 shares.

Some American Funds can be purchased no-load through brokerages such as Fidelity but investors still pay the same annual expense ratio as the "A" shares.

It is no exaggeration to say that the no-load mutual fund industry collapsed in the aftermath of the 2000-2002 bear market. Formerly do-it-yourself investors, who had never experienced a deep bear market, rushed to Advisors desperate for help and thus many formerly no-load fund companies either sold themselves to load firms or converted on their own.
This goes to show what a tiny minority that Bogleheads are compared to the universe of do-it-yourself investors. We truly are an elite group. Many individuals invest exclusively through Advisors.

Fortunately, the discount brokerages and the ETF industry came to the rescue. There is no need for an investor to pay a sales load ever again.
Nedsaid, you tell a good story here, but it did not check out in the resources available to me, most notably the Investment Company Institute Factbook (more below). However:

-I'm not arguing that BH are any other than a select group (I'm sure you are right).
-Or that the 2000-02 bear market rocked many investors on their heels.

But the bolded statement in your post does not check out. Here is a link to the relevant chapter in the current ICI factbook: https://icifactbook.org/pdf/2023-factbook-ch6.pdf.

On p. 76 it states: "Over the past few decades, the way that fund shareholders compensate financial
professionals has changed significantly, moving away from sales loads (e.g., front-end loads)
and toward asset-based fees."

and:

"Gross sales to no-load mutual funds without 12b-1 fees have grown substantially since 2000 and were 91 percent of total gross sales to long-term mutual funds in 2022 (Figure 6.3)."

The figure that follows in the chapter shows no-load fund sales rising from 46% of the total in 2000 to 59% in 2005, directly contradicting your claim, on their way to that 91% most recently.

That said, elsewhere, in carefully parsed bureaucratic prose, the report supports the view that you, and I, and many BH hold: that huge numbers of investors are still paying far too much. It is just that these ordinary investors are being fleeced another way, through assets under management fees, rather than front-end sales charges.

It may nonetheless be true that there are more with-load fund companies now, or that the proliferation of no-load funds halted about 2000; but if the ICI figures are correct, the remaining no-load companies must then have hundreds of billions of dollars more under management than those proliferating with-load companies/funds.
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Re: How Much of the Smallcap Effect Could Mutual Fund Investors Have Got?

Post by nedsaid »

McQ wrote: Wed May 31, 2023 1:51 pm
nedsaid wrote: Wed May 31, 2023 9:05 am ...
You will find that the vast majority of mutual fund companies are load-fund companies. Even American Century and Fidelity, which offer no-load funds directly to the public, sell "A" shares with up front commissions through certain Advisory channels.

Advisors who operate in the Broker-Dealer world sell loaded mutual funds, mostly the "A" shares with the upfront sales charge. "C" shares don't have an upfront sales charge but charge a higher expense ratio (sometimes 1% more a year) than "A" shares and after so many years will convert to "A" status. Advisors get their commissions up front through "A" shares or over a period of time with "C" shares. Depending upon the contract the Advisor has with their affiliated firm, the Advisor may or may not receive the annual 12(b)1 fees, often 0.25% a year. 12(b)1 fees are part of the annual expense ratio.

Advisors who operate in the Registered Investment Advisor world receive an Assets Under Management fee from their clients, often 1% a year. The clients will be invested in share classes with discounted expense ratios, often Institutional class shares. You will most often see clients invested in I, Y, Advisor, or F2 shares.

Some American Funds can be purchased no-load through brokerages such as Fidelity but investors still pay the same annual expense ratio as the "A" shares.

It is no exaggeration to say that the no-load mutual fund industry collapsed in the aftermath of the 2000-2002 bear market. Formerly do-it-yourself investors, who had never experienced a deep bear market, rushed to Advisors desperate for help and thus many formerly no-load fund companies either sold themselves to load firms or converted on their own.
This goes to show what a tiny minority that Bogleheads are compared to the universe of do-it-yourself investors. We truly are an elite group. Many individuals invest exclusively through Advisors.

Fortunately, the discount brokerages and the ETF industry came to the rescue. There is no need for an investor to pay a sales load ever again.
Nedsaid, you tell a good story here, but it did not check out in the resources available to me, most notably the Investment Company Institute Factbook (more below). However:

-I'm not arguing that BH are any other than a select group (I'm sure you are right).
-Or that the 2000-02 bear market rocked many investors on their heels.

But the bolded statement in your post does not check out. Here is a link to the relevant chapter in the current ICI factbook: https://icifactbook.org/pdf/2023-factbook-ch6.pdf.

On p. 76 it states: "Over the past few decades, the way that fund shareholders compensate financial
professionals has changed significantly, moving away from sales loads (e.g., front-end loads)
and toward asset-based fees."


and:

"Gross sales to no-load mutual funds without 12b-1 fees have grown substantially since 2000 and were 91 percent of total gross sales to long-term mutual funds in 2022 (Figure 6.3)."

The figure that follows in the chapter shows no-load fund sales rising from 46% of the total in 2000 to 59% in 2005, directly contradicting your claim, on their way to that 91% most recently.

That said, elsewhere, in carefully parsed bureaucratic prose, the report supports the view that you, and I, and many BH hold: that huge numbers of investors are still paying far too much. It is just that these ordinary investors are being fleeced another way, through assets under management fees, rather than front-end sales charges.

It may nonetheless be true that there are more with-load fund companies now, or that the proliferation of no-load funds halted about 2000; but if the ICI figures are correct, the remaining no-load companies must then have hundreds of billions of dollars more under management than those proliferating with-load companies/funds.
Probably the passive index funds have picked up much of the increase in no-load mutual fund sales and Vanguard represents a big share of that. It isn't my imagination that a lot of formerly no-load fund companies became load or were purchased by load companies. In my geographic area of the country, there were three no-load mutual fund families: Columbia, Safeco, and Crabbe-Huson. Columbia was a favorite provider for 401(k) plans and were a popular mutual fund group in my area. All three were sold and Columbia is now part of Ameriprise.

Scudder was bought by Deutsche Bank and the funds went to load, Invesco Funds are now loaded, Janus is now part of Janus/Henderson and that appears to be no-load. Neuberger-Berman funds are almost exclusively offered through Advisors, one fund is available directly. Babson was also purchased. Dreyfus seems to have narrowed its focus, not so much offered directly to the public, I don't see any equity funds offered. So lots of consolidation within the industry.

The thing is, no-load needs to be more clearly defined. What I am thinking of are no-load mutual funds available directly to the public. If the term no-load includes funds held by Investment Advisors under an Assets Under Management fee then you are undoubtedly correct. The trend is away from Advisors being compensated by commissions towards being compensated by an Assets Under Management agreement, the move from Broker-Dealers to Register Investment Advisors.

It would be interesting to see the figures for no-load mutual funds held directly by the public without an Advisory intermediary. I cannot buy as an individual investor I, Y, F2, or Advisor share classes but these are considered "no-load" though you need an Advisor to access. If you have to pay an Assets Under Management fee to an Advisor to access these share classes, are these truly no-load? I would say no, at least the way I have understood the term. If an Advisor is collecting an AUM fee directly from the client, there is no need for a 12(b)1 fee or a sales charge.

What you are seeing might be merely a result of the shift in how Investment Advisors are compensated.
Last edited by nedsaid on Wed May 31, 2023 6:48 pm, edited 1 time in total.
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Re: How Much of the Smallcap Effect Could Mutual Fund Investors Have Got?

Post by imak »

Surprised to see that no one is bothering to consider the Size Effect in international & emerging markets, where Dimensional funds steadily outperformed the total market indexes.

The history of funds is limited but still going back about 25 years.

Referring from portfoliovisualizer, results for international and emerging markets:

International Developed ex-US markets, Jan 1998 - Apr 2023:
DFA International Small Company I (DFISX) : 6.78% CAGR
Benchmark market index fund (DFALX) : 5.08% CAGR

Emerging markets, Jan 1999 - Apr 2023:
DFA Emerging Markets Small Cap I (DEMSX) : 10.50% CAGR
Benchmark market Index fund (VEIEX) : 7.32% CAGR

Note that volatility and max drawdowns are quite similar for small cap funds and benchmark funds, they are not even noticeable if not checking the portfolio too often (like a true Boglehead).
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Re: How Much of the Smallcap Effect Could Mutual Fund Investors Have Got?

Post by McQ »

I’ve updated the chart from the OP to better answer the question in the title of the thread. The chart shows wealth outcomes for owning either:

1) The Vanguard 500 index fund (a proxy for large stocks)
2) The DFA microcap fund (a proxy for small stocks, and the basis of the SBBI small company index)

The chart shows the value of $1 invested at the end of December 1981, when the DFA fund became available.

Image

In this version I’ve added a reset of the S&P fund line at the end of 1999, setting its value equal to that of the DFA fund. The dotted line shows wealth outcomes on the S&P fund for the second 18 years. Dollar values are called out at 1999 and at 2017.

Could a mutual fund investor have harvested the size effect using real money and actual funds, post-1981?

Yes. And no. And maybe.

1. For a 1981 start, you should have been in large stocks. Over 18 years you would have doubled your money relative to holding small stocks.

2. For a 1999 start, you should have been in small stocks. Over 18 years you would have doubled your money relative to holding large stocks.

3. If you had a 41-year holding period—invested a windfall at age 25 and held until you reached full retirement age of 66 in 2022—it did not matter whether you owned large or small stocks. You were fortunate to harvest one of the great bull markets and built substantial wealth either way, with about $83 for every $1 invested.

It does not appear as if four decades is a long enough period to be sure of gaining an advantage from holding small stocks instead of large.

Thought experiment: If the small stock effect generally provides a net advantage when measured over 100-year periods, but is not stable at the length of your investment horizon of 20 – 30 years, then is it investable for you, the concrete individual in the world?
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Re: How Much of the Smallcap Effect Could Mutual Fund Investors Have Got?

Post by psteinx »

McQ wrote: Fri Jun 02, 2023 5:56 pm Thought experiment: If the small stock effect generally provides a net advantage when measured over 100-year periods, but is not stable at the length of your investment horizon of 20 – 30 years, then is it investable for you, the concrete individual in the world?
I know this part is a hypothetical from you, but I want to call it out.

US stock market history, as a WHOLE, is generally available from 1871 (so, 152 years). (Some weaker data going back further)
Factor breakdowns (small/large, value/growth) are generally available from 1926 (so, 97 years).

There are no "100-year periods", that I know of, of well documented small-cap history in the US. Max history is a SINGLE 97 period. Or, a bit over 3 distinct 30 year periods. Or, nearly 5 20 year periods.

In any case, you have a VERY small n, when considering sample sizes of long-holding periods of tilted portfolios.

If you're drawing colored balls from a bag, then replacing them, you can have certain statistical conclusion, albeit with much higher values of n.

But stock data is even worse, because the market is constantly changing - the contents of the bag of colored balls (future returns) that you draw from, in 2023, is not likely the same as it was in 1927, or 1981, or whatever. An attempted list of changes, including those most likely to affect factor tilting, is a bit too much to get into here, but suffice to say that the investment marketplace of 2023 is quite different even from 1981, much less 1927.
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McQ
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Re: How Much of the Smallcap Effect Could Mutual Fund Investors Have Got?

Post by McQ »

psteinx wrote: Sat Jun 03, 2023 10:48 am
McQ wrote: Fri Jun 02, 2023 5:56 pm Thought experiment: If the small stock effect generally provides a net advantage when measured over 100-year periods, but is not stable at the length of your investment horizon of 20 – 30 years, then is it investable for you, the concrete individual in the world?
I know this part is a hypothetical from you, but I want to call it out.

US stock market history, as a WHOLE, is generally available from 1871 (so, 152 years). (Some weaker data going back further)
Factor breakdowns (small/large, value/growth) are generally available from 1926 (so, 97 years).

There are no "100-year periods", that I know of, of well documented small-cap history in the US. Max history is a SINGLE 97 period. Or, a bit over 3 distinct 30 year periods. Or, nearly 5 20 year periods.

In any case, you have a VERY small n, when considering sample sizes of long-holding periods of tilted portfolios.

If you're drawing colored balls from a bag, then replacing them, you can have certain statistical conclusion, albeit with much higher values of n.

But stock data is even worse, because the market is constantly changing - the contents of the bag of colored balls (future returns) that you draw from, in 2023, is not likely the same as it was in 1927, or 1981, or whatever. An attempted list of changes, including those most likely to affect factor tilting, is a bit too much to get into here, but suffice to say that the investment marketplace of 2023 is quite different even from 1981, much less 1927.
Up to a point, I don't disagree. My '100' was a rounding of 97, so we are looking at the same data. And there has only been one such 'period' (a Paul Samuelson point IIRC, n=1). If ever you need a citation to combat the conventional "but we can extract seventy-eight 20-year rolls from a 97-year record," try this FAJ paper: https://www.tandfonline.com/doi/full/10 ... 18.1547056

But once you get into "you are not sampling the same phenomenon, even 1981 is too long ago" then from my perspective, you are sliding down the slope to 'history is bunk.' I mean, before chatGPT, how can any of that ancient price action be relevant? :wink:
You can take the academic out of the classroom by retirement, but you can't ever take the classroom out of his tone, style, and manner of approach.
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