Does your portfolio tilt toward small/value?

[frugalhen]

In keeping the fama French, does your portfolio tilt toward small caps and value?

[Boglenaut]

I am not sure how to answer this. I make no tilt toward value/growth. I do tilt 2/3 S&P 500 and 1/3 Extended (including some REIT). TSM is 4/5 and 1/5 respectively.

[grap0013]

Yep, 100% tilt.

[billyt]

I am tilted toward large cap value (Wellington) and small cap blend (Extended Market). I have both a small and a value tilt, but do not own any small cap value.

[mptfan]

I am tilted toward large cap value (Wellington) and small cap blend (Extended Market). I have both a small and a value tilt, but do not own any small cap value.

Um... that's not true... if you have a small cap blend fund, then you do own small cap value.

[billyt]

Right you are. I do have small cap value at market weight. I don't have a tilt to small cap value.

[nimo956]

It's been awhile since the Fama French studies came out. Why do people think that the size and value premiums haven't been arbitraged away by too many people adopting this strategy?

[Index Fan]

I answered 'somewhat'. I own Total Stock, Total International, and REIT Index as far as equities go.

[nisiprius]

In keeping the fama French, does your portfolio tilt toward small caps and value?

I want to throw up a red flag here. It sounds to me as if you are saying "Fama and French's research on factor analysis of stock market returns shows that most investors should use a portfolio tilted toward small caps and value."

Go to this video of Eugene Fama speaking, and play it starting at 11:35. Don't jump to conclusions, play some more, try to figure out the context. But do play it.

The interviewer asks: "Some people cite your research showing that value and small firms have higher average returns over time and they assume that you would recommend most investors have a big helping of small and value stocks in their portfolios. Is that a fair representation of your views?"

What do you think Fama's answer is?

[mptfan]

It's been awhile since the Fama French studies came out. Why do people think that the size and value premiums haven't been arbitraged away by too many people adopting this strategy?

Because some risks are inherent, and cannot be arbitraged away. For example, everyone knows that stocks are riskier than bonds, and therefore stocks have a higher risk premium than bonds. This has been known for centuries, so why hasn't the risk premium of stocks been arbitraged away?

[Khanmots]

It's been awhile since the Fama French studies came out. Why do people think that the size and value premiums haven't been arbitraged away by too many people adopting this strategy?

It's been a while since we learned the equities return more than bonds. Why do people think that the equity premium hasn't been arbitraged away?

The answer is that we believe that the equity premium is a risk premium. The higher expected return is compensation for taking more risk.

Likewise people that invest in small and value believe that these are risk premiums and not simply some statistical anomaly that will now disappear. In other words, we believe we're exposing ourselves to additional compensated risk.

The same way as you might increase your exposure to equities in order to increase expected return at the cost of increased exposure to risk (say to 60/40 from 50/50 equities/bonds), we tilt to more exposure to small and value factors.

[Aptenodytes]

I answered 'somewhat'. I own Total Stock, Total International, and REIT Index as far as equities go.

So you are counting REITs as small value?

[EDN]

One way to check for this is to observe the long-term historical difference in returns between the market (CRSP 1-10 or Russell 3000) relative to a smaller and more value oriented equity allocation (20% S&P 500, 30% US large value index, 50% mid/small value index for illustration purposes) and compare it to a recent period such as the last 10 years.

From 1928-2002, the CRSP 1-10 Index compounded at +9.6% and the multi-asset mix (using indexes) returned +12.1%. That is a 26% higher return. From 2003-2012, using the Russell 3000 Index and the DFA funds of the associated asset classes, we saw +7.7% and +9.7% respectively. That to is a 26% higher return for the multi-asset class mix.

A casual glance doesn't reveal any erosion in the additional returns from a smaller and value oriented stock allocation over a decade after the research was published.

Eric

[Random Walker]

And the tilt to small and value isn't just about increased returns. It's also about increased portfolio efficiency. Small and value are weakly correlated with the market (more true for value) and weakly correlated with each other. Diversifying across risk factors is probably much more meaningful than diversifying geographically.

Dave

[Noobvestor]

And the tilt to small and value isn't just about increased returns. It's also about increased portfolio efficiency. Small and value are weakly correlated with the market (more true for value) and weakly correlated with each other. Diversifying across risk factors is probably much more meaningful than diversifying geographically.

Dave

Unless you're Japanese?

[Clive]

Unless you're Japanese?

Go to Kenneth French's data web site http://mba.tuck.dartmouth.edu/pages/fac ... brary.html

About three quarters of the way down there's a Country Portfolios formed on B/M, E/P, CE/P, and D/P zip file link.

Within that zip file there's Japan.dat that has data from 1975

Near the bottom of that dat file (third group of data up from the bottom) there's yearly local (Yen currency) values for both Market and High Book to Market (2nd and 3rd columns in that data group).

Plot those and for Market you'll see the often/commonly highlighted 'Japan' stock pattern of a big rise up to 1990 then big fall and then zigzagging sideways but in a volatile manner more or less since. Providing around a 4% annualised nominal from 1975 - 2011.

Value however followed a totally different motion and provided a 12.3% annualised and the progression looks much more like the S&P500 over those years.

When you also factor in low inflation in more recent decades, a strengthening Yen (so imports cost relatively less) !!!

Code: Select all

Value weighted local
BE/ME
        Mkt   High
1975   25.14   32.83
1976   21.88   20.81
1977   -5.22   18.67
1978   24.31   32.99
1979   4.03   9.2
1980   11.81   13.29
1981   27.5   45.88
1982   6.24   10.02
1983   22.71   19.05
1984   7.53   21.31
1985   10.39   17.85
1986   55.37   46.83
1987   -4.45   13.33
1988   18.11   44.94
1989   10.28   16.92
1990   -36.71   -31.69
1991   -3.73   -4.09
1992   -18.87   -12.13
1993   15.5   20.69
1994   10.48   16.06
1995   4.03   8.56
1996   6.37   14.52
1997   -4.36   -16.91
1998   -4.83   7.9
1999   60.32   34.03
2000   -29.74   25.36
2001   -16.8   -0.31
2002   -14.94   -4.47
2003   17.27   32.63
2004   9.04   27.18
2005   38.89   41.98
2006   10.03   9.15
2007   -7.45   -9.12
2008   -39.75   -27.45
2009   8.88   29.59
2010   2.71   6.61
2011   -13.83   -10.91


Edit : This is what 30% value, 70% cash looked like 1975 - 2009 in real terms (I haven't updated my database for more recent years cash or inflation values).

[scone]

I just became the proud owner of VBR today. Small, but mighty.

[gkaplan]

Define tilt.

Define small/value.

To be more precise, I split my domestic equity into equal thirds of Vanguard Value Index, Vanguard Small-Cap Value index, and REITS index. In addition, Vanguard FSTE All-World ex-US Small-Cap index, is one-third of my foreign equity, whose percentage equals that of my domestic equity.


Thank you.

[Clive]

Define small/value.

Kenneth French's interpretation is :
http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/Data_Library/six_portfolios_developed.html

Big stocks are those in the top 90% of June market cap for the region, and small stocks are those in the bottom 10%. The B/M breakpoints for big and small stocks in a region are the 30th and 70th percentiles of B/M for the big stocks of the region.

[og15F1]

Mine does not

My plan is to match the market and not tilt

However, through my 401k fund choices, I'm probably tilted AWAY from small caps

I think about correcting that by adding some new funds but then just figure a good plan is good enough and I shouldn't complicate it seeking a perfect plan

[BHCadet]

Yes, I've 20% in small cap in my equity portion of allocation according to Vanguard.
US Stock Market is only 7.0% in small cap as stated by Vanguard.

[Trev H]

Half Large, Half Small, Half Market, Half Value, Half US, Half International

50% US Equities - split 50/50 Large Cap Index / Small Value Index...
50% Intl Equities - split 50/50 Intl Large Value (indluding EM), Intl Small Market (including EM).

I don't consider it tilted myself... You have to somehow believe that CAPM is ideal before you would consider diversifying by size and price to be tilting...

Trev H

[xram]

I purchased a little bit of VSS and VWO last October 2012.

My little spreadsheet tells me that I am "down" 28 bucks compared to if I had simply purchased total international (vtiax) on that same day.....

100% proof that international tilting does not work

I think I am going to submit my study to one of the finance journals......

xram

[dbr]

Previous polls on this subject have shown that people on this forum favor SCV tilting.

Maybe someone can find the most recent previous poll.

[dkturner]

Currently a positive value tilt and a negative small tilt (using M* Instant X-ray).

A significant amount of the "tilt" is attributable to international holdings, which are 37% value for TISM, compared to 33% value for TSM. Also TISM is only 4% small, compared to 9% small for TSM. When is a tilt not a tilt?

[Trev H]

Here is what a 50/50 mix of Vanguards Total US Stock and Total Intl Stock indexes looks like via X Ray

26-25-24 (75% Large)
07-06-06 (19% Mid)
02-02-02 (06% Small)

There you go... CAPM and that's not tilted ???

My 4x25 mix of US Large Blend, US Small Value, Intl Large Value, Intl Small Market

15-14-13 (42% Large)
10-10-08 (28% Mid)
15-11-04 (30% Small)

Ahhhh... I don't see tilting there... just a sweet mix of Beta, Size and Price (Diversification).

Only a true "Lumper" could look at the first example above and see it as the ideal starting point, the base, the standard, and anything else is "tilted".



Trev H

[dbr]

Here is what a 50/50 mix of Vanguards Total US Stock and Total Intl Stock indexes looks like via X Ray

26-25-24 (75% Large)
07-06-06 (19% Mid)
02-02-02 (06% Small)

There you go... CAPM and that's not tilted ???

My 4x25 mix of US Large Blend, US Small Value, Intl Large Value, Intl Small Market

15-14-13 (42% Large)
10-10-08 (28% Mid)
15-11-04 (30% Small)

Ahhhh... I don't see tilting there... just a sweet mix of Beta, Size and Price (Diversification).

Only a true "Lumper" could look at the first example above and see it as the ideal starting point, the base, the standard, and anything else is "tilted".



Trev H

I don't agree with investing by what people call things. The right thing to do is see what properties each of the asset allocations in question has and decide what advantages and disadvantages one wants to seek.

In reality there are some good reasons many investors might choose the second option but those reasons have nothing to do with some sort of intuitive conclusion reached by looking at the numbers in the arrays above.

[Clive]

[pennstater2005]

No tilt for me. I have not totally ruled it out for the future. I still don't fully understand it. Still reading The Intelligent Asset Allocator by William Bernstein. It's a more involved read than some of his other books so it's taking some time. When he says in the book to set it down and take a break for a few days….I do

[sscritic]

I own what I own. When I TLHed out of Index 500 I bought Large Cap Index. Later I bought TSM. I wasn't tilting or was I? Before I bought the TSM, I had no small. Then I bought TSM, so I did tilt toward small. But I still have Large Cap, so I am tilting away from small. I guess there is a difference between the action and the result. My answer is thus I did, but I don't.

[ObliviousInvestor]

I do not tilt. But it's not as if I think tilting is a bad idea. Rather, I see it as one of several reasonable ways to adjust the overall risk level of one's portfolio to fit one's needs.

In other words, I'm indifferent to tilting. My reason for not tilting is that I place a very high value on simplicity, and I want to use one of Vanguard's all-in-one funds for my retirement savings. If those funds were tilted, then I would be tilted, and I would have no qualms about it.

[matjen]

I have a portion of IJS and VSS, so YES...I am tilter.

[sscritic]

I have a portion of IJS and VSS, so YES...I am tilter.

That doesn't follow. I have $1000 in a small cap value fund. I have $1,000,000 in a large cap growth fund. Do I tilt small/value? I guess it's all relative. Relative to having all my money in a large cap growth fund, adding $1000 of small cap value does tilt if you want to call that a tilt.

[dbr]

I have no quarrel with anyone choosing to "tilt" to any degree they like, as long as that person understands what they have.

I don't "tilt" because I don't need to and I don't want to.

[matjen]

I have a portion of IJS and VSS, so YES...I am tilter.

That doesn't follow. I have $1000 in a small cap value fund. I have $1,000,000 in a large cap growth fund. Do I tilt small/value? I guess it's all relative. Relative to having all my money in a large cap growth fund, adding $1000 of small cap value does tilt if you want to call that a tilt.

Sorry, to be much more clear. The rest of my equity is all Total Stock Market and Total Int'l funds with a smattering of S&P500 index. I layered on the IJS and VSS. They are about 25% or so of my equity.

[SC Hoosier]

I have 23% of equity portion in small cap value, 23% in large cap value, 23% in TSM. 10% in Int. value, 20% in total Int. I am 37 and looking for risk and return over long run. I would say I am thoroughly tilted.

I am enjoying this thread and this site very much. Thank you to all who make it great.

SC Hoosier

[Radman]

I am fairly new to investing and currently my wife and I invest solely in tax advantaged accounts with vanguard total retirement 2050 fund. I have been reading up on small/value/REIT tilting but I currently don't feel that understand it well enough and in addition given the small size of our current portfolio don't think it would likely make much difference.

From what I can gather some like Rick Ferri recommend tilting for two reasons: First that tilting lets you more accurately replicate the broader economy where there are many small companies and real estate that are not traded and secondly back testing has shown that it can increase returns 1-2% when held for long durations (20-30 years) while at the same time slightly decreasing volatility.

On the other hand some like Taylor Larimore recommend a simple 3 fund portfolio that replicates the traded market and market caps (I.E. holding small caps and REITs as a percentage of the market that they represent). Additionally some say that through back testing you could always find some segment of the market that would appear to improve performance, however, a reversion to the mean should be expected, (I believe there is some Bogle quote that nothing lasts forever). Even Rick Ferri who does tilt has stated that the perfect portfolio is only knowable in hindsight. I have also read that while small caps increase performance that the reason they do this is that they are inherently riskier than large caps and thus they do not increase risk adjusted performance.

As Taylor and others say there are many roads to Dublin. However, I have had difficulty reconciling the statements that small caps do not increase risk adjusted performance with the back testing Rick has shown on his blog and this forum that adding a small cap tilt will decrease volatility. Perhaps Mr. Ferri or others could explain/disabuse me of any false notions I espoused above.

[dharrythomas]

Yes
We've got some Wellington, Value Index, Small Cap Value Index, MidCap Value Index, and REIT. In my TSP, I've also got a larger allocation to the S fund than would replicate the total Market.

[Bungo]

I do not tilt toward small/value, because I'm not persuaded that any past outperformance will continue in the future. (This is a neutral statement: I'm not persuaded that it won't, either.) In fact, within US equities, I am somewhat tilted toward large cap because my 401(k) plan doesn't offer a total stock market index fund, so I use an S&P500 index fund as a proxy for this. I use VTI for the US equity portion held outside of the 401(k).

[docneil88]

And the tilt to small and value isn't just about increased returns. It's also about increased portfolio efficiency. Small and value are weakly correlated with the market (more true for value) and weakly correlated with each other. Diversifying across risk factors is probably much more meaningful than diversifying geographically. Dave

Hi Dave, Over many periods of time that's probably true. But I'm glad I didn't diversify into Germany or Japan before WWII, or Syria before the recent civil war. ("According to the International Monetary Fund (IMF), between March 2011 when the uprising began, and May 2012, the value of the Syrian pound has fallen 45 percent and the Damascus stock exchange decreased 40 percent" [source: http://english.nuqudy.com/Levant/Damage ... an_Ec-1822 ]). Best, Neil

[Garco]

My 403b account has a substantial tilt toward the "extended market." The main component of that is VEMSX -- VG Extended Market Index Fund. Although I've only had access to this fund for a little more than a year, my experience from the past 5-6 years with midcap funds has reinforced my commitment to them. This is, however, not a love story, not a marriage. Just a commitment for as long as they consistently outperform the SP500 (i.e., TR of VEMSX > TR of VINIX).

[vesalius]

I own what I own. When I TLHed out of Index 500 I bought Large Cap Index. Later I bought TSM. I wasn't tilting or was I? Before I bought the TSM, I had no small. Then I bought TSM, so I did tilt toward small. But I still have Large Cap, so I am tilting away from small. I guess there is a difference between the action and the result. My answer is thus I did, but I don't.

As I read in your recent post, that doesn't follow. Going by what you posted, your only tilt was and is to Large. IMO, owning TSM does not constitute a tilt to small, only a move toward a market portfolio. Again paraphrasing your prior post, I guess it's all relative. Relative to having all your money in a index 500 or Large cap index, adding any amount of TSM does tilt if you want to call that a tilt.