How Much To Tilt To Small Value?

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chatbotte
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Re: How Much To Tilt To Small Value?

Post by chatbotte » Mon Feb 13, 2017 2:28 pm

Looks like the value premium has been negative for at least nine years, both in the US and internationally.
Last edited by chatbotte on Mon Feb 13, 2017 2:34 pm, edited 1 time in total.

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willthrill81
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Re: How Much To Tilt To Small Value?

Post by willthrill81 » Mon Feb 13, 2017 2:34 pm

chatbotte wrote:Looks like the value premium has been negative for at least nine years, both in the US and internationally.
For the most part, that's not accurate.

During the last decade (2007-2016), the TSM for U.S. had a CAGR of 7.11%. Large cap value was behind at 5.85%, but mid-cap value was ahead at 7.53%, and small-cap value was ahead at 7.63%.

During that same time, the total international market had a CAGR of .88%, while int'l small cap was 2.14%.

So only large cap value was behind the total market's returns.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

chatbotte
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Re: How Much To Tilt To Small Value?

Post by chatbotte » Mon Feb 13, 2017 2:39 pm

willthrill81 wrote:
chatbotte wrote:Looks like the value premium has been negative for at least nine years, both in the US and internationally.
For the most part, that's not accurate.

During the last decade (2007-2016), the TSM for U.S. had a CAGR of 7.11%. Large cap value was behind at 5.85%, but mid-cap value was ahead at 7.53%, and small-cap value was ahead at 7.63%.

During that same time, the total international market had a CAGR of .88%, while int'l small cap was 2.14%.

So only large cap value was behind the total market's returns.
willthrill81

Value premium = difference between return on high BE/ME ("underpriced") stocks and low BE/ME stocks ("overpriced") stocks, averaged across size. Long/short.

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willthrill81
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Re: How Much To Tilt To Small Value?

Post by willthrill81 » Mon Feb 13, 2017 2:47 pm

chatbotte wrote:
willthrill81 wrote:
chatbotte wrote:Looks like the value premium has been negative for at least nine years, both in the US and internationally.
For the most part, that's not accurate.

During the last decade (2007-2016), the TSM for U.S. had a CAGR of 7.11%. Large cap value was behind at 5.85%, but mid-cap value was ahead at 7.53%, and small-cap value was ahead at 7.63%.

During that same time, the total international market had a CAGR of .88%, while int'l small cap was 2.14%.

So only large cap value was behind the total market's returns.
willthrill81

Value premium = difference between return on high BE/ME ("underpriced") stocks and low BE/ME stocks ("overpriced") stocks, averaged across size. Long/short.
Value and growth cannot simultaneously have higher returns than the TSM. So since value outperformed the TSM, then growth underperformed.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: How Much To Tilt To Small Value?

Post by MrKnight » Mon Feb 13, 2017 3:18 pm

chatbotte wrote:Looks like the value premium has been negative for at least nine years, both in the US and internationally.
No one makes the claim that a small cap value premium will persist over every selected time frame. The claim being advanced is that on average, small-cap value comes ahead.

2007 to 2016 growth beat value.

But both 2006 and 2008 small cap value beat small cap growth, and since 1972 small-cap value's returns substantially leads growth.

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Re: How Much To Tilt To Small Value?

Post by Theoretical » Mon Feb 13, 2017 3:48 pm

For 2016, Value clobbered Growth, especially Small Value.

http://mba.tuck.dartmouth.edu/pages/fac ... brary.html

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Re: How Much To Tilt To Small Value?

Post by MrKnight » Mon Feb 13, 2017 5:29 pm

Since we're on the topic, what are you folks opinion regarding optimal value index fund. I use Vanguard Small Cap Value ... I've read some suggesting that it's not the best to capture the small cap value premium.

Alternatives I have heard are DFSVX and BOSVX... but VSIAX seems to have robust performance too.
Last edited by MrKnight on Mon Feb 13, 2017 5:34 pm, edited 1 time in total.

groovy9
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Re: How Much To Tilt To Small Value?

Post by groovy9 » Mon Feb 13, 2017 5:34 pm

MrKnight wrote:Since we're on the topic, what are you folks opinion regarding optimal value index fund. I use Vanguard Small Cap Value ... I've read some suggesting that it's not the best for the small cap value premium.

Alternatives I have heard are DFSVX and BOSVX... but VSIAX seems to have solid performance too.
I like the S&P 600 Value index (VIOV for Vanguard or IJS for iShares). Its average market cap is quite a bit smaller and companies don't get into the index without stringing together 4 consecutive quarters of profits, which by most (all?) accounts is a pretty good filter for small caps. It has trounced the Russell 2000 over a long time period.

chatbotte
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Re: How Much To Tilt To Small Value?

Post by chatbotte » Mon Feb 13, 2017 5:44 pm

willthrill81 wrote:
chatbotte wrote:
willthrill81 wrote:
chatbotte wrote:Looks like the value premium has been negative for at least nine years, both in the US and internationally.
For the most part, that's not accurate.

During the last decade (2007-2016), the TSM for U.S. had a CAGR of 7.11%. Large cap value was behind at 5.85%, but mid-cap value was ahead at 7.53%, and small-cap value was ahead at 7.63%.

During that same time, the total international market had a CAGR of .88%, while int'l small cap was 2.14%.

So only large cap value was behind the total market's returns.
willthrill81

Value premium = difference between return on high BE/ME ("underpriced") stocks and low BE/ME stocks ("overpriced") stocks, averaged across size. Long/short.
Value and growth cannot simultaneously have higher returns than the TSM. So since value outperformed the TSM, then growth underperformed.
willthrill,

Your numbers don't imply the value premium was positive. Weights matter. "Large" typically is a big part of the market.

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Re: How Much To Tilt To Small Value?

Post by willthrill81 » Mon Feb 13, 2017 5:46 pm

chatbotte wrote:
willthrill81 wrote:
chatbotte wrote:
willthrill81 wrote:
chatbotte wrote:Looks like the value premium has been negative for at least nine years, both in the US and internationally.
For the most part, that's not accurate.

During the last decade (2007-2016), the TSM for U.S. had a CAGR of 7.11%. Large cap value was behind at 5.85%, but mid-cap value was ahead at 7.53%, and small-cap value was ahead at 7.63%.

During that same time, the total international market had a CAGR of .88%, while int'l small cap was 2.14%.

So only large cap value was behind the total market's returns.
willthrill81

Value premium = difference between return on high BE/ME ("underpriced") stocks and low BE/ME stocks ("overpriced") stocks, averaged across size. Long/short.
Value and growth cannot simultaneously have higher returns than the TSM. So since value outperformed the TSM, then growth underperformed.
willthrill,

Your numbers don't imply the value premium was positive. Weights matter. "Large" typically is a big part of the market.
If we're talking about all value equities, you're right. But if we're comparing asset classes, then large cap was the only class where value wasn't ahead of growth.

I think that large cap value will still outperform LCB over the long-term, but the premium is, historically, significantly less than that of SCB and SCV.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

chatbotte
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Re: How Much To Tilt To Small Value?

Post by chatbotte » Mon Feb 13, 2017 5:54 pm

MrKnight wrote:[
No one makes the claim that a small cap value premium will persist over every selected time frame. The claim being advanced is that on average, small-cap value comes ahead.
MrKnight

That's true, but you mustn't happen to want to dip into your savings when value stocks underperform like they did in about 2007-2015.

chatbotte
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Re: How Much To Tilt To Small Value?

Post by chatbotte » Mon Feb 13, 2017 6:10 pm

willthrill81 wrote:
chatbotte wrote:
willthrill81 wrote:
chatbotte wrote:
willthrill81 wrote:
For the most part, that's not accurate.

During the last decade (2007-2016), the TSM for U.S. had a CAGR of 7.11%. Large cap value was behind at 5.85%, but mid-cap value was ahead at 7.53%, and small-cap value was ahead at 7.63%.

During that same time, the total international market had a CAGR of .88%, while int'l small cap was 2.14%.

So only large cap value was behind the total market's returns.
willthrill81

Value premium = difference between return on high BE/ME ("underpriced") stocks and low BE/ME stocks ("overpriced") stocks, averaged across size. Long/short.
Value and growth cannot simultaneously have higher returns than the TSM. So since value outperformed the TSM, then growth underperformed.
willthrill,

Your numbers don't imply the value premium was positive. Weights matter. "Large" typically is a big part of the market.
If we're talking about all value equities, you're right. But if we're comparing asset classes, then large cap was the only class where value wasn't ahead of growth.

I think that large cap value will still outperform LCB over the long-term, but the premium is, historically, significantly less than that of SCB and SCV.
willthrill,

I didn't say anything about asset classes. I said the value premium had been negative in about the last nine years, both in and outside the US. If you don't believe me, you can download HML data from Ken French's website. Also, please note that the value premium isn't defined the way you seem to define it. The value premium isn't related to firm size. The size premium is.

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Re: How Much To Tilt To Small Value?

Post by larryswedroe » Mon Feb 13, 2017 8:44 pm

Just one comment, yes the value premium has been negative for last nine years, but was less negative from 08-16 then the market beta premium was negative from 2000-09 an even longer period. To me it's amusing that the people focus on the value premium being slightly negative for an even shorter period than the beta premium was more negative for a longer period.

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Re: How Much To Tilt To Small Value?

Post by vesalius » Tue Feb 14, 2017 10:28 am

larryswedroe wrote:Just one comment, yes the value premium has been negative for last nine years, but was less negative from 08-16 then the market beta premium was negative from 2000-09 an even longer period. To me it's amusing that the people focus on the value premium being slightly negative for an even shorter period than the beta premium was more negative for a longer period.
Perception and group think is reality. TSM/beta is largely unimpeachable and variations in return are to be expected. Everything else is to one degree or another not dependable and fleeting regardless if it has a similar or even better historical premium in regards to both return and consistency. seems questioning or discussing beta or TSM is, to some anyway, equivalent to stating the sun does not rotate about the earth long ago. For reasons that are beyond me, the discussion truly seems to either offend or be laughable to some people.

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Re: How Much To Tilt To Small Value?

Post by Park » Sun Oct 01, 2017 8:59 am

https://blog.wealthfront.com/optimal-ap ... mart-beta/

An essay from Burton Malkiel on smart beta. I'd like to thank Matjen for the link.

"In the marketing of “Smart Beta” ETFs there has been inadequate recognition of the risks inherent in the technique. For example, the “Fundamental Index”TM ETF (ticker PRF) is a portfolio with a strong “value” tilt. It has slightly outperformed its overall market benchmark over its history. But the entire above-market returns for the PRF portfolio were achieved during 2009, when the proportion of bank stocks in the portfolio was more than twice as large as the weight in the benchmark index and almost 15 percent of the portfolio was invested in two stocks, Citigroup and Bank of America. The “bet” worked but was certainly risky, since it was unclear whether banks would avoid nationalization and a “zeroing out” of the banks’ shareholders. “Smart beta” portfolios may not have high traditional betas, but they do carry considerable risk."

One hears the argument that factor investing may result in greater diversification than market cap indexing, which relies solely on beta. But if you diversify by factors, you may end up with less diversification at the sector and security level.

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Re: How Much To Tilt To Small Value?

Post by Park » Thu Dec 14, 2017 2:57 pm

I'm bumping my own thread, but the following point of view isn't heard as much as it should be, so I thought that I should write this post.

https://www.investingdaily.com/10884/bu ... ey-grow-up

Jeremy Grantham:

"Value investing has always had a hidden but serious risk — the 60-year flood. The so-called price/book effect (and the small stock effect) sound like a free lunch, but, in 1929-33, 20% of all companies went bankrupt. They were not the large high quality blue chips but small “cheap stocks” with low price-book ratios."

It should be noted that value companies tend to be more levered, and 1929-33 was a period of significant deflation. Leverage and deflation don't mix well. One can make the case that with fiat currency, as opposed to the gold based currency of 1929-1933, deflation is less of an issue.

Nevertheless, small value is not a free lunch. Bad returns in bad times, which describes small value in the Depression, is something to consider.

Edited to include the following:

Inflation rates
1929 0.58%
1930 -6.40%
1931 -9.32%
1932 -10.27%

1929-1932 returns US
SCV -85.1%
LCV -77.6%
S&P500 -64.3%

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Re: How Much To Tilt To Small Value?

Post by Theoretical » Thu Dec 14, 2017 5:26 pm

Park wrote:
Thu Dec 14, 2017 2:57 pm
I'm bumping my own thread, but the following point of view isn't heard as much as it should be, so I thought that I should write this post.

https://www.investingdaily.com/10884/bu ... ey-grow-up

Jeremy Grantham:

"Value investing has always had a hidden but serious risk — the 60-year flood. The so-called price/book effect (and the small stock effect) sound like a free lunch, but, in 1929-33, 20% of all companies went bankrupt. They were not the large high quality blue chips but small “cheap stocks” with low price-book ratios."

It should be noted that value companies tend to be more levered, and 1929-33 was a period of significant deflation. Leverage and deflation don't mix well. One can make the case that with fiat currency, as opposed to the gold based currency of 1929-1933, deflation is less of an issue.

Nevertheless, small value is not a free lunch. Bad returns in bad times, which describes small value in the Depression, is something to consider.

Edited to include the following:

Inflation rates
1929 0.58%
1930 -6.40%
1931 -9.32%
1932 -10.27%

1929-1932 returns US
SCV -85.1%
LCV -77.6%
S&P500 -64.3%
This is an extremely relevant point and is why I think it's important to consider how SCV behaves in different situations, as well as how it mixes with your portfolio overall.

In my view, SCV is a bit like a leveraged equity position with lower transaction costs (being baked into and secured by the company's assets) without the risks of buying on margin.

Ergo, I treat mid-large value as 1.3x a large blend equity holding and SCV as 1.5x that amount for determining the portfolio weights.

So for our portfolio, we're at 60% stocks and I treat the portfolio for bond purchase choices as being closer to a 90% stocks portfolio, so I look for longer durations and treasuries/TIPS/safe munis.

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Re: How Much To Tilt To Small Value?

Post by Park » Fri Dec 15, 2017 10:40 am

I can't access the original Grantham paper, so this is from another paper that cites it:

https://www.valuesignals.com/Content/Do ... eturns.pdf

"Grantham finds that value stocks performed vastly below market during the Great Depression and also during the post-2007 financial crisis. This effect is explained by the solid financial strength that was needed for corporate survival during the time- an attribute value stocks rarely possess."

The above point is well taken. When financial circumstances were very bad, the risk of value investing reared its head.

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Re: How Much To Tilt To Small Value?

Post by Taylor Larimore » Sun Dec 31, 2017 3:07 pm

Bogleheads:
How Much Tilt to Small Value
In 2017 Morningstar Small-Value Index gained 8.40%. Meanwhile the Vanguard Total Stock Market Index (VTSAX), which never goes below the market return, gained 20.63%.

Tilting can be dangerous.

Happy New Year
Taylor
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Re: How Much To Tilt To Small Value?

Post by saltycaper » Sun Dec 31, 2017 3:15 pm

Taylor Larimore wrote:
Sun Dec 31, 2017 3:07 pm
Bogleheads:
How Much Tilt to Small Value
In 2017 Morningstar Small-Value Index gained 8.40%. Meanwhile the Vanguard Total Stock Market Index (VTSAX), which never goes below the market return, gained 20.63%.

Tilting can be dangerous.

Happy New Year
Taylor
If you think that's dangerous, you better get rid of Vanguard Total Bond Market Index Fund. It returned only 3.57%.
Quod vitae sectabor iter?

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Re: How Much To Tilt To Small Value?

Post by livesoft » Sun Dec 31, 2017 3:17 pm

Please!

In 2016 Morningstar Small-Value Index gained 26.0%. Meanwhile the Vanguard Total Stock Market Index (VTSAX), which never goes below the market return, gained 12.0%.

Tilting can be lucrative.
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Re: How Much To Tilt To Small Value?

Post by sambb » Sun Dec 31, 2017 3:22 pm

Taylor Larimore wrote:
Sun Dec 31, 2017 3:07 pm
Bogleheads:
How Much Tilt to Small Value
In 2017 Morningstar Small-Value Index gained 8.40%. Meanwhile the Vanguard Total Stock Market Index (VTSAX), which never goes below the market return, gained 20.63%.

Tilting can be dangerous.

Happy New Year
Taylor
I think this comment could be misleading, see livesoft's comments. Any time period can show drift, but SCV/MCV is a decent tilt IMHO. has been debated here.

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Re: How Much To Tilt To Small Value?

Post by triceratop » Sun Dec 31, 2017 3:24 pm

I am very happy when Small Value underperforms the market. I buy more. Do you think Buffett is upset when Berkshire Hathaway stock isn't priced low relative to book value? No, in fact he begins share buybacks.
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Re: How Much To Tilt To Small Value?

Post by jhfenton » Sun Dec 31, 2017 3:24 pm

Taylor Larimore wrote:
Sun Dec 31, 2017 3:07 pm
Bogleheads:
How Much Tilt to Small Value
In 2017 Morningstar Small-Value Index gained 8.40%. Meanwhile the Vanguard Total Stock Market Index (VTSAX), which never goes below the market return, gained 20.63%.

Tilting can be dangerous.

Happy New Year
Taylor
Very dangerous. For two straight years, my odd, highly tilted 80/20 (50/50 US/International) portfolio has essentially tied TSM despite owning almost completely different things and having lower volatility (20% bonds, remember). Different pieces outperformed at different times.

SCV surged last winter after the election, and it spent most of this year letting TSM catch up. If you go back to 11/4/16, VSIAX gained 29.6% while VTSAX gained 31.5%. Very dangerous indeed. :beer

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Re: How Much To Tilt To Small Value?

Post by livesoft » Sun Dec 31, 2017 3:27 pm

Let's all use this opportunity to predict what will happen in 2018. :twisted:
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Re: How Much To Tilt To Small Value?

Post by jhfenton » Sun Dec 31, 2017 3:29 pm

livesoft wrote:
Sun Dec 31, 2017 3:27 pm
Let's all use this opportunity to predict what will happen in 2018. :twisted:
Something I own will do well. Another thing I own will do poorly. That other thing will be only so-so.

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Re: How Much To Tilt To Small Value?

Post by saltycaper » Sun Dec 31, 2017 3:38 pm

I predict SCV will underperform or outperform the US stock market. This bold prediction is based on the fact that it is not meant to track the US stock market.
Quod vitae sectabor iter?

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Re: How Much To Tilt To Small Value?

Post by Park » Sun Dec 31, 2017 6:06 pm

I'm in favor of tilting to small and value, but it's not a free lunch.

https://www.marketwatch.com/story/8-les ... 2014-11-19

From 1930-39, 10-year annualized percentage returns for the S&P 500 Index, U.S. Large Cap Value, U.S. Small Cap and U.S. Small Cap Value are -0.1%, -5.7%, 2.3% and -2.6%. After inflation, SCV was up 1.4%.

http://awealthofcommonsense.com/2014/04 ... -dominate/

1994-98, S&P500 23.84% Wilshire small cap value 14.64%, so underperformance of 9.2%.

From Larry Swedroe's Complete Guide To Factor Based Investing:

1927-2015, odds of value outperforming over 1 year, 3 year, 5 year, 10 year and 20 year horizons were 63%, 72%, 78%, 86% and 94%.

So value can underperform, and might underperform when you least want it to.

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