Value and small cap tilt

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jorgealmd
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Joined: Wed Oct 17, 2012 10:31 pm

Value and small cap tilt

Post by jorgealmd »

I currently hold Vanguard total stock market and total international stock funds. I have read somewhere that it is sometimes a good idea to a bit of value and small cap tilt. Which funds do you recommend?
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nedsaid
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Re: Value and small cap tilt

Post by nedsaid »

If you wanted to tilt, I would use the small cap value index and the value index. You get the most bang for your buck with the small cap value index. I would use the small cap value in larger proportion than the value index.

If you keep reading, it is likely you will want to add more and more things!!
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livesoft
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Re: Value and small cap tilt

Post by livesoft »

I use VBR for small-cap value in the US and VSS for small-cap in the int'l. I used to have the Extended Market Index (there are many ticker symbols: FSEVX, VXF, VEXMX, etc), but small-cap grew so much, I had to sell it all in a rebalancing move.

You may also wish to consult www.altruistfa.com/dfavanguard.htm where a list of funds in several asset classes are described.
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stevewolfe
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Re: Value and small cap tilt

Post by stevewolfe »

nedsaid wrote:If you keep reading, it is likely you will want to add more and more things!!
And then if you keep reading you will likely question the value of adding anything to what you have. Then, after reading some more, you might just say "the heck with it" and live your life. If you do the reading before you make the changes, you might save yourself a whole lot of swapping around and angst. But then again, maybe not! :sharebeer
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nisiprius
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Re: Value and small cap tilt

Post by nisiprius »

1) The benefits of value and small cap tilts are more controversial than you think, and not the sort of thing you should really be doing based on a vague memory that you have "read it somewhere." In addition to reading sources that say you should do this, you might also read Burton Malkiel's dismissal of "Smaller is better" and "Value always wins," in A Random Walk Down Wall Street, in the chapter entitled "Potshots at the Efficient Market Theory and Why They Miss." I'm not saying tilting is wrong, I'm saying that it's nowhere near as certain or as cut-and-dried as all that.

2) Since value and small-cap stocks are riskier than the total market, you should have a plan as to what adjustments you are going to reduce your risk to compensate for the extra risk you are taking on by tilting. It's not a big amount, but it's there.

3) Vanguard offers index funds targeted at each of the nine Morningstar style boxes. They are named as you'd expect, except that two of the large-cap funds don't have the word "large" in their name. They are: Vanguard [Large-cap] Growth Index, Vanguard Large-cap Index, Vanguard [Large-cap] Value index, Vanguard Mid-cap Growth Index, Vanguard Mid-Cap Index, Vanguard Mid-Cap Value Index, Vanguard Small-Cap Growth Index, Vanguard Small-Cap Index, and Vanguard Small-Cap Value Index.

You might ask why Vanguard even bothers to offer the three growth index funds, and what investors have been foolish enough to buy $31 billion of the [Large-cap] Growth Index funds if it is really all that obvious that investors should be tilting toward value and small cap.

4) The mutual fund company most associated with the sophisticated use of Fama-French factors is Dimensional Fund Advisors (DFA). The people who espouse that investing strategy seem to think that DFA has the best funds available for implementing it. DFA funds are only available through advisors, who charge fees. It might be worth it if you have a large enough portfolio to benefit from the services of an advisor and you like the advisor.
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avalpert
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Re: Value and small cap tilt

Post by avalpert »

nisiprius wrote: You might ask why Vanguard even bothers to offer the three growth index funds, and what investors have been foolish enough to buy $31 billion of the [Large-cap] Growth Index funds if it is really all that obvious that investors should be tilting toward value and small cap.
While you make some fine points the implication of the above probably isn't one you should be pursuing - I mean given how much investors put it [name your active fund and exotic strategy] one would think that pursuing an index-based total market approach was insane.
Streptococcus
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Re: Value and small cap tilt

Post by Streptococcus »

nisiprius wrote:1) The benefits of value and small cap tilts are more controversial than you think, and not the sort of thing you should really be doing based on a vague memory that you have "read it somewhere." In addition to reading sources that say you should do this, you might also read Burton Malkiel's dismissal of "Smaller is better" and "Value always wins," in A Random Walk Down Wall Street, in the chapter entitled "Potshots at the Efficient Market Theory and Why They Miss." I'm not saying tilting is wrong, I'm saying that it's nowhere near as certain or as cut-and-dried as all that.

2) Since value and small-cap stocks are riskier than the total market, you should have a plan as to what adjustments you are going to reduce your risk to compensate for the extra risk you are taking on by tilting. It's not a big amount, but it's there.

3) Vanguard offers index funds targeted at each of the nine Morningstar style boxes. They are named as you'd expect, except that two of the large-cap funds don't have the word "large" in their name. They are: Vanguard [Large-cap] Growth Index, Vanguard Large-cap Index, Vanguard [Large-cap] Value index, Vanguard Mid-cap Growth Index, Vanguard Mid-Cap Index, Vanguard Mid-Cap Value Index, Vanguard Small-Cap Growth Index, Vanguard Small-Cap Index, and Vanguard Small-Cap Value Index.

You might ask why Vanguard even bothers to offer the three growth index funds, and what investors have been foolish enough to buy $31 billion of the [Large-cap] Growth Index funds if it is really all that obvious that investors should be tilting toward value and small cap.

4) The mutual fund company most associated with the sophisticated use of Fama-French factors is Dimensional Fund Advisors (DFA). The people who espouse that investing strategy seem to think that DFA has the best funds available for implementing it. DFA funds are only available through advisors, who charge fees. It might be worth it if you have a large enough portfolio to benefit from the services of an advisor and you like the advisor.
Great post!
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Garco
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Re: Value and small cap tilt

Post by Garco »

Nisiprius: DFA funds can be purchased in some 401k's and 403b's. I have (just) one available in my 403b plans.
michaelsieg
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Re: Value and small cap tilt

Post by michaelsieg »

Jorgealmd,
I agree with Nisi - is not as straight forward as one thinks. Any change in your IPS should take time and lots of thinking. I have been running numbers about small and value tilting for a few months now and there are may pros, but also cons to it. I am leaning towards doing it, but after spending several months, I have not yet committed to it. Running some of the numbers can scare you.
Let me give you an example - I just ran the numbers from Prof French's database and looked at returns of the total stock market versus a tilted portfolio (0.2 SMB and 0.4 HML with annual rebalancing) and I looked at 2 time periods, 1980 -2000 and 2000 - today and the results are striking:
A $10 investment in January 1980 invested into TSM would have grown to $65 by January 2000, but in a small and value tilted portfolio it would have grown to $27 (about 7.8 % per year), which is all right, but it is more than 100% less than TSM! This phenomenon is called asset tracking error regret and I can only imagine that this is a painful experience for an investor to live through. (And these numbers are not "real life", this is all before costs/taxes).
After 2000- today, the value/small tilted portfolio did much better. My calculations only looked at the equity side and did not take into account the rebalancing between stocks and bonds of a typical balanced portfolio. So what I learned from this:
-If you want to tilt, you have to be convinced by your own research/running numbers, that this is what you want to do.
-Once you commit to this strategy, you have to stay committed for a long time and you have to be aware, that you will likely have prolonged periods of "underperforming" the entire market.
-I think that the potential biggest enemy of this strategy is probably the investor him/herself - this is strategy IMHO requires much more discipline than a standard 3 fund portfolio.
There are many great posts here about this topic, I would suggest that you do a lot of reading and only commit to this strategy if you are prepared to experience "underperformance" of value and small tited portfolio if you are able to tolerate this and "stay the course".
mikeportfolio
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Joined: Wed May 01, 2013 9:26 pm

Re: Value and small cap tilt

Post by mikeportfolio »

Good article by Rick Ferri on the subject:
http://www.rickferri.com/blog/strategy/ ... ue-stocks/
michaelsieg
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Re: Value and small cap tilt

Post by michaelsieg »

Thanks Mike
Great article
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