What about the value premium?

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MrJoey
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What about the value premium?

Post by MrJoey » Wed Nov 05, 2008 3:55 pm

Does it make sense to tilt TSM with small value fund still?

Or to add large value and small value to those blend categories?

Ive had mine set up like that for awhile. It seems over the long term
the blend and value components end up with the same return over time.

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Ice-9
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Post by Ice-9 » Wed Nov 05, 2008 4:20 pm

Altruist Financial Advisors, whose website includes the helpful DFA v Vanguard chart that is so often cited on this forum, seem to think Vanguards Small Value fund isn't small enough or valuey enough to be their top recommendation.

Their top pick for small value, the Rydex S&P SmallCap Pure Value ETF (RZV), seems to vary from the total market a lot more than the Vanguard Small Value fund.

Chart of TSM vs Vanguard Small Value

Chart of TSM vs Rydex etf RZV

Maybe the etf is more of what you're looking for?

yobria
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Post by yobria » Wed Nov 05, 2008 4:38 pm

If it made sense to you when SV was expensive, it probably still makes sense now that it's (relatively) cheap.

Will historical patterns continue? Who knows, though the value premium does show up in most countries.

Depending on how you look at it, SV also offers a diversification benefit, since SV and TSM won't be perfectly correlated.

Nick

caklim00
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Post by caklim00 » Wed Nov 05, 2008 4:41 pm

I like holding less funds, so I hold TSM (VTI) and SCV (VSIIX), and no LCV. I do add a slice of CRSP 10 (BRSIX) because VSIIX Vanguard SCV is more of a mid/small value fund.

Rodc
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Post by Rodc » Wed Nov 05, 2008 4:58 pm

Ice-9 wrote:Altruist Financial Advisors, whose website includes the helpful DFA v Vanguard chart that is so often cited on this forum, seem to think Vanguards Small Value fund isn't small enough or valuey enough to be their top recommendation.

Their top pick for small value, the Rydex S&P SmallCap Pure Value ETF (RZV), seems to vary from the total market a lot more than the Vanguard Small Value fund.

Chart of TSM vs Vanguard Small Value

Chart of TSM vs Rydex etf RZV

Maybe the etf is more of what you're looking for?
If you put all three on one graph over this one short time period they certainly have a strong family resemblance! RZV does have more volatility than either VISVX or VTSMX, and so goes up and down more, but it still follows VTSMX too closely to be of much help (in this period).
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

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mephistophles
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Post by mephistophles » Wed Nov 05, 2008 5:14 pm

Tilting your portfolio probably makes no difference.

larryswedroe
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Post by larryswedroe » Wed Nov 05, 2008 6:00 pm

Keep in mind that one big advantage IMO of tilting to SV is it allows you to lower your equity allocation, while still maintaining same expected returns. That reduces risk of fat tails, good and bad, and historically produced more efficient portfolios--much lower losses and while smaller gains in best years, gains still pretty good

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PiperWarrior
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Post by PiperWarrior » Wed Nov 05, 2008 6:45 pm

I have a question to those who are saying "not small enough" and/or "not valuey enough".

If I understand FF3F correctly, the return of a sufficiently diversified equity portfolio is predominantly determined by the coefficients to the three factors. If you have TSM+SV, and SV doesn't look small enough or valuey enough to your taste, can't you increase SV a little bit more while reducing TSM to adjust the factor loadings of your portfolio (not the factor loadings of your SV fund)? Or am I missing something?

Sure, if you buy nothing but small-cap value like Larry Swedroe, then "not small enough" and "not valuey enough" may matter, but if you are a tilter, it seems like you can overcome lack of factors loadings in your SV fund to some extent by adjusting the allocation to the SV fund.

caklim00
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Post by caklim00 » Wed Nov 05, 2008 6:59 pm

PiperWarrior wrote:I have a question to those who are saying "not small enough" and/or "not valuey enough".

If I understand FF3F correctly, the return of a sufficiently diversified equity portfolio is predominantly determined by the coefficients to the three factors. If you have TSM+SV, and SV doesn't look small enough or valuey enough to your taste, can't you increase SV a little bit more while reducing TSM to adjust the factor loadings of your portfolio (not the factor loadings of your SV fund)? Or am I missing something?

Sure, if you buy nothing but small-cap value like Larry Swedroe, then "not small enough" and "not valuey enough" may matter, but if you are a tilter, it seems like you can overcome lack of factors loadings in your SV fund to some extent by adjusting the allocation to the SV fund.
I'm quoting another thread, and I'm sure that he'll likely chime in...
SmallHi wrote: I will tell you, in all fairness, and almost anyone familiar with the FF research should acknowledge this, there is something about getting all of your size/value tilts in a relatively concentrated SV Index fund. If I had to worry about anything, thats what I'd be trying to place my finger on. (I don't worry about either, to be fair)

By definition, as of 6/30, over 1,800 stocks could be classified as more value oriented than the market (across large/medium/small capitalizations), and over 3,200 can be classified as smaller than the market (750 mid caps, almost 2,500 small/micro caps). Just how is it that we decide overweighting just 460 of these (through IJS) is ample? Seems more like an arbitrary, active decision to me.

Sure, there is a concentration of distress and liquidity risks (and expected premiums) in these tiny companies, just as their is a lack of one in the largest, highest priced growth stocks (as well as a lack of return). But how one decides that a portfolio that overweights these 460 stocks by a factor of 6 (as TSM/SV portfolios do), relative to a 2 or 3X increase for all 3200 stocks considered smaller/more value oriented than the market (as the Core fund does) is not riskier, or at least as subject to black swans, is beyond me?
While this topic was on TSM/SCV versus DFA Core/Vector, it still illustrates some of the concerns with only holding TSM and SCV. Vanguard Small Cap Value gets you a healthy 981 stocks in the CRSP 5,6 Value range. Adding in BRSIX (in a smaller slice) gets me about 600 more stocks in the CRSP 10 range.

SmallHi
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Post by SmallHi » Wed Nov 05, 2008 8:41 pm

We are all totally convinced that in order to get ample small cap and value exposure, all you need is a small value fund. If someone didn't mid the extra fund, I'd still mix in at least a mid cap value fund for greater diversification. (sometimes I find myself writing about TSM/SV portfolios, but thats just because I am too lazy to go further)

I can tell you this much:

In the US, the value premium has been higher in Small cap stocks.

In the non-US markets? Its been higher in Large cap stocks.

1982-2007
MSCI EAFE = +11.8%
Int'l Large Value = +16.8%
Int'l Small = +14.3%
Int'l Small Value = +16.7%

If we compare Value:Market indexes holding size constant, we see the value premium in large companies is twice as high as the value premium in small companies.

What does this tell us? To an extent, the US experience (a bigger value premium in small companies) is likely just chance. With only 200 or 300 companies in the Large Value Index....it may have (historically) randomly sampled a smaller % of companies that "migrated" out of the value category and into the blend/growth category.

Maybe the opposite will happen going forward. Maybe most of the value premium will be concentrated in larger/mid cap stocks going forward, and less so in small companies? Because of unique liquidity risks, I have to admit I doubt that would be the case...but that is why we diversify.

sh

caklim00
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Post by caklim00 » Wed Nov 05, 2008 11:46 pm

For what its worth, VOE (Vanguard Mid Cap Value) gets you 270 extra stocks. Vanguard SCV has some mid cap stocks in it, so you are basically getting more of a mid/small value blend if you go with VBR (Vanguard Small Cap Value)

P/B ratios:
VTI - 2.03
VBR - 1.19
VOE - 1.39
BRSIX - 1.53

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