Is value investing only beneficial for small caps?

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Topic Author
Mode32
Posts: 196
Joined: Mon Mar 02, 2020 1:24 pm

Is value investing only beneficial for small caps?

Post by Mode32 »

Bogleheads,

Looking to get some insights on value investing.

From what I have read, it appears that value investing is really only beneficial for small caps. I have about 50% Large Cap Value in my kids 529 with the rest Large Cap Growth; I was trying to mimic a blended approach when I started the 529 given my plan didn't offer any large cap blended like TSM (unless I combined it with funds I wasn't interested in).

Large Cap Value has not kept up with Large Cap Growth in my portfolio over the years, and I'm wondering if I mishandled things by adding large cap value at all. I'm not interested in going for small and/or mid-cap value investing (moved away from these positions a months ago) given the volatility, and would rather stick with large caps. I still have over 10 years before the 529 will be utilized and I actively contribute to it (also plan on making the portfolio more conservative about 4-7 years prior to use).


Questions:
1) Should I consider transferring all Large Cap Value to Large Cap Growth, consider adding new money to Large Cap Growth only, or stay the course with 50/50 Large Cap Value/Large Cap Growth?

2) I'm disappointed looking at Large Cap Value performance compared with Large Cap Growth performance in my portfolio; however, I do understand that past performance doesn't equate to future performance...and that it may be time for value investing to pay off soon. Is there any reason to think that when value investing does perform better, it will be include Large Cap Value as well (and not just Small Cap Value)?

Always appreciate the thoughts and insights by investors in this forum. So thanks for your time.

Stay safe.
MotoTrojan
Posts: 10708
Joined: Wed Feb 01, 2017 8:39 pm

Re: Is value investing only beneficial for small caps?

Post by MotoTrojan »

1st of all, I wouldn't lose any sleep over your decision. You should view it as one portfolio, not two funds, and trying to get Total Market exposure was a smart start.

Here is a backtest back to 2005 of 50/50 VTV/VUG (Vanguard Large Value and Large Growth) rebalanced every 6 months, hard to tell the difference I would say. You actually outperformed VTI modestly (the more frequently you rebalance, the more they will converge).

https://www.portfoliovisualizer.com/bac ... ion3_2=100

Now IMHO would be a terrible time to move to 100% growth, never smart to pick something just because it has done well (especially when it has been driven by multiple increase rather than just raw earnings outperformance).

Large-value vs. small-value is a much bigger question. There is some evidence that large-cap value has a lower premium than small-cap value, although I think that is mostly with P/B metrics (others like EBIT/TEV, P/S, etc... are more robust regardless of size). The biggest difference is just raw factor-exposure (defined as a Fama French long-short portfolio of 50/50 large/small and comparing top 3rd to lower 3rd roughly), which you can think of as simply how much exposure to the premium (whether good or bad) you are getting. Small-value funds tend to have much more exposure to the factor, so it isn't necessarily that the premium is better, just that you are getting more exposure to it. You also of course are getting exposure to the size-factor.

I am a hardcore tilter and most of my portfolio is in global small-value funds of various types, but if your intent is to simulate Total Stock Market, I would stick with your 50/50 routine. Your note about moving out because of the volatility this year doesn't bode well for your future success, and the 10 years remaining is not long enough to justify a strong factor exposure IMHO. If you want to make 10-20% small-value, and leave the rest 50/50 LV/LG (basically TSM) that would be reasonable still but you probably want some bonds sooner than later.
rkhusky
Posts: 10511
Joined: Thu Aug 18, 2011 8:09 pm

Re: Is value investing only beneficial for small caps?

Post by rkhusky »

Mode32 wrote: Fri Aug 21, 2020 10:50 am From what I have read, it appears that value investing is really only beneficial for small caps.
No one knows what the future holds. Small Value or Small Growth or Large Value or Large Growth could shine brighter than the others.
Topic Author
Mode32
Posts: 196
Joined: Mon Mar 02, 2020 1:24 pm

Re: Is value investing only beneficial for small caps?

Post by Mode32 »

MotoTrojan wrote: Fri Aug 21, 2020 10:56 am 1st of all, I wouldn't lose any sleep over your decision. You should view it as one portfolio, not two funds, and trying to get Total Market exposure was a smart start.

Here is a backtest back to 2005 of 50/50 VTV/VUG (Vanguard Large Value and Large Growth) rebalanced every 6 months, hard to tell the difference I would say. You actually outperformed VTI modestly (the more frequently you rebalance, the more they will converge).

https://www.portfoliovisualizer.com/bac ... ion3_2=100

Now IMHO would be a terrible time to move to 100% growth, never smart to pick something just because it has done well (especially when it has been driven by multiple increase rather than just raw earnings outperformance).

Large-value vs. small-value is a much bigger question. There is some evidence that large-cap value has a lower premium than small-cap value, although I think that is mostly with P/B metrics (others like EBIT/TEV, P/S, etc... are more robust regardless of size). The biggest difference is just raw factor-exposure (defined as a Fama French long-short portfolio of 50/50 large/small and comparing top 3rd to lower 3rd roughly), which you can think of as simply how much exposure to the premium (whether good or bad) you are getting. Small-value funds tend to have much more exposure to the factor, so it isn't necessarily that the premium is better, just that you are getting more exposure to it. You also of course are getting exposure to the size-factor.

I am a hardcore tilter and most of my portfolio is in global small-value funds of various types, but if your intent is to simulate Total Stock Market, I would stick with your 50/50 routine. Your note about moving out because of the volatility this year doesn't bode well for your future success, and the 10 years remaining is not long enough to justify a strong factor exposure IMHO. If you want to make 10-20% small-value, and leave the rest 50/50 LV/LG (basically TSM) that would be reasonable still but you probably want some bonds sooner than later.
Thank you for the insights on value; it has helped me frame things related to value much better.

I had moved away from small/mid caps because I didn't want so much volatility in my 529 Plan. I stopped contributing to small/mid-caps (overall, 20% of my 529 with the rest being 50/50 split with Large Cap Growth and Large Cap Value) a while ago and then exchanged the small/mid-caps into my allocation for Large Cap Growth and Large Cap Value when their values recovered. I agree, not ideal to switch, but after gaining more experience investing, I realized that all I want is VTSAX or VFIAX (which unfortunately, my 529 Plan doesn't offer unless I include other funds which I'm not interested in).

I must say, it's a little frustrating to see that the Vanguard Large Cap Value position in 529 actually lost a little money over the last two days when the S&P500 made significant gains.

With that said, I would rather our 529 Plan consist of VTSAX or VFIAX, but given I'm not able to do that, I settled for the Large Cap Growth and Large Cap Value (50/50 split) combo.

Thanks again for your time and reasoning.
Topic Author
Mode32
Posts: 196
Joined: Mon Mar 02, 2020 1:24 pm

Re: Is value investing only beneficial for small caps?

Post by Mode32 »

rkhusky wrote: Fri Aug 21, 2020 12:25 pm
Mode32 wrote: Fri Aug 21, 2020 10:50 am From what I have read, it appears that value investing is really only beneficial for small caps.
No one knows what the future holds. Small Value or Small Growth or Large Value or Large Growth could shine brighter than the others.
Very true!
MotoTrojan
Posts: 10708
Joined: Wed Feb 01, 2017 8:39 pm

Re: Is value investing only beneficial for small caps?

Post by MotoTrojan »

Mode32 wrote: Wed Aug 26, 2020 2:46 pm

Thank you for the insights on value; it has helped me frame things related to value much better.

I had moved away from small/mid caps because I didn't want so much volatility in my 529 Plan. I stopped contributing to small/mid-caps (overall, 20% of my 529 with the rest being 50/50 split with Large Cap Growth and Large Cap Value) a while ago and then exchanged the small/mid-caps into my allocation for Large Cap Growth and Large Cap Value when their values recovered. I agree, not ideal to switch, but after gaining more experience investing, I realized that all I want is VTSAX or VFIAX (which unfortunately, my 529 Plan doesn't offer unless I include other funds which I'm not interested in).

I must say, it's a little frustrating to see that the Vanguard Large Cap Value position in 529 actually lost a little money over the last two days when the S&P500 made significant gains.

With that said, I would rather our 529 Plan consist of VTSAX or VFIAX, but given I'm not able to do that, I settled for the Large Cap Growth and Large Cap Value (50/50 split) combo.

Thanks again for your time and reasoning.
You're quite welcome! I understand it can be hard to look at the two lines separately and not think "dang I lost some money!" but I hope it helps you sleep at night to realize you basically are holding VTSAX/VFIAX, you just have it split into two funds. It is how the full portfolio moves that matters.
Topic Author
Mode32
Posts: 196
Joined: Mon Mar 02, 2020 1:24 pm

Re: Is value investing only beneficial for small caps?

Post by Mode32 »

MotoTrojan wrote: Wed Aug 26, 2020 3:31 pm
Mode32 wrote: Wed Aug 26, 2020 2:46 pm

Thank you for the insights on value; it has helped me frame things related to value much better.

I had moved away from small/mid caps because I didn't want so much volatility in my 529 Plan. I stopped contributing to small/mid-caps (overall, 20% of my 529 with the rest being 50/50 split with Large Cap Growth and Large Cap Value) a while ago and then exchanged the small/mid-caps into my allocation for Large Cap Growth and Large Cap Value when their values recovered. I agree, not ideal to switch, but after gaining more experience investing, I realized that all I want is VTSAX or VFIAX (which unfortunately, my 529 Plan doesn't offer unless I include other funds which I'm not interested in).

I must say, it's a little frustrating to see that the Vanguard Large Cap Value position in 529 actually lost a little money over the last two days when the S&P500 made significant gains.

With that said, I would rather our 529 Plan consist of VTSAX or VFIAX, but given I'm not able to do that, I settled for the Large Cap Growth and Large Cap Value (50/50 split) combo.

Thanks again for your time and reasoning.
You're quite welcome! I understand it can be hard to look at the two lines separately and not think "dang I lost some money!" but I hope it helps you sleep at night to realize you basically are holding VTSAX/VFIAX, you just have it split into two funds. It is how the full portfolio moves that matters.

Would the gap be blended portion? I'm assuming putting together a pure growth large cap and a pure value large cap doesn't necessarily give you blended coverage?
MotoTrojan
Posts: 10708
Joined: Wed Feb 01, 2017 8:39 pm

Re: Is value investing only beneficial for small caps?

Post by MotoTrojan »

Mode32 wrote: Wed Aug 26, 2020 5:56 pm
MotoTrojan wrote: Wed Aug 26, 2020 3:31 pm
Mode32 wrote: Wed Aug 26, 2020 2:46 pm

Thank you for the insights on value; it has helped me frame things related to value much better.

I had moved away from small/mid caps because I didn't want so much volatility in my 529 Plan. I stopped contributing to small/mid-caps (overall, 20% of my 529 with the rest being 50/50 split with Large Cap Growth and Large Cap Value) a while ago and then exchanged the small/mid-caps into my allocation for Large Cap Growth and Large Cap Value when their values recovered. I agree, not ideal to switch, but after gaining more experience investing, I realized that all I want is VTSAX or VFIAX (which unfortunately, my 529 Plan doesn't offer unless I include other funds which I'm not interested in).

I must say, it's a little frustrating to see that the Vanguard Large Cap Value position in 529 actually lost a little money over the last two days when the S&P500 made significant gains.

With that said, I would rather our 529 Plan consist of VTSAX or VFIAX, but given I'm not able to do that, I settled for the Large Cap Growth and Large Cap Value (50/50 split) combo.

Thanks again for your time and reasoning.
You're quite welcome! I understand it can be hard to look at the two lines separately and not think "dang I lost some money!" but I hope it helps you sleep at night to realize you basically are holding VTSAX/VFIAX, you just have it split into two funds. It is how the full portfolio moves that matters.

Would the gap be blended portion? I'm assuming putting together a pure growth large cap and a pure value large cap doesn't necessarily give you blended coverage?
The gap is minimal and if anything could be an overlap. These are not "pure" value or growth funds, they are broad based style funds. Yes holding something extreme like 50/50 S&P500 Pure Value & Pure Growth would be a different story.

CRSP along with many other index companies don't actually split the market into two distinct groups (there can be overlap), with many growth indices using other metrics like earnings/sales growth or even momentum, while value side is more generally just a selection of fundamental weights. This page has a nice summary at the bottom of the selection criteria for various indices:

https://advisors.vanguard.com/VGApp/iip ... ethodology

They still work out to be roughly split down the middle though. Did you see the Portfolio Visualizer link I posted above? Here is a new one where I have updated to use the oldest versions of these funds, which allows the backtest to go back to 1993. Once again, in this case I am showing semi-annual rebalancing. Your 50/50 selection actually outperformed the S&P500 slightly :). But holding these value/growth indices in a 50/50 ratio and rebalancing semi-regularly is as close as you'll get to holding the S&P500 directly without that fund available.

https://www.portfoliovisualizer.com/bac ... ion3_2=100
Topic Author
Mode32
Posts: 196
Joined: Mon Mar 02, 2020 1:24 pm

Re: Is value investing only beneficial for small caps?

Post by Mode32 »

MotoTrojan wrote: Wed Aug 26, 2020 6:22 pm
Mode32 wrote: Wed Aug 26, 2020 5:56 pm
MotoTrojan wrote: Wed Aug 26, 2020 3:31 pm
Mode32 wrote: Wed Aug 26, 2020 2:46 pm

Thank you for the insights on value; it has helped me frame things related to value much better.

I had moved away from small/mid caps because I didn't want so much volatility in my 529 Plan. I stopped contributing to small/mid-caps (overall, 20% of my 529 with the rest being 50/50 split with Large Cap Growth and Large Cap Value) a while ago and then exchanged the small/mid-caps into my allocation for Large Cap Growth and Large Cap Value when their values recovered. I agree, not ideal to switch, but after gaining more experience investing, I realized that all I want is VTSAX or VFIAX (which unfortunately, my 529 Plan doesn't offer unless I include other funds which I'm not interested in).

I must say, it's a little frustrating to see that the Vanguard Large Cap Value position in 529 actually lost a little money over the last two days when the S&P500 made significant gains.

With that said, I would rather our 529 Plan consist of VTSAX or VFIAX, but given I'm not able to do that, I settled for the Large Cap Growth and Large Cap Value (50/50 split) combo.

Thanks again for your time and reasoning.
You're quite welcome! I understand it can be hard to look at the two lines separately and not think "dang I lost some money!" but I hope it helps you sleep at night to realize you basically are holding VTSAX/VFIAX, you just have it split into two funds. It is how the full portfolio moves that matters.

Would the gap be blended portion? I'm assuming putting together a pure growth large cap and a pure value large cap doesn't necessarily give you blended coverage?
The gap is minimal and if anything could be an overlap. These are not "pure" value or growth funds, they are broad based style funds. Yes holding something extreme like 50/50 S&P500 Pure Value & Pure Growth would be a different story.

CRSP along with many other index companies don't actually split the market into two distinct groups (there can be overlap), with many growth indices using other metrics like earnings/sales growth or even momentum, while value side is more generally just a selection of fundamental weights. This page has a nice summary at the bottom of the selection criteria for various indices:

https://advisors.vanguard.com/VGApp/iip ... ethodology

They still work out to be roughly split down the middle though. Did you see the Portfolio Visualizer link I posted above? Here is a new one where I have updated to use the oldest versions of these funds, which allows the backtest to go back to 1993. Once again, in this case I am showing semi-annual rebalancing. Your 50/50 selection actually outperformed the S&P500 slightly :). But holding these value/growth indices in a 50/50 ratio and rebalancing semi-regularly is as close as you'll get to holding the S&P500 directly without that fund available.

https://www.portfoliovisualizer.com/bac ... ion3_2=100
Great figure to know, and it's interesting how backtesting worked out!

Again, appreciate you explaining your reasoning. Seeing things from different perspectives helps :)

Thank you!
Topic Author
Mode32
Posts: 196
Joined: Mon Mar 02, 2020 1:24 pm

Re: Is value investing only beneficial for small caps?

Post by Mode32 »

I’m not sure if I should start a new post, but was looking for further advice and insights into the same 529 plan mentioned above.

Again, our 529 is made up of vanguard large cap growth and large cap value with initial AA 50/50 between the two funds. Over the course of the last several months (probably longer), the large cap growth has outperformed large cap value, and currently makes up about 66% of the portfolio.

Note: In our 529 plan, we get to rebalance 2x per year only.

Questions:
1) Should I consider rebalancing? I’m having some trouble reasoning out why I should be given the dramatic outperformance of large cap growth, and the fact that I will continue to contribute monthly 50/50 to both funds?

Thanks
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