Should I offload Micro Caps?

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tetractys
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Should I offload Micro Caps?

Post by tetractys »

I've been using BRSIX as a proxy for small-caps in my portfolio for several years now. For awhile it was held in a Roth, and then in taxable. For the last couple years BRSIX has had big capital gains, because the fund has done well and so has sold stocks that grew way beyond the funds CRSP 10 Index. So the realization has become clear, that when a cap based micro cap fund does well capital gains are commensurate. I've been reinvesting those cap gains for the last two years; but now am thinking of offloading the fund early next year for long term gains and reallocating the money into other parts of my taxable accounts. Of course this would change my allocation scheme.

So should I offload this micro cap fund, or stick with it? -- Tet
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Re: Should I offload Micro Caps?

Post by abuss368 »

I would and consider Total Stock Index. Add REITs or Small Value to the mix if you would like.

No need to make a portfolio any more complex.

Best.
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Should I offload Micro Caps?

Post by baw703916 »

I own IWC in taxable. It has never had a distribution in the several years I've owned it--the ETF structure makes a huge difference in allowing for index turnover w/o tax consequences. It has lagged BRSIX somewhat in 2013-14, but the difference in the 5 year performance between the two funds is almost exactly the difference in M*'s estimated tax costs.
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tetractys
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Re: Should I offload Micro Caps?

Post by tetractys »

Abbuss,
Thanks, if I unload micro caps I will reallocate the money to upped allocations of small cap value, large cap value, total stock market and REITs.

Baw,
Very interesting, will definitely look into that.

Tet
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JonnyDVM
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Re: Should I offload Micro Caps?

Post by JonnyDVM »

So you invested in a sector of the market that did to well so you want to unload it? Me no understand. I'm keeping my BRSIX set at a target of 5% of my equity allocation.
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tetractys
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Re: Should I offload Micro Caps?

Post by tetractys »

JonnyDVM wrote:So you invested in a sector of the market that did to well so you want to unload it? Me no understand. I'm keeping my BRSIX set at a target of 5% of my equity allocation.
JonnyDVM,

Well sort of; all those capital gains pushed me into higher taxes by surprise and I lost out on some tax credit. And now even more, because my paychecks keep increasing, I need to keep my AGI down. I want to stay in the 15% bracket if possible.

Is your BRSIX in taxable?

The fund is a good fund. In an earlier answer BAW suggested IWC; but I've checked it out and it doesn't meet my standards. For one thing the S&P index isn't very small at all, and for another there's no control over the PE, which is about twice that of BRSIX right now.

The big cap gains have happened two years in a row now; how have you handled them?

Thanks for your response, Tet
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Re: Should I offload Micro Caps?

Post by baw703916 »

The other microcap ETFs out there are PZI and WMCR. PZI does seem more valuey, but hasn't performed much differently than IWC.

Because there is going to be a lot of turnover in microcap companies, I'm just not sure how a mutual fund (even a passive one) without an ETF share class can be very tax efficient.
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Re: Should I offload Micro Caps?

Post by Boglegrappler »

Microcap stocks, according to wiki, have market capitalizations of up to 300MM. At a multiple of 20, such a company would earn 15M per year. At a higher multiple, say, 40, 7.5mm per year.

By definition, such companies are in arenas where there is little barrier to entry. The trade off is the growth that some might achieve, although in todays world, most companies with great growth prospects are financed privately until they are far larger.

I think I'd unload that sector.
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Re: Should I offload Micro Caps?

Post by JonnyDVM »

tetractys wrote:
JonnyDVM wrote:So you invested in a sector of the market that did to well so you want to unload it? Me no understand. I'm keeping my BRSIX set at a target of 5% of my equity allocation.
JonnyDVM,

Well sort of; all those capital gains pushed me into higher taxes by surprise and I lost out on some tax credit. And now even more, because my paychecks keep increasing, I need to keep my AGI down. I want to stay in the 15% bracket if possible.

Is your BRSIX in taxable?

The fund is a good fund. In an earlier answer BAW suggested IWC; but I've checked it out and it doesn't meet my standards. For one thing the S&P index isn't very small at all, and for another there's no control over the PE, which is about twice that of BRSIX right now.

The big cap gains have happened two years in a row now; how have you handled them?

Thanks for your response, Tet
In this case you've managed to tilt towards a sector where performance well exceeded that of TSM the past few year. Not to be a cliche man but your kind of letting the tax tail wag the the dog. Surely the gains outweighed the tax paid? My BRSIX is not in taxable but I don't get upset when my taxable equities are doing well. If the capital gains are really costing you significantly tax credits then that is a unique situation and you may be better off going to a TSM which also has the added benefit of not having half of the forum tell you you're a fool for tilting even though your tilted sectors are crushing it. Maybe I'm reading into this post a little too much but I'm hearing- I'm making too much money and my investments are doing too so well so I'm paying more tax. Keep making more money. Increased taxes come with that. That's a good thing!
I’d trade it all for a little more | -C Montgomery Burns
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tetractys
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Re: Should I offload Micro Caps?

Post by tetractys »

baw703916 wrote:The other microcap ETFs out there are PZI and WMCR. PZI does seem more valuey, but hasn't performed much differently than IWC.

Because there is going to be a lot of turnover in microcap companies, I'm just not sure how a mutual fund (even a passive one) without an ETF share class can be very tax efficient.
I think your right about tax efficiency. But if I can stay in the tax free %15 bracket I'll be OK. For indices, I like the CRSP 10 much better than the Wilshire or S&P micro cap indices, and the Zak's index I can't even tell what it is. -- Tet
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Re: Should I offload Micro Caps?

Post by tetractys »

Boglegrappler wrote:Microcap stocks, according to wiki, have market capitalizations of up to 300MM. At a multiple of 20, such a company would earn 15M per year. At a higher multiple, say, 40, 7.5mm per year.

By definition, such companies are in arenas where there is little barrier to entry. The trade off is the growth that some might achieve, although in todays world, most companies with great growth prospects are financed privately until they are far larger.

I think I'd unload that sector.
Boglegrappler, I don't have the facts on hand to understand what your second paragraph means. I just know that historically there is a small stock factor or premium. And the volatility I believe is good for my portfolio ala Markowitz and MPT. My post is not to debate this at all. -- Tet
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tetractys
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Re: Should I offload Micro Caps?

Post by tetractys »

JonnyDVM wrote:In this case you've managed to tilt towards a sector where performance well exceeded that of TSM the past few year. Not to be a cliche man but your kind of letting the tax tail wag the the dog. Surely the gains outweighed the tax paid? My BRSIX is not in taxable but I don't get upset when my taxable equities are doing well. If the capital gains are really costing you significantly tax credits then that is a unique situation and you may be better off going to a TSM which also has the added benefit of not having half of the forum tell you you're a fool for tilting even though your tilted sectors are crushing it. Maybe I'm reading into this post a little too much but I'm hearing- I'm making too much money and my investments are doing too so well so I'm paying more tax. Keep making more money. Increased taxes come with that. That's a good thing!
JonnyDVM,
Thanks, your posts are helping me focus. My concern is getting bumped out of the %15 tax bracket unexpectedly. As you know that's where cap gains are taxed %0 recently. I'm leaning on keeping the fund now; but I need to monitor and plan things more closely. That includes keeping spending down so I can up retirement contributions. And anyway, maybe those big cap gains won't happen again for a few years.
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Re: Should I offload Micro Caps?

Post by baw703916 »

Actually BRSIX has not greatly outperformed stocks in general the last few years, nor for that matter have microcaps in general.

http://performance.morningstar.com/fund ... ture=en-US

The 5 year returns are 17.29% for BRSIX, 16.88% for the S&P. Ten year returns are 7.98% for BRSIX, 8.38% for the S&P. Fifteen year returns are much better for BRSIX, as a consequence of small value stocks having largely sidestepped the tech bear market of 2000-2002.

It's true that BRSIX and microcaps in general had a fantastic ride in calendar year 2013. But saying they have greatly outperformed over the last few years is probably too much recency bias.

I'm sure that all the 3-Funders reading this post will enjoy the confirmation bias! But we shouldn't care what BRSIX or microcaps did, only what they might do going forward, whether they are a worthwhile addition to one's portfolio, and which vehicle if any is a good way to invest in them.
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