The annual Bridgeway microcap thread: BRSIX
The annual Bridgeway microcap thread: BRSIX
Every year or so, a post pops up about Bridgeway's Ultra-Small Company Market fund (BRSIX). We haven't had one yet in 2012, so here goes.
Several people on the forum hold this fund because it's a not-too-expensive and not-too-active fund that allows access to the microcap sector, which mutual funds generally can't include. Microcaps are smaller-than-small, and they historically have outperformed. They are risky. They are illiquid. If a fund that invests in them gets too big, the fund could disrupt the whole market trying to buy stocks that are very thinly traded. Really, only slice-and-dicers and French-Fama 3-factor devotees invest in microcap funds.
Personally I have held BRSIX for many years. However, I'm in a moment of doubt. If I sold it, I would just invest in Vanguard's Small Value index fund instead (VISVX). If I sold it, I would have one less company to deal with. I also know that VISVX has been outperforming BRSIX for just shy of 10 years, and at a lower cost. Bridgeway doesn't seem to really be providing the microcap benchmark results (good or bad), so I'm no longer convinced that the fund is worth holding. I'm also still not too thrilled with BRSIX's epic underperformance in 2009.
I was hoping to hear some other thoughts about BRSIX before I make a decision to let it go or keep it.
Here are some things to consider about BRSIX (and for this, I'm indebted to the contributors to the prior threads on BRSIX, particularly Rick Ferri, Robert T, subrosa, and Alex Frakt).
-BRSIX claims to invest in the CRSP decile 10, which includes the very smallest investable stocks. However, as Rick Ferri has pointed out, it really invests in decile 8-10. In 2010, only 65% of the fund was in decile 10. Rick Ferri has said that no investable microcap fund actually exists, but BRSIX is the best substitution. (Read more here: "The Truth about Micro-Cap Index Funds" http://www.forbes.com/2010/02/02/microc ... nnellatest
-BRSIX allows access to microcaps without going through an advisor (as with DFA) or through a more bloated fund.
-Its expense ratio is .76%, which isn't too bad, but isn't wonderful either. (VISVX, which isn't totally comparable, charges .35% for investor shares and .21% for admiral shares and etf shares.)
-Apparently, BRSIX balloooned to more than a billion in assets in the mid-2000s, but is now back down to $318 million in assets; maybe it can still be nimble. (By comparison, Bridgeway's Ultra Small Company, BRUSX, the good fund that's been closed since 1998, has $89 million in assets. VISVX has $7.2 billion in assets.)
-Bridgeway is an ethical company. John Montgomery, the founder, should get more acknowledgment for running a mutual fund with mutualistic ideals.
-BRSIX invests in companies with an average weighted market cap of $217 million, which is substantially more than the $50-100 million you'd want from a true microcap fund. (By comparison, VISVX has a median market cap of $1.7 billion.)
-BRSIX doesn't seem to be that different from a regular small fund over the past nearly-10 years. But we are in a weird business environment where borrowing costs are amazingly low, but very few loans are being granted to businesses by banks. This makes it hard for small businesses to grow. Maybe microcaps are just in a holding pattern now, and their behavior might change a lot if liquidity frees up.
-BRSIX was created as a near-index fund. Yet it catastrophically underperformed its benchmark in 2009. In that year, the CRSP 10 benchmark returned 81.7%. BRSIX returned only 26%. Now, that's not bad, but it's 55.7% below the benchmark. Yikes.
-Another Rick Ferri point: BRSIX provides access to very small companies, which are a huge sector of the US economy but one that it is difficult to invest in. It might be worth accepting BRSIX's shortcomings in order to invest in a fund that mimics an otherwise inaccessible swathe of the economy.
I'd love to hear some input about BRSIX and its place in a portfolio. There are a ton of other great threads here about it, but I wonder what people are thinking at the moment.
Several people on the forum hold this fund because it's a not-too-expensive and not-too-active fund that allows access to the microcap sector, which mutual funds generally can't include. Microcaps are smaller-than-small, and they historically have outperformed. They are risky. They are illiquid. If a fund that invests in them gets too big, the fund could disrupt the whole market trying to buy stocks that are very thinly traded. Really, only slice-and-dicers and French-Fama 3-factor devotees invest in microcap funds.
Personally I have held BRSIX for many years. However, I'm in a moment of doubt. If I sold it, I would just invest in Vanguard's Small Value index fund instead (VISVX). If I sold it, I would have one less company to deal with. I also know that VISVX has been outperforming BRSIX for just shy of 10 years, and at a lower cost. Bridgeway doesn't seem to really be providing the microcap benchmark results (good or bad), so I'm no longer convinced that the fund is worth holding. I'm also still not too thrilled with BRSIX's epic underperformance in 2009.
I was hoping to hear some other thoughts about BRSIX before I make a decision to let it go or keep it.
Here are some things to consider about BRSIX (and for this, I'm indebted to the contributors to the prior threads on BRSIX, particularly Rick Ferri, Robert T, subrosa, and Alex Frakt).
-BRSIX claims to invest in the CRSP decile 10, which includes the very smallest investable stocks. However, as Rick Ferri has pointed out, it really invests in decile 8-10. In 2010, only 65% of the fund was in decile 10. Rick Ferri has said that no investable microcap fund actually exists, but BRSIX is the best substitution. (Read more here: "The Truth about Micro-Cap Index Funds" http://www.forbes.com/2010/02/02/microc ... nnellatest
-BRSIX allows access to microcaps without going through an advisor (as with DFA) or through a more bloated fund.
-Its expense ratio is .76%, which isn't too bad, but isn't wonderful either. (VISVX, which isn't totally comparable, charges .35% for investor shares and .21% for admiral shares and etf shares.)
-Apparently, BRSIX balloooned to more than a billion in assets in the mid-2000s, but is now back down to $318 million in assets; maybe it can still be nimble. (By comparison, Bridgeway's Ultra Small Company, BRUSX, the good fund that's been closed since 1998, has $89 million in assets. VISVX has $7.2 billion in assets.)
-Bridgeway is an ethical company. John Montgomery, the founder, should get more acknowledgment for running a mutual fund with mutualistic ideals.
-BRSIX invests in companies with an average weighted market cap of $217 million, which is substantially more than the $50-100 million you'd want from a true microcap fund. (By comparison, VISVX has a median market cap of $1.7 billion.)
-BRSIX doesn't seem to be that different from a regular small fund over the past nearly-10 years. But we are in a weird business environment where borrowing costs are amazingly low, but very few loans are being granted to businesses by banks. This makes it hard for small businesses to grow. Maybe microcaps are just in a holding pattern now, and their behavior might change a lot if liquidity frees up.
-BRSIX was created as a near-index fund. Yet it catastrophically underperformed its benchmark in 2009. In that year, the CRSP 10 benchmark returned 81.7%. BRSIX returned only 26%. Now, that's not bad, but it's 55.7% below the benchmark. Yikes.
-Another Rick Ferri point: BRSIX provides access to very small companies, which are a huge sector of the US economy but one that it is difficult to invest in. It might be worth accepting BRSIX's shortcomings in order to invest in a fund that mimics an otherwise inaccessible swathe of the economy.
I'd love to hear some input about BRSIX and its place in a portfolio. There are a ton of other great threads here about it, but I wonder what people are thinking at the moment.
Re: The annual Bridgeway microcap thread: BRSIX
Here's a search of prior threads on BRSIX. http://tinyurl.com/7v3mssv Lots of good info in them.
Re: The annual Bridgeway microcap thread: BRSIX
Not so much a result of bad management but simply because of a) it's holdings are broader than CRSP 10 and b) their trading strategies kept them away from the most dangerous stocks in the group (e.g. companies about to go bankrupt) which happened to be the best performing stocks in '09. Compared to the IWC ETF, it's performance probably actually reflected the microcap segment of the market quite well.BRSIX was created as a near-index fund. Yet it catastrophically underperformed its benchmark in 2009. In that year, the CRSP 10 benchmark returned 81.7%. BRSIX returned only 26%. Now, that's not bad, but it's 55.7% below the benchmark. Yikes.
This is a market segment where a few winners can really give you great results. I think there was one year (2003?) when this fund did extraordinarily well for that reason.Maybe microcaps are just in a holding pattern now, and their behavior might change a lot if liquidity frees up.
This is a holding to have with the expectation that 9 years out of 10, it won't beat a normal smallcap fund, but you can have that one big year where it will do very well.
I held this fund for a while, but got rid of it for a couple of reasons: a) I no longer expected that it would outperform other segments of the market on a going-forward basis as I no longer accepted the notion that higher risk means higher expected returns (and yes, I know that view is not popular here!) b) it was only 4% of my portfolio so it wouldn't make a big enough difference in that one year it might double to make it worth the trouble of dealing with two fund companies.
Overall, I think it's an excellent fund--just not a good one for me.
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Re: The annual Bridgeway microcap thread: BRSIX
Also on the verge of dumping it.....like last year.....and the year before.....and the year before that. Maybe I'll take the plunge this year. I haven't been rewarded in the past for making rapid portfolio changes.
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Re: The annual Bridgeway microcap thread: BRSIX
If BRSIX was truly a microcap *index* fund, it would be a unique offering. However, it seems the liquidity and investable space of microcaps is just too low for BRSIX (or any fund) to achieve this goal. So I view BRSIX as just another microcap fund, of which there are quite a few options these days:
Perritt has two funds (PREOX and PRCGX), of which PREOX has the smallest market cap of all mutual funds.
Pinnacle Value was profiled by David Snowball at MFO: http://www.mutualfundobserver.com/2011/ ... ober-2011/
Small-cap specialists Wasatch and Royce both have microcap funds as well, among others.
I held PREOX for several years. I enjoyed the wild ride and low correlation to the rest of the market. Definitely not for everyone. I also sold the last of my Bridgeway funds this year, which means there is a good chance that they will take off and crush the market for the next few years.
Perritt has two funds (PREOX and PRCGX), of which PREOX has the smallest market cap of all mutual funds.
Pinnacle Value was profiled by David Snowball at MFO: http://www.mutualfundobserver.com/2011/ ... ober-2011/
Small-cap specialists Wasatch and Royce both have microcap funds as well, among others.
I held PREOX for several years. I enjoyed the wild ride and low correlation to the rest of the market. Definitely not for everyone. I also sold the last of my Bridgeway funds this year, which means there is a good chance that they will take off and crush the market for the next few years.
Re: The annual Bridgeway microcap thread: BRSIX
A microcap fund probably ought to be a closed end fund, because then it could hold the least liquid stocks without worrying about fund flows.
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Re: The annual Bridgeway microcap thread: BRSIX
I addressed this issue specifically in this blog post
http://www.cbsnews.com/8301-505123_162- ... -returns/?
It shows that Bridgeway has basically achieved what it sets out to do.
As one poster noted, the stocks that firms like DFA and Bridgeway screen out because of the long term evidence did the best in 09 during the market's reversal, so that impacts the short term data. But don't think one wants to base decisions on that short period.
IMO they do all the right things, including managing trading costs and incorporating momentum. It's why we are now using their OMNI funds for small value.
Best wishes
Larry
http://www.cbsnews.com/8301-505123_162- ... -returns/?
It shows that Bridgeway has basically achieved what it sets out to do.
As one poster noted, the stocks that firms like DFA and Bridgeway screen out because of the long term evidence did the best in 09 during the market's reversal, so that impacts the short term data. But don't think one wants to base decisions on that short period.
IMO they do all the right things, including managing trading costs and incorporating momentum. It's why we are now using their OMNI funds for small value.
Best wishes
Larry
Re: The annual Bridgeway microcap thread: BRSIX
goggles, what % of your portfolio is in micro, what % in small?
Paul
Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
Re: The annual Bridgeway microcap thread: BRSIX
Between the high expense ratio, the tracking error, and the high transaction costs of buying microcaps, I can't see the appeal of this fund personally. Keep it simple and low fee.
Re: The annual Bridgeway microcap thread: BRSIX
You might not think it's a good way to base decisions, but the market apparently thinks it is.larryswedroe wrote:As one poster noted, the stocks that firms like DFA and Bridgeway screen out because of the long term evidence did the best in 09 during the market's reversal, so that impacts the short term data. But don't think one wants to base decisions on that short period.
What good is "long term evidence" when the market doesn't heed it?
Last edited by Dave_HWW on Tue May 29, 2012 9:47 am, edited 1 time in total.
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Re: The annual Bridgeway microcap thread: BRSIX
Re High Expenses and high trading costs.
One other thing, CRSP 9-10 has lower monthly correlations about .78 vs say .88 for CRSP 6-8 relative to CRSP 1-2.Annual level its about .76 vs. .86
Best wishes
Larry
Regarding high trading costs, that is true if you are subject to forced trading, being a liquidity taker. Not true if you are patient trader, more of liquidity provider. Like DFA, Bridgeway is generally patient trader and liquidity provider. But that leads to the tracking error. But a long term investor should not care about random tracking error as long as it is random. Caring about tracking error because one is a pure indexer is one of the negatives about indexing, negatives that can be minimized or eliminated by intelligent structure.For the period August 1997 through December 2011, the fund returned 9.1 percent, outperforming the CRSP 9-10 index (the bottom 20 percent of stocks ranked by market capitalization), which returned 8.6 percent. And it came close to matching the 9.6 percent return of the CRSP 10 index (the smallest 10 percent of stocks)
One other thing, CRSP 9-10 has lower monthly correlations about .78 vs say .88 for CRSP 6-8 relative to CRSP 1-2.Annual level its about .76 vs. .86
Best wishes
Larry
Re: The annual Bridgeway microcap thread: BRSIX
Has or had? I mean, are those correlations written on stone tablets somewhere for the stock market gremlins to obey for eternity or is it just another prediction bound to fail just like the ones based on "long term evidence" have since 08?larryswedroe wrote: One other thing, CRSP 9-10 has lower monthly correlations about .78 vs say .88 for CRSP 6-8 relative to CRSP 1-2.Annual level its about .76 vs. .86
Re: The annual Bridgeway microcap thread: BRSIX
I know! When these threads pop up, I usually think about dropping it, but ultimately just leave it there. Maybe I just hadn't had a recent enough bout of uncertainty. Hence this thread. Good point about rapid changes not paying off.EmergDoc wrote:Also on the verge of dumping it.....like last year.....and the year before.....and the year before that. Maybe I'll take the plunge this year. I haven't been rewarded in the past for making rapid portfolio changes.
Clamui, thanks for talking about other possible funds. I did a bit of info-hunting on them.
PREOX. (Perritt Ultra Micro-Cap). Expense ratio 1.66% (no load). Assets $60.2 million. Average market cap $62 million.
PRCGX. (Perritt Micro Cap Opportunities). Expense ratio 1.22% (no load). Assets $361 million. Average market cap $221 million.
PVFIX. (Pinnacle Value). Expense ratio 1.47% (no load). Assets $48.8 million. Average market cap $126 million.
WMICX (Wasatch Micro Cap). Expense ratio 2.14% (!) (no load). Assets $302.3 million. Average market cap $569 million.
WAMVX (Wasatch Micro Cap Value). Expense ratio 2.25% (!) (no load). Assets $145.4 million. Average market cap $487 million.
RYOTX (Royce Micro-Cap Investment). Expense ratio 1.50% (no load). Assets $1.2 billion (!). Average market cap $380 million.
RYDFX (Royce Micro-Cap Discovery). Expense ratio 1.49% (no load). Assets $3.9 million (!!). Average market cap $367 million.
(There are several more Royce micro-cap funds too.)
BRSIX (Bridgeway Ultra-Small Company Market). Expense ratio .76%. Assets $318 million. Average market cap $217 million.
I didn't realize there were so many other microcap funds. PREOX is particularly good in being really micro. Presumably that will end as soon as they have a really good year. Do microcap owners need to rely on selling after a great year to avoid the return to mean effect that afflicts good active funds?
I've got to admit, it's kind of fun to flirt with the dark side here. Just look at those expense ratios... and yet, maybe.....
Edit: to add BRSIX.
Last edited by goggles on Tue May 29, 2012 12:01 pm, edited 1 time in total.
Re: The annual Bridgeway microcap thread: BRSIX
Larry Swedroe picks this point up too. I think it's a good one. Bridgeway does appear to be trying to get microcap returns while mitigating risk. I'm not sure that's really going to work out; I guess I'm a little uncertain about where the crossover points between an index fund, a passive fund, a quant fund, and an active fund are. Bridgeway gives an interesting case study there--especially since it's big enough that liquidity is a problem. Dumbmoney also notes that maybe a closed-end fund structure might work better as a result. I'll have to think about that.stlutz wrote: Not so much a result of bad management but simply because of a) it's holdings are broader than CRSP 10 and b) their trading strategies kept them away from the most dangerous stocks in the group (e.g. companies about to go bankrupt) which happened to be the best performing stocks in '09. Compared to the IWC ETF, it's performance probably actually reflected the microcap segment of the market quite well.
By the way, Larry, I didn't see that blog post of yours before. Thanks for pointing it out. It's quite useful.
This is a fair point. Keep it simple is good advice. Yobria notes this here, and it's a good idea in general. It's not too horrible to deal with more than one fund company if it really provides a diversification benefit to do so. But does it? Dunno.stlutz wrote: it was only 4% of my portfolio so it wouldn't make a big enough difference in that one year it might double to make it worth the trouble of dealing with two fund companies.
Re: The annual Bridgeway microcap thread: BRSIX
One would think so, but Royce's closed end micro-cap fund (RMT) has lagged their open end micro-cap fund (RYOTX) pretty badly.goggles wrote:Dumbmoney also notes that maybe a closed-end fund structure might work better as a result. I'll have to think about that.
(also note: RYDFX has only adopted a micro-cap focus very recently...like this year)
Last edited by Dave_HWW on Tue May 29, 2012 10:30 am, edited 1 time in total.
Re: The annual Bridgeway microcap thread: BRSIX
Paul, the basic breakdown I have is 80% stock, 20% bond. In stocks, I'm 60% domestic, 40% international. I have 10% of equity in micro (that's 16.7% of domestic). The only plain-small I have is via total stock, VTSMX, and so is less than 2% of equity. However, I have 25% of equity in small value (that's 41.7% of domestic). My small value is via Vanguard's index VISVX, which I mentioned earlier. Now, in a better world, I would split some of that small value off into large value, but I'm waiting until I convert a bit more into my Roth before I do that. The eventual goal is half large, half small; half blend, half value; half domestic, half international. You can half it all!pkcrafter wrote:goggles, what % of your portfolio is in micro, what % in small?
Paul
In other words, it's complicated. However, I'm fine with having a very overweighted small and value portfolio. (Overall I am at 60% blend and 40% value on the equity side.) I've held this from when I really got a clue ten years ago through to the present.
I bet you're glad you asked! Would you like a Coke with your slice and dice?
Edit: I just read this post again. Good Lord. I'm going to get raked over the coals. Don't worry, I love the three-fund portfolio too!
Re: The annual Bridgeway microcap thread: BRSIX
It's also been discussed here that they do securities lending the right way, and it has generated quite a bit of income for this fund.larryswedroe wrote:IMO they do all the right things, including managing trading costs and incorporating momentum.
Re: The annual Bridgeway microcap thread: BRSIX
Also, Dave (How Wealth Works), welcome to the forum.
Re: The annual Bridgeway microcap thread: BRSIX
Yes, I'll have the coke. I'd ask if you want fries with that, but I see most of your plate is already loaded with fries.goggles: I bet you're glad you asked! Would you like a Coke with your slice and dice?
Just so you aren't disappointed: Lots of hat, very few cattle.Edit: I just read this post again. Good Lord. I'm going to get raked over the coals. Don't worry, I love the three-fund portfolio too!
By the way, you and the others who hold an active fund like Bridgeway are up against the classic active fund delimma--is it sleeping or is it dead? This problem is as important as the cost issue, but it doesn't get as much play. The fact is that most investors who hold a snoozing active fund will dump it after a relatively short period of underperformance rather than hold on to see if it awakes. This would be the preferred choice once you realize that the whole purpose of holding an active fund is to outperform. It will do no good if the fund sleeps for 4 or 5 years and then re-awakes because the loss over that time won't be recovered for a very long time--if ever.
Paul
Last edited by pkcrafter on Tue May 29, 2012 11:04 am, edited 1 time in total.
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Re: The annual Bridgeway microcap thread: BRSIX
Two things,
First, the smallest most illiquid stocks typically have the highest lending premiums. So yes you can generate more income from them, helping to offset the higher expenses of the fund. This helps explain why DFA has had much higher securities lending revenue than Vanguard in similar small cap funds.
Second
Dave_HowWealthWorks.com
Dave, the small premium has been shown to be an independent/unique factor relative to market factor. The lower the size decile the lower the correlation as you pick up more of that unique independent factor. What we also know is that in crises the correlation of ALL risky assets rise towards one. But over the long term diversification across risky assets helps. It also shows that the most important diversification is to highest quality safe fixed income assets.
Best wishes
Larry
First, the smallest most illiquid stocks typically have the highest lending premiums. So yes you can generate more income from them, helping to offset the higher expenses of the fund. This helps explain why DFA has had much higher securities lending revenue than Vanguard in similar small cap funds.
Second
Dave_HowWealthWorks.com
Dave, the small premium has been shown to be an independent/unique factor relative to market factor. The lower the size decile the lower the correlation as you pick up more of that unique independent factor. What we also know is that in crises the correlation of ALL risky assets rise towards one. But over the long term diversification across risky assets helps. It also shows that the most important diversification is to highest quality safe fixed income assets.
Best wishes
Larry
Re: The annual Bridgeway microcap thread: BRSIX
Lets make this real simple: you bought BRSIX because you wanted to tilt to the size factor. By holding the smallest stocks possible, it allows you to commit as few resources as possible to non-market funds (which helps with tracking error). Because these stocks are so illiquid and hard to trade, any passive fund will have to sample the universe and trade patiently, often deviating from the index to avoid being overburdoned by trading costs. So, with this approach, you will find the portfolio returns will deviate from the index over short/intermediate periods of time.
There is absolutely nothing in the returns of the last 5 or so years that would allow you to conclude Bridgeway is good or bad at their chosen objective. So don't start making decisions based on these meaningless short periods of time. Buying the Vanguard SV fund in replace of BRSIX could be a disaster. Micro cap stocks have performed poorly of late and mid cap stocks (the vast majority of VISVX is mid cap) have done quite well, which might completely reverse course over the next 5 years.
Now, that is not to say the fund is without fault. 500 stocks are far too few, Decile 10 is not a very investor-friendly index (even when you try to implement it in a structured sense), etc. but assuming you own it today, you have already thought through all these issues and determined they aren't serious enough for you to avoid the investment (I know some advisors who jumped on BRSIX in 2004 that may not have fully thought through these problems, but that is another story), so these issues shouldn't impact the decision today -- these drawbacks aren't new and you should have understood these drawbacks could lead to these poor short term outcomes.
As if we needed further proof, this thread is a shining example of why discipline is by far the most difficult principle to maintain--especially in the face of adverse circumstances. All the books in the world and chat site encouragement doesn't fix this. For most people, the results of their portfolio aren't a function of their investments, but instead their behavior with those investments.
There is absolutely nothing in the returns of the last 5 or so years that would allow you to conclude Bridgeway is good or bad at their chosen objective. So don't start making decisions based on these meaningless short periods of time. Buying the Vanguard SV fund in replace of BRSIX could be a disaster. Micro cap stocks have performed poorly of late and mid cap stocks (the vast majority of VISVX is mid cap) have done quite well, which might completely reverse course over the next 5 years.
Now, that is not to say the fund is without fault. 500 stocks are far too few, Decile 10 is not a very investor-friendly index (even when you try to implement it in a structured sense), etc. but assuming you own it today, you have already thought through all these issues and determined they aren't serious enough for you to avoid the investment (I know some advisors who jumped on BRSIX in 2004 that may not have fully thought through these problems, but that is another story), so these issues shouldn't impact the decision today -- these drawbacks aren't new and you should have understood these drawbacks could lead to these poor short term outcomes.
As if we needed further proof, this thread is a shining example of why discipline is by far the most difficult principle to maintain--especially in the face of adverse circumstances. All the books in the world and chat site encouragement doesn't fix this. For most people, the results of their portfolio aren't a function of their investments, but instead their behavior with those investments.
The most disciplined investor in the world.
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Re: The annual Bridgeway microcap thread: BRSIX
Jerry
The fund has almost 600 stocks and don't see how one can conclude that that is "far too few." Sure more is better, but then either you have to stop screening out stocks with poor risk characteristics and or go up in market size. Neither attractive alternative. 600 should be plenty to keep tracking error risk to acceptable level, but it won't eliminate it of course. But should be random and acceptable, at least IMO
Larry
The fund has almost 600 stocks and don't see how one can conclude that that is "far too few." Sure more is better, but then either you have to stop screening out stocks with poor risk characteristics and or go up in market size. Neither attractive alternative. 600 should be plenty to keep tracking error risk to acceptable level, but it won't eliminate it of course. But should be random and acceptable, at least IMO
Larry
Re: The annual Bridgeway microcap thread: BRSIX
Again is it "has been shown to be" or "has been shown to have been"? To my knowledge there haven't been any experiments performed to distinguish between these two distinct possibilities, but if you're aware that the former has been shown to the exclusion of the latter than please tell us where it was published.larryswedroe wrote: Dave, the small premium has been shown to be an independent/unique factor relative to market factor. The lower the size decile the lower the correlation as you pick up more of that unique independent factor. What we also know is that in crises the correlation of ALL risky assets rise towards one. But over the long term diversification across risky assets helps. It also shows that the most important diversification is to highest quality safe fixed income assets.
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Re: The annual Bridgeway microcap thread: BRSIX
Dave
Yes technically that is correct, but it doesn't change anything IMO.
You can say the same thing about the ERP for example
Either you believe in 86 years of data, data that holds up in developed and EM markets as well, or not. You must make investment decisions based on some rational belief.
Adding to the data are the wealth of papers showing the simple and logical risk stories which support the data, there are unique risks in small companies that cause them to perform differently than large companies. Bottom line is that unless you believe those unique differences will somehow disappear why should one think the correlations should not remain lower as the market cap goes down?
Best wishes
Larry
Yes technically that is correct, but it doesn't change anything IMO.
You can say the same thing about the ERP for example
Either you believe in 86 years of data, data that holds up in developed and EM markets as well, or not. You must make investment decisions based on some rational belief.
Adding to the data are the wealth of papers showing the simple and logical risk stories which support the data, there are unique risks in small companies that cause them to perform differently than large companies. Bottom line is that unless you believe those unique differences will somehow disappear why should one think the correlations should not remain lower as the market cap goes down?
Best wishes
Larry
Last edited by larryswedroe on Tue May 29, 2012 11:57 am, edited 1 time in total.
Re: The annual Bridgeway microcap thread: BRSIX
There is nothing wrong with going up a bit in size -- say from trying to track the archaic CRSP indexes to instead using a "% of market cap" approach, which minimizes turnover and represents a more constant # of companies and is much more friendly to implement. To the extent you want a certain amount of size exposure in your portfolio, using a fund with a slightly larger universe just means you need to hold a bit more of the fund to get there (instead of 67% TSM, 33% "MicroA", you go 60% TSM, 40% "MicroB"). This of course assumes the fund still trade patiently, use cash flows to rebalance, screen out IPOs, etc. A slightly larger buy range also normally means a lower expense ratio as well, so a bit larger weighting doesn't necessarily increase portfolio expenses.larryswedroe wrote:Jerry
The fund has almost 600 stocks and don't see how one can conclude that that is "far too few." Sure more is better, but then either you have to stop screening out stocks with poor risk characteristics and or go up in market size. Neither attractive alternative. 600 should be plenty to keep tracking error risk to acceptable level, but it won't eliminate it of course. But should be random and acceptable, at least IMO
Larry
Once you get "down there" in size, holding D10 vs. D9-10 or "bottom 4% of the market" is pretty well meaningless. Here are the returns of all 3 strategies + TSM going back 60 years:
TSM Index = +10.6% (SmB = 0.00)
CRSP 10 = +12.4% (SmB = 1.20)
CRSP 9-10 = +12.3% (SmB = 1.14)
Micro Index (bottom 4% of the market) = +12.2% (SmB = 1.05)
As I said, all micro cap variations are about the same adjusted for small differences in SmB exposure.
So its all about execution. If we compare DFAs US Micro Cap fund to the last index I listed (which is its index), we see over the last 5 years, the fund net of expenses has outpaced its index by 0.2% per year with a monthly correlation of 0.996. Closer tracking, more predictable results, more implementation friendly approach allows it to exceed the return on the index after fees.
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Re: The annual Bridgeway microcap thread: BRSIX
Jerry
Nothing you said changes anything. I am not arguing that more stocks are not better, just that 600 is enough and yes I agree it is execution that matters
BTW, as I am sure you know if you go back to 26 the data looks different 11.5 for Decile 9 and 13.1 for decile 10. Personally I think the more recent period is likely to be more representative, but perhaps for different reasons. It is Sarbox---basically killing ability of very small companies to go public and that means the small premium will go more to private equity holders as the companies stay private longer. Which also means you will have lot fewer stocks to diversify (but still far more than needed to basically eliminate idiosyncratic risks and capture the returns of the asset class with high reliability over the long term). We see this in the incredible shrinking market, much fewer stocks now trade publicly
Best wishes
Larry
Nothing you said changes anything. I am not arguing that more stocks are not better, just that 600 is enough and yes I agree it is execution that matters
BTW, as I am sure you know if you go back to 26 the data looks different 11.5 for Decile 9 and 13.1 for decile 10. Personally I think the more recent period is likely to be more representative, but perhaps for different reasons. It is Sarbox---basically killing ability of very small companies to go public and that means the small premium will go more to private equity holders as the companies stay private longer. Which also means you will have lot fewer stocks to diversify (but still far more than needed to basically eliminate idiosyncratic risks and capture the returns of the asset class with high reliability over the long term). We see this in the incredible shrinking market, much fewer stocks now trade publicly
Best wishes
Larry
Re: The annual Bridgeway microcap thread: BRSIX
BRSIX tracks almost identically with iShares Russell Microcap (IWC).
M* BRSIX total return chart from 2005 with IWC
Paul
M* BRSIX total return chart from 2005 with IWC
Paul
...and then Buffy staked Edward. The end.
Re: The annual Bridgeway microcap thread: BRSIX
Why is it important to invest in "EVERY" sector of the economy? What difference does it make, as long as you are in a bunch of low cost, diversified, uncorrelated sectors? I am asking a real question. Maybe there is some reason that I don't understand.-Another Rick Ferri point: BRSIX provides access to very small companies, which are a huge sector of the US economy but one that it is difficult to invest in. It might be worth accepting BRSIX's shortcomings in order to invest in a fund that mimics an otherwise inaccessible swathe of the economy.
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The most important thing you should know about me is that I am not an expert.
Re: The annual Bridgeway microcap thread: BRSIX
I don't get it either. To me, it seems like the "justification" a TSMer would make for tilting to something without having to admit to a non-total market approach. We hear that a lot with other things like REITS ("RE is such a big % of the economy but underrepresented in the stock market"), TIPS (despite such a small part of the bond market, "a large tilt is OK because we are someone more exposed to unexpected inflation than the average investor").tc101 wrote:Why is it important to invest in "EVERY" sector of the economy? What difference does it make, as long as you are in a bunch of low cost, diversified, uncorrelated sectors? I am asking a real question. Maybe there is some reason that I don't understand.-Another Rick Ferri point: BRSIX provides access to very small companies, which are a huge sector of the US economy but one that it is difficult to invest in. It might be worth accepting BRSIX's shortcomings in order to invest in a fund that mimics an otherwise inaccessible swathe of the economy.
Contrast this with 3F investors, who just think risk and return are related, there are multiple sources of risk, and everyone should decide for themselves how much risk is appropriate for them (instead of letting the market dictate your allocations for you in every circumstance).
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Re: The annual Bridgeway microcap thread: BRSIX
Jerry lee
Here is perhaps another interesting thought
The 10th decile should have a lot more of the stocks with lottery like distributions, penny stocks, IPOs, stocks in bankruptcy---so there is more opportunity to add value by screening them. That makes sense to me as logically the 10th decile stocks should have higher returns than the 9th, even purely for liquidity premium reasons.
Best wishes
Larry
Here is perhaps another interesting thought
The 10th decile should have a lot more of the stocks with lottery like distributions, penny stocks, IPOs, stocks in bankruptcy---so there is more opportunity to add value by screening them. That makes sense to me as logically the 10th decile stocks should have higher returns than the 9th, even purely for liquidity premium reasons.
Best wishes
Larry
Re: The annual Bridgeway microcap thread: BRSIX
TC101, note that I added this to my summary list because it's an argument I've heard for holding BRSIX, not because I am positive that it is true. That said, I think the whole point of using TSM is in an attempt to invest in every sector of the economy (well, maybe except the black market). So I'm not sure what's troubling you there. Reasonable people can disagree about the effectiveness of TSM as a mirror of the economy. Microcap is also about as uncorrelated as you can get while buying into a non-sector US fund, which applies to your second question.Jerry_lee wrote:I don't get it either. To me, it seems like the "justification" a TSMer would make for tilting to something without having to admit to a non-total market approach. We hear that a lot with other things like REITS ("RE is such a big % of the economy but underrepresented in the stock market"), TIPS (despite such a small part of the bond market, "a large tilt is OK because we are someone more exposed to unexpected inflation than the average investor").tc101 wrote: Why is it important to invest in "EVERY" sector of the economy? What difference does it make, as long as you are in a bunch of low cost, diversified, uncorrelated sectors? I am asking a real question. Maybe there is some reason that I don't understand.
Contrast this with 3F investors, who just think risk and return are related, there are multiple sources of risk, and everyone should decide for themselves how much risk is appropriate for them (instead of letting the market dictate your allocations for you in every circumstance).
Jerry, about your TSM-justifier/3 factor-believer contrast. I think one can be agnostic about it and still do the same thing and maybe even come out fine. It doesn't matter WHY microcaps are different from TSM, it just matters that they are, and that they don't go absolutely to zero. I invested in microcaps because they are risky and respond differently from what one can buy via TSM or even small cap funds. I think Rick's point that they reflect a wider swathe of the economy is interesting. But none of the reasons really matter if microcaps add diversity and not-crazy risk.
Your prior point, that BRSIX does a decent job of reflecting its sector, is a good one. You do say that moving to VISVX (which would really be mostly be for simplicity) could be a disaster. One of the reasons I am in microcaps in the first place is that I don't see underperformance, losses, etc., as a giant disaster. I do like though that you suggest that continuing to hold microcaps may work out, since small (really medium) value has had a long run.
I also like your point about discipline. Here's the thing, though: as with EmergDoc, I think about selling this fund every year. Haven't ever managed to do it. If my greatest weakness in discipline is to reassess my portfolio annually, consider simplifying, and then do nothing, I feel ok about it. And let's face it. I'll probably do nothing.
PKCrafter/Paul, I love your comment on the issue of whether an active fund is sleeping or dead. Maybe this thread is an attempt to nudge it with my boot to see it's awake. Alas, my gigantic cowboy hat makes it so I can't actually see which it is. You are right, too--no cattle. Alas.
Stratton/Paul, thanks for the iShares comparison. I guess BRSIX is more of an index than I was getting to suspect.
Larry, I'm processing your comments on size, liquidity, risk, screening, and tracking. Thanks.
Re: The annual Bridgeway microcap thread: BRSIX
Because there are no stock market gremlins there to maintain unique differences or set the correlations within ranges inscripted on stone tablets. This is not physics so if you want to base your investment decisions on some rational belief then I'd say that's a good one to start with ("investing is not physics").larryswedroe wrote:Dave
Yes technically that is correct, but it doesn't change anything IMO.
You can say the same thing about the ERP for example
Either you believe in 86 years of data, data that holds up in developed and EM markets as well, or not. You must make investment decisions based on some rational belief.
Adding to the data are the wealth of papers showing the simple and logical risk stories which support the data, there are unique risks in small companies that cause them to perform differently than large companies. Bottom line is that unless you believe those unique differences will somehow disappear why should one think the correlations should not remain lower as the market cap goes down?
Best wishes
Larry
On the other hand if your attitude is "I've decided I must make x number of decisions in my investment carrier therefore I will convince myself that I have the information required to do so even if I really don't" then yeah pretending like the stock market gremlins are keeping the correlations within prescribed ranges will help you achieve that, but why should making decisions be such a high priority when what we really want to be making is money?
How else would you define diversified? Also how else can you determine which sectors will be uncorrelated (in the future, not the past)? You can't, so the only way is to buy them all.tc101 wrote: Why is it important to invest in "EVERY" sector of the economy? What difference does it make, as long as you are in a bunch of low cost, diversified, uncorrelated sectors? I am asking a real question. Maybe there is some reason that I don't understand.
European PIIGS bonds are probably one of the riskiest things going right now and their return is capped at around 7%. So assuming your overall portfolio is less risky than that, are you expecting less return than that?Jerry_lee wrote:I don't get it either. To me, it seems like the "justification" a TSMer would make for tilting to something without having to admit to a non-total market approach. We hear that a lot with other things like REITS ("RE is such a big % of the economy but underrepresented in the stock market"), TIPS (despite such a small part of the bond market, "a large tilt is OK because we are someone more exposed to unexpected inflation than the average investor").
Contrast this with 3F investors, who just think risk and return are related, there are multiple sources of risk, and everyone should decide for themselves how much risk is appropriate for them (instead of letting the market dictate your allocations for you in every circumstance).
This seems to be the biggest difference between 3F and TSM investors...despite all the evidence to the contrary 3F investors seem to think it's the ultimate truth that risk and return are related and proceed to construct towering artifices on that foundation whereas TSM investors are hesitant to build anything because they recognize that that foundation is actually very shaky if not complete doo doo. Fortunately (for "TSMers") the theory/strategy of consulting the wisdom of the market is independent from the theory of risk/return, but as you described the way folks generally use the 3F model requires both to be true in order to succeed.
Re: The annual Bridgeway microcap thread: BRSIX
Dave, if you're going to dismiss the basis of modern finance, you might want to include some data. Just because we don't know the future with certainty doesn't mean we know literally nothing about what could happen. As it is, you seem to be dealing in fear, uncertainty, and doubt.
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Re: The annual Bridgeway microcap thread: BRSIX
Dave_HowWealthWorks.com
No one is pretending this is physical science like physics. Having said that IMO you can greatly put the odds in your favor by using the evidence on data and from peer reviewed research.
If you think otherwise fine. Good luck to you
Best wishes
Larry
No one is pretending this is physical science like physics. Having said that IMO you can greatly put the odds in your favor by using the evidence on data and from peer reviewed research.
If you think otherwise fine. Good luck to you
Best wishes
Larry
Re: The annual Bridgeway microcap thread: BRSIX
And I would do so if it were the basis of modern finance, but in fact the risk/return theory is only accepted by a small portion of investment practitioners. It is not the basis of modern finance or "ultimate truth" like the 3-factor camp seems to believe.goggles wrote:Dave, if you're going to dismiss the basis of modern finance, you might want to include some data. Just because we don't know the future with certainty doesn't mean we know literally nothing about what could happen. As it is, you seem to be dealing in fear, uncertainty, and doubt.
In any case I'm certainly not saying that we know literally nothing about what could happen. There are many things I know, but it's not because they happened in the past; That's the second biggest error that seems to be made by the 3F investors: they also think that the only way to know something is to observe it in past data when in fact that's probably the worst way to know something; Best is to know that something is physically impossible (for example, if you own a piece of every asset in the world then it's impossible to lose money because no matter which asset funds flow out of they always flow into something else), second best is fundamental analysis (for example, Bank CDs are a better investment than treasury bonds because they pay a higher rate despite being equally guaranteed), and the worst is past data (especially when distorted by summary statistics like correlation which are provably inappropriate for these types of data streams).
But if did want to analyze data why shouldn't I hire an active manager to analyze it for me? Wouldn't that be more reasonable than taking a few hours a week to learn about 2-3 regression factors when there are, in fact, hundreds or thousands of factors which active managers analyze for a living? I mean, if analyzing data can really help improve your portfolio then why not hire a professional to do it instead of settling for your own amateur work? Or if you believe the professionals can't do it then why would you think you can? Doesn't make any sense.
But I asked you if the peer reviewed research actually said what you claimed it did and your response was basically, "no, but I'm going to act like it does because it'd be better if it did." I'm all for using peer reviewed research and properly interpreted evidence, but when the evidence shows that the "unique characteristics", "correlation", etc are not stable quantities (with specific reasons to believe they won't change in the future) as they are in the physical sciences and you go on acting like they are anyway (because you wish they were) then....well that's not using the evidence and the peer reviewed research...it's the opposite (ie it's defying or contradicting the evidence and peer reviewed research).larryswedroe wrote:Dave_HowWealthWorks.com
No one is pretending this is physical science like physics. Having said that IMO you can greatly put the odds in your favor by using the evidence on data and from peer reviewed research.
If you think otherwise fine. Good luck to you
Best wishes
Larry
Re: The annual Bridgeway microcap thread: BRSIX
BRSIX is not the easiest or most accepted fund to own. It hasn't made any money for investors for awhile either. Things change though, and it's worth revisiting investment decisions. I've been holding BRSIX for several years now, and recently did just that. I found that this fund still fits nicely into my plan. --Tet
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Re: The annual Bridgeway microcap thread: BRSIX
If correlations were stable and premiums were stable there would not be any risks. And one (certainly not me) counts on the correlations being the same. I don't know what they will be, nor does anyone claim to know that either. What we do expect is that in most environments the correlations will be well below 1 and thus add some diversification benefit and that the risk premiums are likely to persist (but not certain). That is based on the peer reviewed research as well as the data.But I asked you if the peer reviewed research actually said what you claimed it did and your response was basically, "no, but I'm going to act like it does because it'd be better if it did." I'm all for using peer reviewed research and properly interpreted evidence, but when the evidence shows that the "unique characteristics", "correlation", etc are not stable quantities (with specific reasons to believe they won't change in the future) as they are in the physical sciences and you go on acting like they are anyway (because you wish they were) then....well that's not using the evidence and the peer reviewed research...it's the opposite (ie it's defying or contradicting the evidence and peer reviewed research).
Best wishes
Larry
Re: The annual Bridgeway microcap thread: BRSIX
I dumped BRSIX about 3 or 4 years ago after I realized I was making my entire portfolio too complicated by all the slicing (REITs, Microcap, SCV). Now I just tilt as much to SmB and HmL as possible given fund constraints with 401k. Just did a Tax Loss Harvest from VIOV to VBR. My biggest issue is getting as much SmB and HmL on the foreign side as I would like.
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Re: The annual Bridgeway microcap thread: BRSIX
I no longer hold BRSIX. This used to be an area of the market that was not included in the total US stock market index fund or small value fund. That has changed. Much of microcap now overlaps with small cap and TSM due to the shrinking number of listed stocks. The US common stock portfolio holds only TSM and SV today (with REITS treated as a separate asset class)
Rick Ferri
Rick Ferri
The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.
Re: The annual Bridgeway microcap thread: BRSIX
Aah! Just as I was about to say "leave it for another year," there's this. Time to ruminate some more. Thanks for the input.Rick Ferri wrote:I no longer hold BRSIX. This used to be an area of the market that was not included in the total US stock market index fund or small value fund. That has changed. Much of microcap now overlaps with small cap and TSM due to the shrinking number of listed stocks. The US common stock portfolio holds only TSM and SV today (with REITS treated as a separate asset class)
Rick Ferri
BTW, do you think this shrinking market is because of Sarbanes-Oxley reporting, larger economic problems, liquidity, something else? I just wonder if you think SV/TSM funds will continue to hold microcaps in the future. Speculation, but I am curious.
Re: The annual Bridgeway microcap thread: BRSIX
Regarding the high expense ratio: Bridgeway has been fairly successful in generating a lot of income from security lending for this particular fund (more so than Vanguard's small company funds). I checked last year's semi-annual report, and they brought in $741 million through security lending, which came close to covering the $820 they charged as part of the 0.50% management fee. The total cost of fees (including an $84 million waiver) was $1234 million.
When I last checked, Vanguard tended to shave off a few basis points via security lending, while BRSIX tends to shave off 40-50 points each year.
When I last checked, Vanguard tended to shave off a few basis points via security lending, while BRSIX tends to shave off 40-50 points each year.
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Re: The annual Bridgeway microcap thread: BRSIX
I think it's a combination of many factors; increased regulation, low common stock valuations, very low borrowing costs, and private equity funds that are awash in capital and willing to pay up. All SV funds have a cut off for size. Some go deep into microcap and some do not. IJS does go fairly deep.goggles wrote:Do you think this shrinking market is because of Sarbanes-Oxley reporting, larger economic problems, liquidity, something else? I just wonder if you think SV/TSM funds will continue to hold microcaps in the future. Speculation, but I am curious.
Rick Ferri
The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.
Re: The annual Bridgeway microcap thread: BRSIX
Rick,Rick Ferri wrote:I no longer hold BRSIX.
Rick Ferri
In your May 4, 2009 Wall Street Journal article titled “Tight-Fisted Investing” you provided a model portfolio that included a 3% allocation to BRSIX. If you were asked to provide them with an updated portfolio model, could we assume that it would remain the same with the exception of the BRSIX allocation which would now go to IJS and/or VTI?
Thanks,
Bradley
You can sum up any active fund manager’s presentation at an investor conference in one sentence: “We’re doing well, all things considered.”
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Re: The annual Bridgeway microcap thread: BRSIX
My US common stock allocation is 75% in VTI (Vanguard US Total Stock Market) and 25% in IJS (iShares S&P 600 small-value). This has been my allocation since March. REITs are treated as a separate asset class and allocation in a portfolio.
Rick Ferri
Rick Ferri
The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.
Re: The annual Bridgeway microcap thread: BRSIX
This was a very good thread and I wanted to bump it to the top again.
Like the OP, it seems like every year I almost sell BRSIX but then I convince myself not to do it. I was dead set on selling some in the early days of 2014 (when it would be OK for me to take some capital gains) but now after rereading this thread I may not do it.
BRSIX finally outperformed the S&P 500 by a wide margin this year (by about 20% or so, low 30's versus low 50s percentage annual return?). In 2012 they had an approximately 20% NAV capital gains distribution and this year, 2013, they had an approximately 10% NAV distribution. The distributions don't bother me much since I am in the 0% capital gains bracket.
So has any reasoning for or against BRSIX really changed?
Like the OP, it seems like every year I almost sell BRSIX but then I convince myself not to do it. I was dead set on selling some in the early days of 2014 (when it would be OK for me to take some capital gains) but now after rereading this thread I may not do it.
BRSIX finally outperformed the S&P 500 by a wide margin this year (by about 20% or so, low 30's versus low 50s percentage annual return?). In 2012 they had an approximately 20% NAV capital gains distribution and this year, 2013, they had an approximately 10% NAV distribution. The distributions don't bother me much since I am in the 0% capital gains bracket.
So has any reasoning for or against BRSIX really changed?