International Small Cap Value

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Topic Author
necroman
Posts: 53
Joined: Tue Mar 23, 2021 9:33 pm

International Small Cap Value

Post by necroman »

Hey Gang,

My IRA with Vanguard has a fairly simple allocation of the following:

Total Stock Market (VTSAX)--40%
Total International (VTIAX)--40%
US Small Cap Value (VSIAX)--20%

I had recently read some posts about diversification and risk, and some of the conversation was about international stocks, especially emerging markets and small cap value. I like VTIAX because it does have about 20% in emerging markets, but I thought about adding an ex-US small cap value tilt to my international stock allocation, maybe 30% or so. So, I thought about the following allocation:

Total Stock Market (VTSAX)--40%
Total International (VTIAX)--27%
US Small Cap Value (VSIAX)--20%
ex-US Small Cap Value (VFSAX)--13%

What are your thoughts? Is this a viable strategy? Am I overthinking this? One post said that continuing to add asset classes results in diminishing returns. I do want to keep it simple, but I also thought about diversification benefits. Any guidance would be greatly appreciated. Thank you.

Necroman
The oldest and strongest emotion of mankind is fear, and the oldest and strongest kind of fear is fear of the unknown. --H.P. Lovecraft
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arcticpineapplecorp.
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Re: International Small Cap Value

Post by arcticpineapplecorp. »

it's a larger tilt than many suggest, so you have to deal with greater tracking error. it may not produce the results you desire over the time period you have. if you have the conviction of small cap value, then stick with your conviction and don't look back. thing is, these can have long periods of underperformance and then get outperformance in quick/short bursts. so you have to be there when the gains come. if you're not, because you tire of underperformance, then don't bother.

just adding asset classes doesn't get you diminishing returns, it might depend upon the asset classes you add.

Meb Faber has said on his podcast his entire Roth IRA is invested in Vanguard's Emerging Markets Index Fund because he was looking for the highest risk/highest return for that account that grows and is withdrawn tax free.

the following chart was from a presentation Paul Merriman gave, and he's a big supporter of small cap and value (or small cap value), yet he cautions investors to understand there can be long unproductive runs of that asset class:

Image
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Topic Author
necroman
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Joined: Tue Mar 23, 2021 9:33 pm

Re: International Small Cap Value

Post by necroman »

Artic Pineapple Corp:

Thank you for your perspective. I'm looking at 30 years until retirement, and I have an expected pension that should cover most of my needs. I'm really trying to maximize returns in this IRA, hence the relative aggressive position of 100% stocks. Hopefully that's a long enough time frame to endure the ebbs and flows of small cap value. Thank you for your perspective.

Necroman
The oldest and strongest emotion of mankind is fear, and the oldest and strongest kind of fear is fear of the unknown. --H.P. Lovecraft
swilgu1
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Joined: Sat Apr 17, 2021 12:31 pm

Re: International Small Cap Value

Post by swilgu1 »

Be aware that VSFAX is not a value-tilted fund, it is only tilted towards small companies (both value and growth). Unfortunately, vanguard doesn't have a exUS Small Cap Value fund. I use the ETF AVDV for my own exUS Small Cap Value allocation, but unlike VSFAX, this only contains developed markets exUS.
Topic Author
necroman
Posts: 53
Joined: Tue Mar 23, 2021 9:33 pm

Re: International Small Cap Value

Post by necroman »

Swilgu1,

Man, I missed that. Thank you for pointing that out to me. I appreciate it.

Necroman
The oldest and strongest emotion of mankind is fear, and the oldest and strongest kind of fear is fear of the unknown. --H.P. Lovecraft
asif408
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Re: International Small Cap Value

Post by asif408 »

Seems reasonable, though as swilgu1 says that fund is just small cap and not necessarily value tilted, so may not be getting what you are looking for going that route. Considering it is only 13% of you portfolio, it probably won't make a huge difference, but maybe some.

I tend to look at these things in layers. Your top layer is your allocation between US, developed ex-US, and emerging markets. This probably will make the biggest difference in your returns. The next layer is tilting those regions to by sectors (e.g., energy, tech, etc) or type (e.g, small, value, etc.). The could make a difference depending on how much you tilt and where. Beyond that I would agree you probably just get diminishing returns with any additional tinkering.

For example, my current allocation at the top layer is 50% EM, 40% developed ex-US, and 10% US. Below that for the second layer I have a global energy fund, so a tilt to energy stocks, and then my entire allocation of EM and developed ex-US is heavily tilted to value. So I am heavily weighted to overseas value stocks, and heavily underweight US stocks, and essentially own no US growth stocks outside of the energy sector. I have about half my developed ex-US allocation in AVDV, an international SCV ETF. If you are going to go that route I'd recommend that fund or something similar. I don't tilt to EM SCV, one reason because there isn't really a decent fund out there but more importantly valuations in small cap in EM are not as attractive as in developed ex-US and US.

Mine is an extreme case, but just using myself as an example to highlight how one could go about it.
Last edited by asif408 on Tue Nov 23, 2021 10:12 am, edited 1 time in total.
Topic Author
necroman
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Re: International Small Cap Value

Post by necroman »

Asif408,

Thank you for your perspective. I think my thought process was somewhat similar, though far more basic than your approach. My 60%/40% US stock to international stock ratio was my starting point. Within that structure, I wanted to fine tune it a bit with an emphasis on something like small cap value with its purported long term return benefits and diversification. But I think that's about as far as I want to take it. I don't think I have the bandwidth to engage in complicated portfolio designs.
The oldest and strongest emotion of mankind is fear, and the oldest and strongest kind of fear is fear of the unknown. --H.P. Lovecraft
asif408
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Location: Florida

Re: International Small Cap Value

Post by asif408 »

necroman wrote: Tue Nov 23, 2021 10:12 am Asif408,

Thank you for your perspective. I think my thought process was somewhat similar, though far more basic than your approach. My 60%/40% US stock to international stock ratio was my starting point. Within that structure, I wanted to fine tune it a bit with an emphasis on something like small cap value with its purported long term return benefits and diversification. But I think that's about as far as I want to take it. I don't think I have the bandwidth to engage in complicated portfolio designs.
Make sense. I'd probably just switch the VFSAX to AVDV or something similar and call it a day, then.

FWIW, my approach only uses 4 funds, so it's not more complex than your approach, if I made it sound complicated. I have a EM value fund, a large cap developed ex-US value fund, a small cap developed ex-US value fund, and a global energy fund. I do own some smaller positions in a HSA and a taxable account of other funds but those are for money I may be spending sooner so are invested with that in mind. Certainly it could be more complex if I wanted a small tilt (I'd probably own 8 funds or so).

I also have a pension and because my pension is most invested in US and growth stocks, I figure I can take the risk of a very heavy tilt, because if my portfolio does poorly it's likely my pension will do well, and if my pension does poorly, there's a good chance my portfolio will do well. So basically I'm hedging my bets that I'll have a bigger pension if my IRA performs poorly and a bigger IRA if my pension investments perform poorly. Even though pensions are "guaranteed", I'm pretty confident the benefit could be reduced based on the future performance.
Topic Author
necroman
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Re: International Small Cap Value

Post by necroman »

I'm in the same boat with the pension. My pension is also "guaranteed," but Arizona does have a fair share of local legislators who want to dismantle it. We'll have to see if it survives. With the safety net of the pension, I wanted to take a more aggressive position with my IRA. I think your balancing act of your pension's domestic investments and your focus on international investments is clever.
The oldest and strongest emotion of mankind is fear, and the oldest and strongest kind of fear is fear of the unknown. --H.P. Lovecraft
asif408
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Location: Florida

Re: International Small Cap Value

Post by asif408 »

necroman wrote: Tue Nov 23, 2021 10:58 am I'm in the same boat with the pension. My pension is also "guaranteed," but Arizona does have a fair share of local legislators who want to dismantle it. We'll have to see if it survives. With the safety net of the pension, I wanted to take a more aggressive position with my IRA. I think your balancing act of your pension's domestic investments and your focus on international investments is clever.
Yes, I've never really seen much discussion on it here, but I think it's an important consideration to look at how your pension is invested if you have one. Certainly if Arizona has it mostly invested domestically and in large growth stocks you could consider a higher international, small, and value allocation to hedge your bets a bit.

It's hard to quantify the worth of my pension at this point, because it depends on how long I stay here and if benefits are the same or reduced when I get to retirement. And since I'm still 20+ years away from retirement, to keep things simple I view my IRAs and pension as two halves at this point of approximately equal value. As I get closer to retirement I should be able to more easily assess the value of each.
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grabiner
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Re: International Small Cap Value

Post by grabiner »

necroman wrote: Tue Nov 23, 2021 10:58 am I'm in the same boat with the pension. My pension is also "guaranteed," but Arizona does have a fair share of local legislators who want to dismantle it. We'll have to see if it survives. With the safety net of the pension, I wanted to take a more aggressive position with my IRA. I think your balancing act of your pension's domestic investments and your focus on international investments is clever.
Do you have a taxable account? You shouldn't open one if you aren't maxing out your IRA and 401(k)/403(b), but if you do have one, it should hold an international stock index because AZ allows a foreign tax credit against state tax.
Wiki David Grabiner
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