Small Value vs. Small Growth Performance

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burnout454
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Small Value vs. Small Growth Performance

Post by burnout454 »

Based on a longer period of history, it seems that SV beats SG. Indeed, SG apparently has been the worst performing equity class.

Just wondering if anyone has thoughts on the performance over the last 5 year or so, when SG beat SV by a long shot. (In the graph below, VBR is Small Value and VBK is Small Growth.)

Is this reason enough to have both SV and SG?
yobria
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Re: Small Value vs. Small Growth Performance

Post by yobria »

burnout454 wrote:Based on a longer period of history, it seems that SV beats SG. Indeed, SG apparently has been the worst performing equity class.
Yep, useful information...if you have a time machine. There are infinite historical patterns which can be tweaked to fit any story. But there are few sets of real world results (such as what you're looking at). Trust what you see in the real world IMO.
burnout454 wrote:Just wondering if anyone has thoughts on the performance over the last 5 year or so, when SG beat SV by a long shot. (In the graph below, VBR is Small Value and VBK is Small Growth.)

Is this reason enough to have both SV and SG?
The reason to own SG is that none of the SV outperformance/SG underperformance stories make any sense:

1. SV is a free lunch the hedge funds have been polite enough not to trade away.

2. SV is riskier than SG (but that would mean SG is even less risky that TSM, which we know is false, and Vanguard SV and SG have *exactly* the same std dev as per M*).

3. A lot of advisors are pushing SV, and the market won't let them down.

Let's face reality - these are sector plays. If financials do well, value will win. If tech does well, growth will.

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SVariance1
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Re: Small Value vs. Small Growth Performance

Post by SVariance1 »

It is not reason enough for me. What would be the thesis for owning vbk or most small cap growth products? The long term historical results are terrible. My thesis for owning small cap value and not small cap growth is based on the behavioral story. Human nature does not change very much.
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Re: Small Value vs. Small Growth Performance

Post by SVariance1 »

yobria wrote: The reason to own SG is that none of the SV outperformance/SG underperformance stories make any sense:
Wow, you need alot of convincing. Have you taken a look at survivorship bias for scv and scg. SCV has a much higher rate of survival. Do you think it is a coincidence?
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Re: Small Value vs. Small Growth Performance

Post by yobria »

SVariance1 wrote:
yobria wrote: The reason to own SG is that none of the SV outperformance/SG underperformance stories make any sense:
Wow, you need alot of convincing. Have you taken a look at survivorship bias for scv and scg. SCV has a much higher rate of survival. Do you think it is a coincidence?
I'd expect the class with the lower rate of survival to have the higher return, since it must be riskier.

As you can see, we can dream up an infinite number of stories to support out points.

But step back from those stories. Do they pass the smell test? Do they depend on persistent free lunches and irrational market players? And hedge funds that don't care to trade them away?

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SVariance1
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Re: Small Value vs. Small Growth Performance

Post by SVariance1 »

yobria wrote:
SVariance1 wrote:
yobria wrote: The reason to own SG is that none of the SV outperformance/SG underperformance stories make any sense:
Wow, you need alot of convincing. Have you taken a look at survivorship bias for scv and scg. SCV has a much higher rate of survival. Do you think it is a coincidence?
I'd expect the class with the lower rate of survival to have the higher return, since it must be riskier.

As you can see, we can dream up an infinite number of stories to support out points.

But step back from those stories. Do they pass the smell test? Do they depend on persistent free lunches and irrational market players? And hedge funds that don't care to trade them away?

Nick
Hedge funds can't trade away human behavior
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nisiprius
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Re: Small Value vs. Small Growth Performance

Post by nisiprius »

If the "value" evidence is so solid, why does Vanguard even bother to have a Small-Cap Growth fund, and why did customers invest $7 billion of their hard-earned dough into it? That's not one of Vanguard's biggest funds, but it's a respectable size by most standards--same ballpark as Fairholme, for example ($9.5 billion).

Obviously the "small growth loses" story is not quite as cut-and-dried as all that.
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Re: Small Value vs. Small Growth Performance

Post by SVariance1 »

You would have to ask Vanguard as to why they have a small cap growth fund. Why do they have a market neutral fund? Why do they have any actively managed funds when the organization strongly favors passive investing.
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Re: Small Value vs. Small Growth Performance

Post by A Devout Indexer »

burnout454 wrote:Based on a longer period of history, it seems that SV beats SG. Indeed, SG apparently has been the worst performing equity class.

Just wondering if anyone has thoughts on the performance over the last 5 year or so, when SG beat SV by a long shot. (In the graph below, VBR is Small Value and VBK is Small Growth.)

Is this reason enough to have both SV and SG?
Burnout,

The 5 year underperformance for small value is exactly what we'd expect: riskier asset classes have underperformed safer asset classes as the period has been dominated by a severe recession, a real estate collapse, and a sovereign debt crisis. Longer term, we'd of course expect this higher risk to translate into higher returns, whether that is stocks over bonds, small stocks over large stocks, or value stocks over growth stocks. I wouldn't pay much attention to sectors, they drift over time from value to growth or small to large in an unpredictable way (remember when Polaroid and GM were the market's premier growth stocks?).

A 5 or 10 year period of negative returns for a risk/return relationship (stocks over bonds, value over growth, etc.) is far more common than most people assume, and certainly no reason to assume that relationship doesn't hold.

Consider this: stocks have underperformed 1 month t-bills since 2000--almost 12 years, and long term government bonds over the last 30 years. How many credible people do you hear saying that you should not own stocks because they aren't worth the risk? The higher expected returns associated with higher risks don't materialize in every sample period.

The reality is, we now have about 20 years of out of sample evidence (the original Fama/French research identifying a small cap and value premium as part of a multi factor explanation of investment returns was from 1964-1990 period) using Russell Indexes. Here are the results:

Russell 1000 Growth = 8.1%
Russell 1000 Value = +9.6%
Russell 2000 Growth = +7.7%
Russell 2000 Value = +12.0%

Some take issue with Russell data due to issues with how the construct their small cap indexes, so we can also look at the MSCI data that Vanguard uses to implement their index funds (inception of data = 6/1992). Here are the results:

MSCI 750 Growth = +7.3%
MSCI 750 Value = +8.7%
MSCI 1750 Growth = +9.5%
MSCI 1750 Value = +11.0%

We can also look at additional out of sample data on non-US stocks. For large cap developed international stocks, data is available since 1975, so we can certainly observe the 1991- 10/2011 returns:

MSCI EAFE Growth = +4.2%
MSCI EAFE Value = +7.0%

Small cap "blend" and value data is available since 1999:

MSCI EAFE Small "blend" = +4.7%
MSCI EAFE Small Value = +7.7%

Finally, we can even look to emerging markets and large cap "blend" and value data available since 1997:

MSCI Emerging Markets "blend" = +7.8%
MSCI Emerging Markets Value = +8.9%

Clearly, value and small have persisted in every market imaginable using any combo of indexes.

As for the "risk", well, if you've lived through the last 5 years and still doubt the higher risk for value/growth, small/large, or stock/bond, I don't know what to tell you. If you need quantifiable data, pull up an iShares or Vanguard portfolio breakdown for their value and growth indexes or small and large indexes and look at relative profitability of each (earnings growth, cash flow, sales, projected revenues, debt levels, etc.). You see a wide disparity between the two extremes. Are companies with higher earnings growth or less indebtedness not safer than those whose prospects look far more bleak? As we learn all the time, a low price in and of itself is not a sufficient criteria to provide a margin of safety and thus a safer security. A low price today says nothing about the likelihood of that price being much, much lower tomorrow. You notice that MF Global wasn't a major holding of the Vanguard Small Growth fund, right?
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Re: Small Value vs. Small Growth Performance

Post by A Devout Indexer »

SVariance1 wrote:You would have to ask Vanguard as to why they have a small cap growth fund. Why do they have a market neutral fund? Why do they have any actively managed funds when the organization strongly favors passive investing.
Great answer Mike!
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Re: Small Value vs. Small Growth Performance

Post by bertilak »

SVariance1 wrote:You would have to ask Vanguard as to why they have a small cap growth fund. Why do they have a market neutral fund? Why do they have any actively managed funds when the organization strongly favors passive investing.
I have not asked them but have been advised by one of their CFPs not to invest in them. When I pushed back a little about small/value I was told OK, if it makes you happy, but keep it under 5% of equity.

I *suspect* VG is simply supplying what its customers want.

Or, it could be they see some value in slice-n-dice (w/o necessarily overweighting) and are providing the slices.
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Re: Small Value vs. Small Growth Performance

Post by Beagler »

Are a lot of us a heck of a lot better off for following the multi-factor small- and value strategy over the long haul, rather than a TSM portfolio? You beta believe it!!
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Re: Small Value vs. Small Growth Performance

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Re: Small Value vs. Small Growth Performance

Post by Opponent Process »

nisiprius wrote:why does Vanguard even bother to have a Small-Cap Growth fund, and why did customers invest $7 billion of their hard-earned dough into it?
it would be useful to survey those shareholders. I'm guessing a lot of institutional folks following a computer. maybe some momentum players. I can't imagine some small midwestern investor saying, "hmmm..small growth..that sounds like a winner!", and I can't imagine someone investing in SG just to spite Fama and French.

I do buy into the behavioral arguments. well, I'm a little biased; I'm a neuroscientist. give the dude in the next cubicle over $100 bucks and ask him what stock he'd buy and he'd say either Google or Apple. he probably couldn't name a single small value stock (WTF is "small value"?). but this would be true for small growth as well. the small and value premia almost seem like common sense. the SG story remains an enigma.
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Re: Small Value vs. Small Growth Performance

Post by Imperabo »

That chart doesn't account for dividends. That would close the gap somewhat, and VBR has a positive 5-year return.
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Re: Small Value vs. Small Growth Performance

Post by stopthescammers »

nisiprius wrote:If the "value" evidence is so solid, why does Vanguard even bother to have a Small-Cap Growth fund, and why did customers invest $7 billion of their hard-earned dough into it? That's not one of Vanguard's biggest funds, but it's a respectable size by most standards--same ballpark as Fairholme, for example ($9.5 billion).
Funny you should ask because just today I was coincidentally reading John C Bogle's answer to this very question. He says,
"I expect that the new style indexes will greatly assist investors in meeting their particular investment objectives. In the accumulation phase of your life, you might be well served by a relatively low dividend yield to minimize your taxes. At retirement and in the distribution phase of your life, you would presumably be better served by a higher yield. (Bogle On Mutual Funds: New Perspectives for the Intelligent Investor ISBN 978-1556238604, p. 184.)

...when Vanguard created the industry's first Growth Index Fund and Index Value Fund in 1992, the former was designed for younger investors who focused on wealth accumulation, were seeking tax-efficiency, and were willing to assume larger risks. The latter was designed for older investors who focused on wealth preservation, were seeking higher income, and were happy to reduce their risks. Alas, while the original idea was strong, the ensuing reality was weak. What followed their introduction was a classic case of performance chasing. (The Little Book of Common Sense Investing ISBN 978-0470102107, pp. 133-34.) "
http://www.bogleheads.org/wiki/Vanguard ... tributions

I stumbled across this while researching ways to increase the tax efficiency of my portfolio. It turns out that small growth stocks are about 5x more tax efficient than the overall market. 5x! When I discovered this it all finally made sense: Small growth stocks are simply the muni's of the stock world and, just as research shows for investment grade corporate bonds, in all likelihood the value premium isn't a risk story, but a tax story.

Mystery solved: if you pay less tax than others then you can get a free lunch investing in tax inefficient assets, otherwise don't count on it. And to those of you who think you're better off 3-factor tilting even regardless of tax considerations?...it ain't over till the dust settles, the taxes are paid, and the fat lady sings.
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Re: Small Value vs. Small Growth Performance

Post by yobria »

Opponent Process wrote:I do buy into the behavioral arguments. well, I'm a little biased; I'm a neuroscientist. give the dude in the next cubicle over $100 bucks and ask him what stock he'd buy and he'd say either Google or Apple.
He probably would, thus pushing the price of Google or Apple higher than it should be. But you forgot what happens a second later: an institutional investor scoops up the free lunch and corrects the market.

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Re: Small Value vs. Small Growth Performance

Post by Rodc »

If the "value" evidence is so solid, why does Vanguard even bother to have a Small-Cap Growth fund, and why did customers invest $7 billion of their hard-earned dough into it?
Some years ago when first starting I picked some "growth" funds because, heck, I wanted growth! :)

Not sure it matters a lot what small time investors choose to do as they don't likely drive the market.
Last edited by Rodc on Sat Nov 05, 2011 4:47 pm, edited 1 time in total.
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Re: Small Value vs. Small Growth Performance

Post by fundtalker123 »

Presumably small cap growth ETFs exist only so fools can buy them and geniuses can sell them short. What other explanation could there be?
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