Small Value vs Small Growth

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Small Value vs Small Growth

Postby Karl » Thu Jan 31, 2013 9:26 pm

Theory tells us that SV should beat SG. The argument varies, either being that investors are mesmerized by hot & exciting growth stocks and pay too much or that value stocks are risky dogs (e.g. K-mart) and they have to provide higher returns to entice any investors to touch them.

I was just taking a look at the performance of Vanguard SV index vs SG index. I notice that since inception on May 21, 1998 it's actually been Growth that's won over that roughly 14 1/2 year period. Admittedly, that's not a huge amount of time and the difference isn't vast: 5.63% for SV and 6.35% for SG. I'm also pretty sure the indexes they follow have changed over that period as is the case with most Vanguard funds.

So where is this higher performance I'm told value is supposed to provide? Is the time span in question simply too short (quite a plausible argument)? Or is it a more fundamental issue? Like the index SV tracks simply isn't "valuey" enough? Of course, in this performance contest it's up against a SG index that, by DFA standards, is ultra-mega-growthy (as opposed to DFA's definition of "growth" where the market itself is growth so simply small cap index would the the benchmark for SG).

Please note, I'm hardly bashing investing in values stocks. Just the other day I decided to exchange some assets between Small Cap Index and SV, so evidently I feel that a value bias should do at least as well in the long run, I hope. Though given my chronic history of being wrong, you may wish to move all your money to SG. :D
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Re: Small Value vs Small Growth

Postby livesoft » Thu Jan 31, 2013 9:28 pm

Karl wrote:So where is this higher performance I'm told value is supposed to provide?
Nobody knows and nobody can tell you. It is probably in the same place where all my lost socks are.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: Small Value vs Small Growth

Postby nisiprius » Thu Jan 31, 2013 9:32 pm

The connoisseurs say that what I call Vanguard's "factor funds"--the nine index funds with names resembling Fama-French factors--are stinky-poo cheapjack Dunkin' Donuts funds, and that to get that great body and deep brooding Small Value cup profile, you need to use single-estate-grown french-roasted mutual funds.

I once did my personal look, following my own chosen personal rules, using the data available to me, of the small-cap effect (not small-cap value). I constructed two portfolios, using the SBBI data series, one of 60% large-company stocks and 40% intermediate-term bonds. For the second, I adjusted the mix of large-company and small-company stocks but each time I also adjusted the overall stock-bond balance to match the standard deviation of the first portfolio. That is, I cut back on stocks in order to compensate for the extra volatility of small-company stocks. The optimum mix was very close to 25% large-company stocks, 25% small-company stocks, and 50% bonds.

What I found was that yes, by golly, over the about-eighty-year period, overall, the second mix averaged 0.33%/year annualized higher returns. However, there were periods in there as long as twenty years during which one portfolio or the other prevailed by as much as 1-2%.

In short, if there's something to it, it's something that takes 80 years or so to make itself known, and within that 80-year period you can easily have 15 or 20-year periods during which the "wrong" portfolio wins--and wins by much more than the average "edge" of the superior portfolio.
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Re: Small Value vs Small Growth

Postby ks289 » Thu Jan 31, 2013 9:32 pm

livesoft wrote:
Karl wrote:So where is this higher performance I'm told value is supposed to provide?
Nobody knows and nobody can tell you. It is probably in the same place where all my lost socks are.


Jerry Lee may be able to. :wink:
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Re: Small Value vs Small Growth

Postby Beat The Street » Thu Jan 31, 2013 9:44 pm

Look at a real small value index like the Guggenheim S&P 600 smallcap pure value. The size and value premiums are as real as the market premium.
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Re: Small Value vs Small Growth

Postby baw703916 » Thu Jan 31, 2013 9:48 pm

ks289 wrote:
livesoft wrote:
Karl wrote:So where is this higher performance I'm told value is supposed to provide?
Nobody knows and nobody can tell you. It is probably in the same place where all my lost socks are.


Jerry Lee may be able to. :wink:


I hope so...I'd like to find those lost socks!
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Re: Small Value vs Small Growth

Postby nisiprius » Thu Jan 31, 2013 9:49 pm

Question. What about utilities? I just remembered that whenever Larry Swedroe talks about small value, it's never small value, it's "small value ex-utilities," because, well, small value utilities stocks are small value stocks that don't behave like small value stocks. And I just noticed that Vanguard doesn't exclude them; VISVX and the index it tracks are 6.8% utilities. Maybe it is the utilities that are responsible for the subtle off-note that prevents VISVX from achieving full complexity and nutty earthiness...
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Re: Small Value vs Small Growth

Postby baw703916 » Thu Jan 31, 2013 9:52 pm

nisiprius wrote:The connoisseurs say that what I call Vanguard's "factor funds"--the nine index funds with names resembling Fama-French factors--are stinky-poo cheapjack Dunkin' Donuts funds, and that to get that great body and deep brooding Small Value cup profile, you need to use single-estate-grown french-roasted mutual funds.


Better yet, a fund that specializes in companies that look like they've passed through the digestive tract of a civet.
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Re: Small Value vs Small Growth

Postby pkcrafter » Thu Jan 31, 2013 9:53 pm

Great question and sharp observation. What I've noticed lately (past year) is investor portfolios holding small growth and no value, and worse, I've seen it in some 401k offerings--nothing but small growth for an option. Talk about recency bias. There is going to be a performance shift to value very soon--just as soon as investors make complete fools of themselves. Diversify and stay that way.

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Re: Small Value vs Small Growth

Postby nisiprius » Thu Jan 31, 2013 10:11 pm

Beat The Street wrote:Look at a real small value index like the Guggenheim S&P 600 smallcap pure value. The size and value premiums are as real as the market premium.
OK, I just looked at it.

Vanguard Small-Cap Value Index (VISVX) in blue.
RZV Guggenheim Smallcap 600 Pure Value in orange.

Image

What, exactly, am I supposed to be seeing?

Because what I think I'm seeing is a fund that has exhibited considerably greater risk than VISVX--during 2008-2009, an original investment $10,000 in RSV lost 2/3 of its value while VISVX lost half. And, for taking that risk, it rewarded investors, over its lifetime to date, by growing $10,000 to $12,546.47 while VISVX grew it to $13,346.58.

No, of course seven years doesn't show much. But it's all we've got. And it does show that something that in theory is supposed to outperform a little, in practice can underperform for periods as long as seven years.
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Re: Small Value vs Small Growth

Postby Karl » Thu Jan 31, 2013 10:16 pm

nisiprius wrote:Question. What about utilities? I just remembered that whenever Larry Swedroe talks about small value, it's never small value, it's "small value ex-utilities," because, well, small value utilities stocks are small value stocks that don't behave like small value stocks. And I just noticed that Vanguard doesn't exclude them; VISVX and the index it tracks are 6.8% utilities. Maybe it is the utilities that are responsible for the subtle off-note that prevents VISVX from achieving full complexity and nutty earthiness...


Doesn't DFA toss out REITs as well, unlike Vanguard that lets any riff raff in?
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Re: Small Value vs Small Growth

Postby stlutz » Thu Jan 31, 2013 10:18 pm

Theory tells us that SV should beat SG.


Actually, theory doesn't really tell us that. Backtesting does, and the theory is then used to explain the results of the backtest. BTW, studies that have compared returns of actual value mutual funds vs. actual growth mutual funds have shown a very slight outperformance by growth, so the result you are seeing is actually consistent with what has actually occurred in the real world over time.
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Re: Small Value vs Small Growth

Postby Karl » Thu Jan 31, 2013 10:24 pm

nisiprius wrote:What, exactly, am I supposed to be seeing?

Because what I think I'm seeing is a fund that has exhibited considerably greater risk than VISVX--during 2008-2009, an original investment $10,000 in RSV lost 2/3 of its value while VISVX lost half. And, for taking that risk, it rewarded investors, over its lifetime to date, by growing $10,000 to $12,546.47 while VISVX grew it to $13,346.58.


Hey, we found the greater risk then in the small value (at least the "real" kind that's sufficiently "valuey"). :happy

Now we just need to wait to see the greater return that greater risk produces. It fits with the fundamental idea that higher risk = higher expected return. It doesn't fit the behavioral story about how investors are smitten with sexy little growth companies, such that value is a free lunch for any of us who don't find growth quite so sexy.
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Re: Small Value vs Small Growth

Postby baw703916 » Thu Jan 31, 2013 10:30 pm

nisiprius wrote: Because what I think I'm seeing is a fund that has exhibited considerably greater risk than VISVX--during 2008-2009, an original investment $10,000 in RSV lost 2/3 of its value while VISVX lost half. And, for taking that risk, it rewarded investors, over its lifetime to date, by growing $10,000 to $12,546.47 while VISVX grew it to $13,346.58.


I do own RZV in my Roth. I have a nice gain, overall, partly due to buying more shares in early 2009. I would never recommend this fund to anyone who had doubts about their willingness to rebalance into it after a huge drop. It's also not a very large part of my portfolio.
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Re: Small Value vs Small Growth

Postby Calm Man » Thu Jan 31, 2013 10:52 pm

Karl, I wonder if this dissection is really worth it as most of us here believe in broad diversification.. Who knows what will happen. Frankly, to me TSM is more than adequate. If you want small caps, maybe just buy the small cap index fund, period?
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Re: Small Value vs Small Growth

Postby dharrythomas » Thu Jan 31, 2013 11:29 pm

It seems that the biggest risk/return effect is in the very smallest end of the pool and most value tilted side. DFA slices much thinner than Vanguard which splits into value or growth depending on how you relate to the middle. If they divided the market into three segments and didn't put the middle 1/3 to 1/2 of stocks in either value or growth, you should over time see a more pronounced difference IF you can wait long enough since there might be a 20 year timeperiod where the value effect wasn't evident. If that happens to be the 20 years after you placed your money on one side of the bet so be it, the long term can be really long term.

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Re: Small Value vs Small Growth

Postby livesoft » Thu Jan 31, 2013 11:31 pm

Calm Man wrote:Karl, I wonder if this dissection is really worth it as most of us here believe in broad diversification.. Who knows what will happen. Frankly, to me TSM is more than adequate. If you want small caps, maybe just buy the small cap index fund, period?

Forum polls demonstrate that most poll respondents tilt to small-cap and value. We all believe in broad diversification, but the small-cap value crowd here overwhelms the "3-fund portfolio" crowd despite the vociferousness to the contrary.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: Small Value vs Small Growth

Postby Karl » Thu Jan 31, 2013 11:34 pm

Calm Man wrote:Karl, I wonder if this dissection is really worth it as most of us here believe in broad diversification.. Who knows what will happen. Frankly, to me TSM is more than adequate. If you want small caps, maybe just buy the small cap index fund, period?


Given that TSM is by far my largest equity holding (for the last 18 years), it would seem I believe in the same. That said, I still don't put everything in total market funds.

Also, this is the place to discuss investing theory. "Just go with TSM" is perfectly fine advice, but it does make for really limited & dull discussion I think you'd have to admit.
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Re: Small Value vs Small Growth

Postby Garco » Thu Jan 31, 2013 11:36 pm

For several years I owned TIAA-CREF MCV and MCG funds (admittedly, both managed funds). I started out with a roughly equal share of the two. But MCV never beat MCG in any year, and usually fell short by a significant amount. Finally, while wanting to believe the theory but also wanting to make more money, I "compromised": I continued to hold both funds but in a roughly 60-40 ratio of MCG to MCV. Even then I ended up losing money for the sake of theory, but not as much after I gave greater weight to the G over the V.
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Re: Small Value vs Small Growth

Postby livesoft » Thu Jan 31, 2013 11:39 pm

I am not interested if static holdings of SV beats SG over short or long periods of time. I am interested in whether rebalancing into and out of SV at lows and highs beats the same for SG. That is, does SV offer a higher rebalancing premium than SG?
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: Small Value vs Small Growth

Postby Karl » Thu Jan 31, 2013 11:41 pm

dharrythomas wrote:It seems that the biggest risk/return effect is in the very smallest end of the pool and most value tilted side. DFA slices much thinner than Vanguard which splits into value or growth depending on how you relate to the middle. If they divided the market into three segments and didn't put the middle 1/3 to 1/2 of stocks in either value or growth, you should over time see a more pronounced difference IF you can wait long enough since there might be a 20 year timeperiod where the value effect wasn't evident. If that happens to be the 20 years after you placed your money on one side of the bet so be it, the long term can be really long term.


Even 20 years might not be enough. Isn't there a recent 30-year period in which boring T-bonds beat stocks? That sure isn't supposed to happen. Investors in Japan who bought into their market at the end of 1989 are still waiting to see the superior returns stocks promise. That's not supposed to happen either. The long-term seems to be really long.
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Re: Small Value vs Small Growth

Postby larryswedroe » Fri Feb 01, 2013 12:07 am

few thoughts
First, regulated utilites are excluded from value stocks as are REITS, though Vanguard funds include both
We have had period of sharply falling rates recently and both utilities and REITS are long term risk so you would expect outperformance. Also value risk has shown up with negative premium for much of the recent past, since the crisis. Just like when equities risks shows up you expect underperformance and value tends to do worst in FINANCIAL crises. 1998-2012 is too short to tell you anything. Consider that 69-08 large growth underperformed long term treasuries. Do you then believe they have higher expected returns? I sure hope not. Investors make the mistake all the time of RECENCY. And that causes them to confuse strategy and outcome.

Finally, there are two theories about small growth vs small value. One is that value is riskier, and thus is higher expected returns. The other is behavioral, that investors misprice growth stocks, persistently overpaying, especially for small growth (the lottery effect), leading to higher returns to value. Those are the only two theories I know of and both lead to higher expected returns for small value over small growth

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Re: Small Value vs Small Growth

Postby momar » Fri Feb 01, 2013 12:44 am

nisiprius wrote:In short, if there's something to it, it's something that takes 80 years or so to make itself known, and within that 80-year period you can easily have 15 or 20-year periods during which the "wrong" portfolio wins--and wins by much more than the average "edge" of the superior portfolio.

So this is what gets me: we have 20 year periods where the wrong portfolio wins. We have 80 years of data, at best. Seems to me that's not enough, considering how long growth or value can outperform.
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Re: Small Value vs Small Growth

Postby tarnation » Fri Feb 01, 2013 12:52 am

If one accepts it is a four factor world, Value is a risk factor. Momentum is a risk factor. Value and momentum factors are negatively correlated. Momentum returns will show up in a growth fund.
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Re: Small Value vs Small Growth

Postby Karl » Fri Feb 01, 2013 3:13 am

momar wrote:So this is what gets me: we have 20 year periods where the wrong portfolio wins. We have 80 years of data, at best. Seems to me that's not enough, considering how long growth or value can outperform.


You're right that stock market data is lacking. We only have complete market data going back in 1926 in the US (far less in most of the rest of the world). Jeremy Siegel had to piece together data to trace his way back 200 years to a time when only a handful of stocks existed. And even then he had to use rolling 30-year periods to make up for the obvious problem that he only had a mere six periods of 30 years that didn't overlap. Sure not much data for a robust statistical analysis, or so I'm told by some math geeks.
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Re: Small Value vs Small Growth

Postby Karl » Fri Feb 01, 2013 3:18 am

larryswedroe wrote:few thoughts
First, regulated utilites are excluded from value stocks as are REITS, though Vanguard funds include both
We have had period of sharply falling rates recently and both utilities and REITS are long term risk so you would expect outperformance. Also value risk has shown up with negative premium for much of the recent past, since the crisis. Just like when equities risks shows up you expect underperformance and value tends to do worst in FINANCIAL crises. 1998-2012 is too short to tell you anything. Consider that 69-08 large growth underperformed long term treasuries. Do you then believe they have higher expected returns? I sure hope not. Investors make the mistake all the time of RECENCY. And that causes them to confuse strategy and outcome.

Finally, there are two theories about small growth vs small value. One is that value is riskier, and thus is higher expected returns. The other is behavioral, that investors misprice growth stocks, persistently overpaying, especially for small growth (the lottery effect), leading to higher returns to value. Those are the only two theories I know of and both lead to higher expected returns for small value over small growth

Best wishes
Larry


Larry, given the larger size & relative "growthiness" of the stocks in Vanguard Small Value Index by how much would it be expected to outperform TSM over the very long run?

Could you then compare that to the outperformance that would be expected from a DFA SV fund where the stocks are really small & deep value?

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Re: Small Value vs Small Growth

Postby nisiprius » Fri Feb 01, 2013 8:37 am

Karl wrote:Also, this is the place to discuss investing theory. "Just go with TSM" is perfectly fine advice, but it does make for really limited & dull discussion I think you'd have to admit.
What's an interesting topic is: what is the standard of proof in investing? What constitutes convincing evidence? How much past data do you need, and how much does it tell you about the future (I think the SEC warning is implicitly referring to the ten years of past performance shown in fund documents; I think "no assurance of future results" does not mean "tells you nothing at all;" and I think that while past performance does not predict future performance, past behavior might predict future behavior).

Another interesting topic is "do verbal statements about how investments behave check out?" I'm coming to the conclusion that statements like "thus-and-such does well when thus-and-such, because of thus-and-such" usually do not check out, if you decide for yourself what would be a reasonable set of data to look at and look at it... as opposed to looking at the specific illustration the person making the statement chooses.

When I do this, what I think I "typically" see is one recent dramatic "confirmation," like VGSIX rising 2000-2004 while broad market funds were falling... plus contradictory cases, like VGSIX tanking much worse than the broad market in 2008-2009... plus the data trail petering out because the actual funds or the indexes they track only go back a decade or so, or are all-but-proprietary, or both. And the advocates point to the one brief shining moment as confirmation, have alibis for the counterexamples, and wave their hands about what would have happened hypothetically if the fund had existed before it existed.

I'd like to dig a bit deeper into the ex-utilities thing. My mean-spirited skeptical soul wonders whether Fama and French excluded utilities in the original work, or whether it was introduced later after the fact, as a back-tested "improvement," because the original factors weren't working well...
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Re: Small Value vs Small Growth

Postby larryswedroe » Fri Feb 01, 2013 8:49 am

Karl, that is a question of how much the two funds load on the factors, which can change over time also. We switched from DFA SV to the Bridgeway Omni SV as we think it has higher expected returns by roughly 90bp a year. You might compare the differences in size and value between its fund and DFA's and then compare DFA to Vanguard to make an estimate. Or perhaps someone like Eric might have time to run the loading factors for you

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Skepticism is healthy but unhealthy skepticism is not (:-)). Regulated utilities were excluded because they don't act like other stocks due to regulation of their profits. And RE was excluded because they act more like own asset class.

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Re: Small Value vs Small Growth

Postby Calm Man » Fri Feb 01, 2013 9:36 am

Karl wrote:
Calm Man wrote:Karl, I wonder if this dissection is really worth it as most of us here believe in broad diversification.. Who knows what will happen. Frankly, to me TSM is more than adequate. If you want small caps, maybe just buy the small cap index fund, period?


Given that TSM is by far my largest equity holding (for the last 18 years), it would seem I believe in the same. That said, I still don't put everything in total market funds.

Also, this is the place to discuss investing theory. "Just go with TSM" is perfectly fine advice, but it does make for really limited & dull discussion I think you'd have to admit.


I admit it. I am one of those guys who likes to check the account monthly (usually the first of the month to see my bond fund distributions) and get pleasure out of just seeing a money market and 2 other funds - bond and TSM.
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Re: Small Value vs Small Growth

Postby Grt2bOutdoors » Fri Feb 01, 2013 9:41 am

nisiprius wrote:
Beat The Street wrote:Look at a real small value index like the Guggenheim S&P 600 smallcap pure value. The size and value premiums are as real as the market premium.
OK, I just looked at it.

Vanguard Small-Cap Value Index (VISVX) in blue.
RZV Guggenheim Smallcap 600 Pure Value in orange.

Image

What, exactly, am I supposed to be seeing?

Because what I think I'm seeing is a fund that has exhibited considerably greater risk than VISVX--during 2008-2009, an original investment $10,000 in RSV lost 2/3 of its value while VISVX lost half. And, for taking that risk, it rewarded investors, over its lifetime to date, by growing $10,000 to $12,546.47 while VISVX grew it to $13,346.58.

No, of course seven years doesn't show much. But it's all we've got. And it does show that something that in theory is supposed to outperform a little, in practice can underperform for periods as long as seven years.


How much of VISVX's outpeformance was due to income? I say this without looking at the components of the returns, but with 6.8% of the fund being utilities, utilities generally pay handsome dividends. In a market starved for yield, VISVX holdings may attract a different sort of crowd which doesn't distinguish what is value or growth, rather they just want to own "show me the money" companies.
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Re: Small Value vs Small Growth

Postby Beat The Street » Fri Feb 01, 2013 12:21 pm

nisiprius wrote:
Beat The Street wrote:Look at a real small value index like the Guggenheim S&P 600 smallcap pure value. The size and value premiums are as real as the market premium.
OK, I just looked at it.

Vanguard Small-Cap Value Index (VISVX) in blue.
RZV Guggenheim Smallcap 600 Pure Value in orange.

Image

What, exactly, am I supposed to be seeing?

Because what I think I'm seeing is a fund that has exhibited considerably greater risk than VISVX--during 2008-2009, an original investment $10,000 in RSV lost 2/3 of its value while VISVX lost half. And, for taking that risk, it rewarded investors, over its lifetime to date, by growing $10,000 to $12,546.47 while VISVX grew it to $13,346.58.

No, of course seven years doesn't show much. But it's all we've got. And it does show that something that in theory is supposed to outperform a little, in practice can underperform for periods as long as seven years.


Statistics say to trust the largest sample size and the Small Cap Pure Value Index goes back to 1995 the Vanguard Small Value was incepted in 1998 and since then the Pure Value has outperformed by about 0.70% annually. It was with greater risk though. DFA small cap value outperformed Vanguard by about 1.60% annually since 1998 with slightly greater risk but not as much as the Guggenheim fund. Small Value isn't for everyone but over the long term (more than 7 years apparently) I believe it will outperform the Vanguard Small Cap Index.
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Re: Small Value vs Small Growth

Postby YDNAL » Fri Feb 01, 2013 2:25 pm

Beat The Street wrote:Statistics say to trust the largest sample size and the Small Cap Pure Value Index goes back to 1995 the Vanguard Small Value was incepted in 1998 and since then the Pure Value has outperformed by about 0.70% annually. It was with greater risk though. DFA small cap value outperformed Vanguard by about 1.60% annually since 1998 with slightly greater risk but not as much as the Guggenheim fund. Small Value isn't for everyone but over the long term (more than 7 years apparently) I believe it will outperform the Vanguard Small Cap Index.

Is this the same Guggenheim ETF (RZV) that trails even Vanguard Total Mkt (VTSMX) by 7.7% since inception? *
03/31/06 VTSMX $16,933.98 -- RZV $16,933.98
12/31/12 VTSMX $21,809.23 -- RZV $20,135.05 -7.7%
http://quote.morningstar.com/fund/chart ... ture=en-US (just add RZV in "compare to symbol")

* rhetorical question, no reply necessary.

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Re: Small Value vs Small Growth

Postby Beat The Street » Fri Feb 01, 2013 4:31 pm

Once again, trust the largest sample size. It is quite easy to pick periods of outperformance for either fund. I could say since 2/8/2008 rzv is up 28% but vtsmx only 12%. The short term is always surprising, long term rarely is.
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Re: Small Value vs Small Growth

Postby Beat The Street » Fri Feb 01, 2013 4:33 pm

You want a less risky small value fund check out JKL or IWN.
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Re: Small Value vs Small Growth

Postby larryswedroe » Fri Feb 01, 2013 6:58 pm

Momar
what helps is if you have out of sample data. Fama and French based their original paper on the period 63-92. Since then they have updated the data to 1926 and of course now through 2012. So we have two out of sample tests. Then the data was updated to include developed markets starting in 1970. Then also same for EM starting in 1988. And everywhere you look there is a value premium and it is about the same size. That gives more confidence that it's not an anomaly. Tstats also help you in your consideration.

Tarnation
If something is a factor, like in the four factor model that doesn't mean it is necessarily a risk factor. it just means it's an EXPLANATORY factor, a source of returns. The factor can be risk story as most believe beta and size are, or as is the case with value some believe it's risk and some behavioral, and some believe it's some of both, and then momentum is not a risk factor at all. No one considers it such. It's purely a behavioral story

Hope that helps
Larry
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Re: Small Value vs Small Growth

Postby nisiprius » Fri Feb 01, 2013 9:13 pm

Beat The Street wrote:Once again, trust the largest sample size. It is quite easy to pick periods of outperformance for either fund. I could say since 2/8/2008 rzv is up 28% but vtsmx only 12%. The short term is always surprising, long term rarely is.
Unfortunately--not zinging you, just brooding about a REAL problem--investment thinking seems to be enormously damaged by the habit of averaging everything with equal weight between two sharp-cutoff endpoints. The devil is in the endpoints, and when it is not intentionally tendentious cherry-picking, it is best a source of endless controversy between intellectually honest seekers after truth.

Long term absolutely can be surprising. "Boxcar averaging," which seems to be the normal procedure, is evil. Even a 10-year moving average is subject to vicious instability. It incorporates a upside-down echo of ten-year-old financial headlines. Furthermore, boxcar averaging actually creates periodic cycles in the moving average that did not really exist in the data, just as a seashell manufacturers "the sound of the ocean" from ambient room noise.

The results you get for even an 75-year average are going to be meaningfully different depending on whether you start measuring from from June, 1929 or June, 1932. For example, the annualized total return of small-company stocks from June 1929 to August 2004 is 11677/1.578^(1/75) = 12.6%. From June, 1932 to June, 2007, 16983/0.175^(1/75) = 16.5%.

That's almost a 4% difference in annualized return over 75 years, depending on choice of endpoints. Yet people will claim to see vital investing implications in long-term portfolio differences measured in basis points.

Worse yet, all theory based on long-term statistics is only useful if you, in fact, stay the course in a portfolio for the long term. But nobody actually does this. Very few ordinary mainstream investors, for example, were actually putting 20% or more of their stock portfolio into international stocks thirty years ago. And I'd guess very few are putting less than 20% into international today. Regardless of the reasons, the facts are that people do not restrict themselves to investments and indexes available thirty years ago. And, meanwhile, there are serious questions about the continuity of the sample. I mean, really, is the stock market the same thing today as it was before the creation of the SEC? Are mutual funds today the same as things as they were before the Investment Company Act of 1940.
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Re: Small Value vs Small Growth

Postby dharrythomas » Fri Feb 01, 2013 10:38 pm

nisiprius:

Actually I started in the USAA Cornerstone Fund in 1988 which had 20% Bonds, 20% Basic Value Stocks, 20% REITs, 20% Gold Stocks, and 20% International. I stayed until they raised their expense ratio and banded their allocations to allow tactical asset allocation (go figure).

Regardless your point is right on. WE DON'T KNOW. :confused

We know what the factors are but we don't know how they'll play out over any specific timeframe. Returns of asset classes will vary absolutely and in relation to each other, correlations change. In history, there are periods of hundreds of years with little to no economic progress. Firms, markets, civilizations collapse, there are no guarantees other than death.

We (DW and I) tilt value and small and have REIT, Precious Metals and Mining, and International RE Index, and where available we're in Admiral shares. But, I'm not sure it's worth the effort and that we wouldn't be better off if we put the traditional IRA in Target Retirement, the Roths into Wellington, STAR, or LifeStrategy Moderate Growth, and taxable into either the World Index or Tax Managed Balanced. Isn't as individually tailored, but probably good enough.

I'd spend less time thinking about it and have about as good a chance of having a satifactory result (as long as I didn't mess around with whatever plan I put in place).

Anyway, thanks for you post.

Good Luck

Harry
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Re: Small Value vs Small Growth

Postby Beat The Street » Fri Feb 01, 2013 11:35 pm

Good post nisiprius, that's why I come to these boards.
“Never ask anyone for their opinion, forecast, or recommendation. Just ask them what they have—or don’t have—in their portfolio.” -Taleb
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Re: Small Value vs Small Growth

Postby larryswedroe » Sat Feb 02, 2013 9:09 am

few thoughts
The issue Nisiprius raises is why I have always cautioned that you have to be careful to consider your starting and end dates when looking at returns. Valuations matter, and they matter a great deal. So if you start a period with valuations at very low levels and end it with valuations at high levels you will get a misleading figure if you then project the historic returns going forward. Consider investors that looked at the period 1950-99 and saw great stock returns. So they project that long term return going forward, after all it's 50 years. The problem was that in 1950 P/E was in single digits and in 1999 it was about 5x as high (if my memory serves). There was no way that stocks could repeat that performance. in fact a Gordon type model would have projected much lower returns.

You start your data in 1929 and you have high valuations and low expected returns. You start in 1933 and you have low prices, high expected returns, so you will get, likely, very different outcomes.

Investors understand this generally when looking at bonds and yields but seem to forget this when thinking about stocks. And that can lead to big problems.

Best wishes
Larry
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Re: Small Value vs Small Growth

Postby hpowders » Sat Feb 02, 2013 10:30 am

Why not take advantage of both value and growth and hold a "small blend" fund? :happy
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Re: Small Value vs Small Growth

Postby rj49 » Mon Feb 04, 2013 10:54 pm

Or how about compromising between a total market approach or overweighting small value: divide the investment between SP500 and Extended Market index to make a market weight, as the TSP does in its Lifestyle funds. The VG charts show that the Extended Market index has beaten the Small Value Fund over a 10-year period, you get greater diversification by owning mid caps and more stocks, and you're not basing your future on some investing dogma on here that midcaps are bad, small and large caps are good, despite evidence to the contrary for some time (see Mel's Unloved Midcaps updates). Then if you want to get midcap/small outperformance, you simply don't rebalance if you believe that segment of the market will outperform, or choose your own rebalancing method. I'm sure Fama and French are highly-skilled academics, but there are scores of finance academics who believe in different theories of investing (Bodie, Markowitz, Sharpe, etc), and they have the academic literature to support their theories, so I'm not sure I'd base my investing future on a single backtested belief, particularly when selling the funds that implement such a theory is a lucrative business for advisors and the academics who originated the theory. Just my view, if you want to tilt away like Don Quixote, feel free.
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Re: Small Value vs Small Growth

Postby ziszew » Mon Feb 04, 2013 11:51 pm

rj49 wrote:<<snip>>
The VG charts show that the Extended Market index has beaten the Small Value Fund over a 10-year period,
<<snip>>
I'm sure Fama and French are highly-skilled academics, but there are scores of finance academics who believe in different theories of investing (Bodie, Markowitz, Sharpe, etc), and they have the academic literature to support their theories, so I'm not sure I'd base my investing future on a single backtested belief, particularly when selling the funds that implement such a theory is a lucrative business for advisors and the academics who originated the theory. Just my view, if you want to tilt away like Don Quixote, feel free.


And over a 15 year period, VG Small Value beats VG Extended Market according to the telltale chart. (and that Fama-French inspired quixotic company known as DFA beats VG small value)

Full disclosure: I own VISVX and have no ties to DFA, although my wife graduated from the (now) Chicago Booth School of Business
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