ownership of "small cap value" stocks

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privatefarmer
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ownership of "small cap value" stocks

Post by privatefarmer » Mon Sep 11, 2017 7:35 am

I have lately been skeptical about the SCV "premium" going forward due to factor-crowding. So I looked up some of the stocks that were owned by DFSVX and VISVX and what I found was shocking (at least to me). If you look up some of the companies on Morningstar and click on ownership, it will list the top 10 mutual funds that own the company, by the number of shares they own.

For basically every "small cap value" company that I looked it, the ownership was almost exclusively small-cap value, small cap blend, or value funds. Total stock market funds only owned ~10% of the companies and the rest was owned by factor-based funds.

What this seems to tell me is that if every "passive investor" owned only the total stock market index these SCV companies would have FAR less dollars invested in them. In fact, ~90% of the money invested in them is from "factor-based" funds... If there was only a "small" amount of dollars chasing the SCV factor premium then you wouldn't expect factor-based funds to own such a large portion of these companies, correct?

Anyhow, it may be meaningless data and I'm certainly no expert but it seems like from a very simple observation of the ownership of these small/value companies that most of the money invested in them is from investors chasing the factor-premium and this seems like it would not only eat up any factor premium but would possibly lead to a bubble.

Just my .02

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Re: ownership of "small cap value" stocks

Post by sschullo » Mon Sep 11, 2017 7:45 am

Sounds like you are a passive strategy investor looking at actively managed funds.
I own most of my equity allocation in the TSM index, International index, and small allocation tilt towards blended small and mid-caps with the extended market index. For value tilt, I use VG Wellesley for my Roth IRA. Nothing exciting.
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Re: ownership of "small cap value" stocks

Post by Doc » Mon Sep 11, 2017 7:47 am

privatefarmer wrote:
Mon Sep 11, 2017 7:35 am
Anyhow, it may be meaningless data and I'm certainly no expert but it seems like from a very simple observation of the ownership of these small/value companies that most of the money invested in them is from investors chasing the factor-premium and this seems like it would not only eat up any factor premium but would possibly lead to a bubble.
OK but what does this have to do with passive vs active. The "theory" behind small cap value includes the premise that there is also more risk. See Swedroe's Black Swan's book.
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Re: ownership of "small cap value" stocks

Post by privatefarmer » Mon Sep 11, 2017 7:54 am

Doc wrote:
Mon Sep 11, 2017 7:47 am
privatefarmer wrote:
Mon Sep 11, 2017 7:35 am
Anyhow, it may be meaningless data and I'm certainly no expert but it seems like from a very simple observation of the ownership of these small/value companies that most of the money invested in them is from investors chasing the factor-premium and this seems like it would not only eat up any factor premium but would possibly lead to a bubble.
OK but what does this have to do with passive vs active. The "theory" behind small cap value includes the premise that there is also more risk. See Swedroe's Black Swan's book.
Right. I have his book and understand the risk story as to why there's a premium. I guess my concern is that, from looking at who owns these companies the most, these funds are essentially being "propped up" by factor-based funds and otherwise would have far less $$ invested in them if nobody was chasing factors.

If for some reason all passive investors were to just switch to owning only TSM index, these companies would fall by like 90%. The vast majority of the wealth in these companies is not coming from TSM investors who simply accept their market weight but rather is coming from investors chasing the small/value premium. It seems like the definition of "bubble" does it not?

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Re: ownership of "small cap value" stocks

Post by Alexa9 » Mon Sep 11, 2017 7:54 am

Now that small value is quite popular, I wonder if the premiums will decrease. I think Larry had an article on it.

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Re: ownership of "small cap value" stocks

Post by privatefarmer » Mon Sep 11, 2017 7:58 am

What if Apple, Microsoft and other tech stocks suddenly had a huge surge of $$$ invested from investors chasing the "tech stock premium" ala the 90's? What if the ownership of these tech companies was almost exclusively mutual funds that only invested in tech stocks and TSM funds only made up a small portion of the ownership? Wouldn't this be a bubble? Maybe I'm totally wrong on this just trying to wrap my head around it.

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Re: ownership of "small cap value" stocks

Post by harvestbook » Mon Sep 11, 2017 8:04 am

Isn't that true of every factor, though? That's why there are factor funds: because there is a (marketable) factor.
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Re: ownership of "small cap value" stocks

Post by stan1 » Mon Sep 11, 2017 8:11 am

This looks like a bubble also:

1 Apple Inc.
2 Microsoft Corp.
3 Alphabet Inc.
4 Amazon.com Inc.
5 Facebook Inc.

That's the Top 5 holdings of Total Stock Market.

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Re: ownership of "small cap value" stocks

Post by totality » Mon Sep 11, 2017 8:15 am

My two cents on factors/tilts:

If the outperformance is not persistent, you should just own TSM.

If the outperformance is persistent, it is because of risk. If that's the case, you would add risk to your portfolio by tilting. If you are okay with adding risk to your portfolio, you could alternatively just own TSM and increase your asset allocation to equities to get the same effect.

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Re: ownership of "small cap value" stocks

Post by privatefarmer » Mon Sep 11, 2017 8:26 am

totality wrote:
Mon Sep 11, 2017 8:15 am
My two cents on factors/tilts:

If the outperformance is not persistent, you should just own TSM.

If the outperformance is persistent, it is because of risk. If that's the case, you would add risk to your portfolio by tilting. If you are okay with adding risk to your portfolio, you could alternatively just own TSM and increase your asset allocation to equities to get the same effect.
I agree. I think this is a more efficient way of getting risk-adjusted return. I do believe, however, that deviating in any way from the TSM within your equities is making an active bet and we all know the history of active vs passive. Making an active bet that doesn't really increase transaction costs or taxes, however, may end up being just as good as being passive. So I could see the reasoning behind tilting towards SCV but I am finding that I would rather just mirror the TSM as best I can.

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Re: ownership of "small cap value" stocks

Post by staythecourse » Mon Sep 11, 2017 8:42 am

totality wrote:
Mon Sep 11, 2017 8:15 am
My two cents on factors/tilts:

If the outperformance is not persistent, you should just own TSM.

If the outperformance is persistent, it is because of risk. If that's the case, you would add risk to your portfolio by tilting. If you are okay with adding risk to your portfolio, you could alternatively just own TSM and increase your asset allocation to equities to get the same effect.
Umm... No. The idea would be to hold a diversified set of risk factors with low correlations. It does not mean the different risks are "added" together to overall increase the risk of the portfolio. If one looks at a graph of beta, small, and value they have LOW correlations. Not saying I agree or don't, but that would be the theory of why many folks choose to add small and value as a better way to diversify.

Good luck.
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Re: ownership of "small cap value" stocks

Post by dkturner » Mon Sep 11, 2017 9:02 am

stan1 wrote:
Mon Sep 11, 2017 8:11 am
This looks like a bubble also:

1 Apple Inc.
2 Microsoft Corp.
3 Alphabet Inc.
4 Amazon.com Inc.
5 Facebook Inc.

That's the Top 5 holdings of Total Stock Market.
And those five holdings comprise more than 10% of the total market capitalization of total stock market funds. All of the small-cap stocks (more than 2000) in the total stock market funds account for less than 10% of the total capitalization.

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Re: ownership of "small cap value" stocks

Post by Random Walker » Mon Sep 11, 2017 9:07 am

If that's the case, you would add risk to your portfolio by tilting. If you are okay with adding risk to your portfolio, you could alternatively just own TSM and increase your asset allocation to equities to get the same effect.
This is incorrect. One can certainly have a TSM portfolio and a tilted portfolio with the same expected return, but the tilted portfolio will be more diversified across different types of risk. To achieve the extra return, the TSM portfolio simply increases exposure to more of the same type of risk,market beta. The tilted portfolio will have increased exposure to size, value, term, and less exposure to market beta. This is because the tilted portfolio will have decreased overall equity exposure and increased bond exposure for the same expected return as the TSM only portfolio. Now nothing is cheaper than more market beta, and the tilted portfolio will be more expensive: tradeoffs.

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Re: ownership of "small cap value" stocks

Post by nisiprius » Mon Sep 11, 2017 9:10 am

Swedroe and Berkin's book, Your Complete Guide to Factor-based Investing, is, of course, advocacy for factors. Chapter 8 is entitled "does publication reduce the size of premiums?" factor premiums decline after the factors are discovered, and cite some academic studies. In the ones they cite, they found that, yes, the size of the premiums really did decline after publication, but only by 30%. They didn't go away completely. Of course, you can interpret this as the glass is 30% empty or the glass is 70% full. I take it all with a big grain of salt myself. I don't believe the decline is really as little as 30%; consider what's happened in the much-touted collateralized commodity funds and ETFs since they were created and publicized around 2006.[Struck out in light of staythecourse's comments, below].

The decline effect creates a problem. On the one hand, you don't want to jump onto some newly-discovered factor before it's had a chance to prove itself. On the other hand, by the time it has proven itself it may already be fading.

One very, very, very interesting (and disturbing) comment from that book:
There is a significant increase in trading by hedge funds in the period just before publication, suggesting that hedge funds have knowledge about the anomalies prior to journal publication.
According to Morningstar's style box breakdown of Vanguard Total Stock, about 2% of the stock market falls into the category they call "small-cap value." Since factor mavens invariably claims that Vanguard's factor-named funds aren't very good and their their preferred vehicles are smaller and "more value-y" than the stocks in the small-cap value index, the percentage of really good small-cap value stocks is probably less than 2%. Obviously if everyone wants them there won't be enough to go around, and privatefarmer suggests this is already happening.
Last edited by nisiprius on Mon Sep 11, 2017 6:23 pm, edited 2 times in total.
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Re: ownership of "small cap value" stocks

Post by staythecourse » Mon Sep 11, 2017 9:18 am

nisiprius wrote:
Mon Sep 11, 2017 9:10 am
I don't believe the decline is really as little as 30%; consider what's happened in the much-touted collateralized commodity funds and ETFs since they were created and publicized around 2006.
Nisi,

You are know enough to know that CCF have no PREMIUM that can not be diversified away. So there is no inherent expected return of the asset class beyond the collateral return. The reason CCF have done poor may be for several reasons or no reason at all (we haven't had any unexpected inflation or prolonged supply/ demand disconnect). Thinking it has anything to do with its publications by the Yale guys is a reach.

I do agree with your assessment about publications interfering with returns, but stocks have done just fine since ERP has been known hasn't it?

Good luck.
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Re: ownership of "small cap value" stocks

Post by Random Walker » Mon Sep 11, 2017 9:26 am

Publication of the premiums is a huge issue. That's why I first and foremost put my faith in the risk based explanations. The market prices risk, and therefore it would be illogical for the small and value premiums to disappear completely. I have a tougher time with the behavioral explanations, but even there, despite fancy computers and algorithms, I somehow think human behavior persistence will shine through. I have particular faith in value because it has both risk based and behavioral explanations.

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Re: ownership of "small cap value" stocks

Post by The Wizard » Mon Sep 11, 2017 10:06 am

OP is correct.
SCV stocks have been bid up over the past decade due to perceived bonus. So this lessens any advantage that existed previously.

Similarly with dividend stocks, typically larger companies. Certain investors have been crowding into those to get higher "income" thus driving up the price of those stocks and lessening the effective dividend payout percentage...
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Re: ownership of "small cap value" stocks

Post by betablocker » Mon Sep 11, 2017 10:24 am

privatefarmer wrote:
Mon Sep 11, 2017 7:35 am
I have lately been skeptical about the SCV "premium" going forward due to factor-crowding. So I looked up some of the stocks that were owned by DFSVX and VISVX and what I found was shocking (at least to me). If you look up some of the companies on Morningstar and click on ownership, it will list the top 10 mutual funds that own the company, by the number of shares they own.

For basically every "small cap value" company that I looked it, the ownership was almost exclusively small-cap value, small cap blend, or value funds. Total stock market funds only owned ~10% of the companies and the rest was owned by factor-based funds.

What this seems to tell me is that if every "passive investor" owned only the total stock market index these SCV companies would have FAR less dollars invested in them. In fact, ~90% of the money invested in them is from "factor-based" funds... If there was only a "small" amount of dollars chasing the SCV factor premium then you wouldn't expect factor-based funds to own such a large portion of these companies, correct?

Anyhow, it may be meaningless data and I'm certainly no expert but it seems like from a very simple observation of the ownership of these small/value companies that most of the money invested in them is from investors chasing the factor-premium and this seems like it would not only eat up any factor premium but would possibly lead to a bubble.

Just my .02
I am no expert either but the data seem to make sense to me. Small companies are a small portion of the TSM so TSM would own very little of them. Factor funds are betting that some portion of these small and mostly likely relatively ugly companies will do better than people would expect. At that point other non value funds and investors would start buying the stock and it would cease to be a value stock. Eventually, the value funds would sell the stock (after its momentum starts diminishing assuming they are screen for that) and reinvest in the next set of cheap stocks.

Is your concern that the value factor will be discredited and then money would be pulled from the funds causing these already crappy companies to go down even more? That is certainly possible and would be a great time to get into value but that's true about every asset in existence. People will pull money out of TSM and put it into bonds when they see Facebook or Alphabet starting to go down. If your concern is that the value factor will disappear forever then you have to believe that the market and investor behavior have fundamentally changed. People won't overestimate the growth of Amazon and overestimate how bad things will be for Kroger, Target, etc. That managers (who clearly know about this) won't be worried about losing their jobs because they didn't buy Amazon and bought Kroger instead. Just watch 10 minutes of the family office guys on CNBC's Halftime report and you'll know that the value premium will be alive and well.

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Re: ownership of "small cap value" stocks

Post by Doc » Mon Sep 11, 2017 10:33 am

The Wizard wrote:
Mon Sep 11, 2017 10:06 am
OP is correct.
SCV stocks have been bid up over the past decade due to perceived bonus. So this lessens any advantage that existed previously.

Similarly with dividend stocks, typically larger companies. Certain investors have been crowding into those to get higher "income" thus driving up the price of those stocks and lessening the effective dividend payout percentage...
I didn't think that is what the OP was addressing. Yes investors as a whole might be bidding up the price of small value stocks. But how much of the that "whole" is made up of passive investors?

I don't see any evidence that there is a significant effect here no matter what the cause might be.

Twelve month rolling return chart for Total stock, S&P 600 SV and CRSP SV funds

Image

http://quotes.morningstar.com/chart/fun ... 22%3A12%7D
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Re: ownership of "small cap value" stocks

Post by totality » Mon Sep 11, 2017 10:48 am

Thanks for the explanations, staythecourse and Random Walker, that helps me understand the factor viewpoint better.

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Re: ownership of "small cap value" stocks

Post by saltycaper » Mon Sep 11, 2017 1:11 pm

privatefarmer wrote:
Mon Sep 11, 2017 7:35 am

In fact, ~90% of the money invested in them is from "factor-based" funds...
This appears to be incorrect, thus rendering the rest of the post irrelevant. If you can show that 90% of the money invested in small-cap value companies is indeed from factor-based funds, I will stand corrected.
"I guess I should warn you, if I turn out to be particularly clear, you've probably misunderstood what I've said." --Alan Greenspan

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Re: ownership of "small cap value" stocks

Post by avalpert » Mon Sep 11, 2017 2:36 pm

privatefarmer wrote:
Mon Sep 11, 2017 7:35 am
I have lately been skeptical about the SCV "premium" going forward due to factor-crowding. So I looked up some of the stocks that were owned by DFSVX and VISVX and what I found was shocking (at least to me). If you look up some of the companies on Morningstar and click on ownership, it will list the top 10 mutual funds that own the company, by the number of shares they own.

For basically every "small cap value" company that I looked it, the ownership was almost exclusively small-cap value, small cap blend, or value funds. Total stock market funds only owned ~10% of the companies and the rest was owned by factor-based funds.

What this seems to tell me is that if every "passive investor" owned only the total stock market index these SCV companies would have FAR less dollars invested in them. In fact, ~90% of the money invested in them is from "factor-based" funds... If there was only a "small" amount of dollars chasing the SCV factor premium then you wouldn't expect factor-based funds to own such a large portion of these companies, correct?

Anyhow, it may be meaningless data and I'm certainly no expert but it seems like from a very simple observation of the ownership of these small/value companies that most of the money invested in them is from investors chasing the factor-premium and this seems like it would not only eat up any factor premium but would possibly lead to a bubble.

Just my .02
This is beyond meaningless data - this is pointless and wrong. Did you check small growth company ownership for comparison? Did you compare what % of shares are held by Vanguard Total Stock Market Index in say Microsoft compared to CDW (hint, they are nearly the same as you would expect)? Did you look at the total % owned by funds? If you did you wouldn't have asserted that 90% of money invested in these stocks is from factor-based funds.

Honestly, there is nothing in your observation to draw any conclusions from let alone the conclusions you draw.

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Re: ownership of "small cap value" stocks

Post by avalpert » Mon Sep 11, 2017 2:37 pm

The Wizard wrote:
Mon Sep 11, 2017 10:06 am
OP is correct.
SCV stocks have been bid up over the past decade due to perceived bonus. So this lessens any advantage that existed previously.
Has the spread in valuations between the high and low ends of the market narrowed? Where is the evidence that SCV has 'been bid up' over the last decade?

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Re: ownership of "small cap value" stocks

Post by nisiprius » Mon Sep 11, 2017 6:21 pm

staythecourse wrote:
Mon Sep 11, 2017 9:18 am
nisiprius wrote:
Mon Sep 11, 2017 9:10 am
I don't believe the decline is really as little as 30%; consider what's happened in the much-touted collateralized commodity funds and ETFs since they were created and publicized around 2006.
Nisi, you are know enough to know that CCF have no PREMIUM that can not be diversified away. So there is no inherent expected return of the asset class beyond the collateral return...
:oops: Yes, you are right.
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Re: ownership of "small cap value" stocks

Post by stlutz » Mon Sep 11, 2017 7:03 pm

I actually question the premise behind the OP. Who else would own the smallcap value stocks if it's not small and value funds?

Total market funds aren't going to own any higher proportion of La Quinta Holdings than they do of Exxon Mobil--that's the definition of being a total market fund--if you own 2% of XOM you own 2% of LQ. That leaves a lot of shares left over for others to own, and it seems entirely logical that smallcap and value funds are going to be the ones who invest in these stocks as opposed to, say, largecap growth investors.

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Re: ownership of "small cap value" stocks

Post by stlutz » Mon Sep 11, 2017 7:09 pm

Has the spread in valuations between the high and low ends of the market narrowed? Where is the evidence that SCV has 'been bid up' over the last decade?
I contend that you have no way of knowing. Suppose the market trades at 25x earnings and value as a group trades at 18x. Further suppose with these ratios you should have an expected premium. If the value stocks instead trade at 20x, your premium is pretty much gone.

Given how much multiples vary through time, I don't think I have any way to say, "premium at 18x; no premium at 20x". Instead, you make your bet and live with the results.

We should also keep in mind that by random chance value has 50% odds of outperforming growth over any period of time. If I tilt to value and beat the market, I'm happy, but I don't necessarily know that I earned an expected return premium as opposed to future events unfolding a way that unexpectedly favored value stocks. These two have certainly been confused with each other when looking at historical returns.

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Re: ownership of "small cap value" stocks

Post by avalpert » Mon Sep 11, 2017 8:43 pm

stlutz wrote:
Mon Sep 11, 2017 7:09 pm
Has the spread in valuations between the high and low ends of the market narrowed? Where is the evidence that SCV has 'been bid up' over the last decade?
I contend that you have no way of knowing. Suppose the market trades at 25x earnings and value as a group trades at 18x. Further suppose with these ratios you should have an expected premium. If the value stocks instead trade at 20x, your premium is pretty much gone.

Given how much multiples vary through time, I don't think I have any way to say, "premium at 18x; no premium at 20x". Instead, you make your bet and live with the results.
I agree that looking at snapshots in time, it would be hard to discern systemic change - but if you were looking at long term trends in the valuation spreads (say between the F&F groups of top 30% to minus 30%) you should see consistent tightening if that corner of the market is being bid up by people chasing a past premium.

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Re: ownership of "small cap value" stocks

Post by privatefarmer » Tue Sep 12, 2017 12:15 am

saltycaper wrote:
Mon Sep 11, 2017 1:11 pm
privatefarmer wrote:
Mon Sep 11, 2017 7:35 am

In fact, ~90% of the money invested in them is from "factor-based" funds...
This appears to be incorrect, thus rendering the rest of the post irrelevant. If you can show that 90% of the money invested in small-cap value companies is indeed from factor-based funds, I will stand corrected.
here's one example : ticker AAN is the largest held security by DFSVX. If you look at it's ownership on Morningstar they list the top 10 funds owning it, vanguard TSM index holds <10% of those shares and the rest are owned by factor-based funds such as fidelity small cap discover, DFSVX, vanguard small cap, t row price SCV, etc. I realize that this is only the top 10 funds but from this sample it's obvious that the ownership is almost exclusively factor-based funds. Obviously individual investors own this company as well, I am only looking at the funds. This is seen across the board amongst these "small value" companies, the funds that own them are almost exclusively factor-based funds.

I understand that since SCV is such a small part of the market, TSM index funds will not own that much of them relative to say the S/P 500. However, that does not mean that the ownership of the individual companies should be dominated by factor-based funds. What I am getting at is that these companies appear to be largely "propped up" by factor-based funds, when looking only at the funds that own these companies. If factor-based funds did not exist, these companies would have a MUCH lower valuation. In other words, it seems logical that as factor publication has increased, factor-based funds have grown in popularity and now own nearly all the value of these companies when only considering mutual funds (not considering individual investors who own the stocks).

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Re: ownership of "small cap value" stocks

Post by privatefarmer » Tue Sep 12, 2017 12:22 am

privatefarmer wrote:
Tue Sep 12, 2017 12:15 am
saltycaper wrote:
Mon Sep 11, 2017 1:11 pm
privatefarmer wrote:
Mon Sep 11, 2017 7:35 am

In fact, ~90% of the money invested in them is from "factor-based" funds...
This appears to be incorrect, thus rendering the rest of the post irrelevant. If you can show that 90% of the money invested in small-cap value companies is indeed from factor-based funds, I will stand corrected.
here's one example : ticker AAN is the largest held security by DFSVX. If you look at it's ownership on Morningstar they list the top 10 funds owning it, vanguard TSM index holds <10% of those shares and the rest are owned by factor-based funds such as fidelity small cap discover, DFSVX, vanguard small cap, t row price SCV, etc. I realize that this is only the top 10 funds but from this sample it's obvious that the ownership is almost exclusively factor-based funds. Obviously individual investors own this company as well, I am only looking at the funds. This is seen across the board amongst these "small value" companies, the funds that own them are almost exclusively factor-based funds.

I understand that since SCV is such a small part of the market, TSM index funds will not own that much of them relative to say the S/P 500. However, that does not mean that the ownership of the individual companies should be dominated by factor-based funds. What I am getting at is that these companies appear to be largely "propped up" by factor-based funds, when looking only at the funds that own these companies. If factor-based funds did not exist, these companies would have a MUCH lower valuation. In other words, it seems logical that as factor publication has increased, factor-based funds have grown in popularity and now own nearly all the value of these companies when only considering mutual funds (not considering individual investors who own the stocks).
Also looking at AAN as an example, Morningstar lists the type of funds that own it. Roughly 30,000,000 of the 45,000,000 shares owned by funds are owned by small cap funds. two-thirds of the shares that are owned by funds are owned by small-cap funds! I am assuming they classify TSM funds as "large blend". Maybe this is all meaningless, I don't really know, but it just seems like these factor-chasing funds are essentially propping up these companies and if there **was** a "premium" it could easily have been eaten up a long time ago by the influx of $$$s into these stocks that otherwise would be worth a fraction of what they are today....

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Re: ownership of "small cap value" stocks

Post by privatefarmer » Tue Sep 12, 2017 12:30 am

privatefarmer wrote:
Tue Sep 12, 2017 12:22 am
privatefarmer wrote:
Tue Sep 12, 2017 12:15 am
saltycaper wrote:
Mon Sep 11, 2017 1:11 pm
privatefarmer wrote:
Mon Sep 11, 2017 7:35 am

In fact, ~90% of the money invested in them is from "factor-based" funds...
This appears to be incorrect, thus rendering the rest of the post irrelevant. If you can show that 90% of the money invested in small-cap value companies is indeed from factor-based funds, I will stand corrected.
here's one example : ticker AAN is the largest held security by DFSVX. If you look at it's ownership on Morningstar they list the top 10 funds owning it, vanguard TSM index holds <10% of those shares and the rest are owned by factor-based funds such as fidelity small cap discover, DFSVX, vanguard small cap, t row price SCV, etc. I realize that this is only the top 10 funds but from this sample it's obvious that the ownership is almost exclusively factor-based funds. Obviously individual investors own this company as well, I am only looking at the funds. This is seen across the board amongst these "small value" companies, the funds that own them are almost exclusively factor-based funds.

I understand that since SCV is such a small part of the market, TSM index funds will not own that much of them relative to say the S/P 500. However, that does not mean that the ownership of the individual companies should be dominated by factor-based funds. What I am getting at is that these companies appear to be largely "propped up" by factor-based funds, when looking only at the funds that own these companies. If factor-based funds did not exist, these companies would have a MUCH lower valuation. In other words, it seems logical that as factor publication has increased, factor-based funds have grown in popularity and now own nearly all the value of these companies when only considering mutual funds (not considering individual investors who own the stocks).
Also looking at AAN as an example, Morningstar lists the type of funds that own it. Roughly 30,000,000 of the 45,000,000 shares owned by funds are owned by small cap funds. two-thirds of the shares that are owned by funds are owned by small-cap funds! I am assuming they classify TSM funds as "large blend". Maybe this is all meaningless, I don't really know, but it just seems like these factor-chasing funds are essentially propping up these companies and if there **was** a "premium" it could easily have been eaten up a long time ago by the influx of $$$s into these stocks that otherwise would be worth a fraction of what they are today....
One more point, when looking at AAN as an example, roughly 40% of it is owned by mutual funds according to Morningstar (the rest is owned by institutions which I assume may include hedge funds that also are chasing factor-premiums). And as I previously posted 2/3 of that is small-cap funds. So, ~25% of ticker AAN is owned by small-cap mutual funds... and only ~5% is owned by TSM index funds...

Breaking down AAN by ownership :
TSM index funds : 5%
Mid cap funds : 6%
small cap funds : 28%
institutions : 60%

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Re: ownership of "small cap value" stocks

Post by stlutz » Tue Sep 12, 2017 12:45 am

Breaking down AAN by ownership :
TSM index funds : 5%
Mid cap funds : 6%
small cap funds : 28%
institutions : 60%
What do you think the percentages should be? That is, what do you think would be consistent with investors not having piled into the stock and bid the price way up?

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Re: ownership of "small cap value" stocks

Post by gordoni2 » Tue Sep 12, 2017 2:22 am

Using Morningstar the owners of Apple (AAPL) appear to be:

31% large cap mutual funds
57% institutions

Thus AAPL appears "propped-up" by large-cap mutual funds in the same way Aaron's (AAN) is "propped-up" by small cap funds. When I did the numbers I get 45% of AAN held by small cap funds, so arguably AAN is "propped-up" to a greater extent than AAPL.

I think the heart of the issue though is whether small-cap value is overvalued. I don't think that can be answered by looking at ownership. I think it requires looking at P/E, P/B, growth rates, and so on, and comparing them to the mid and large cap market segments. Here are Vanguard's current numbers:

Code: Select all

                         P/E  P/B  5yr E growth
small cap value (VSIAX) 16.4  1.9     7.8%
small cap value (VTWV)  17.7  1.4     7.1%
small cap value (VIOV)  21.9  1.7     5.2%
mid cap value (VMVAX)   18.9  2.1     7.4%
large cap value (VVIAX) 18.8  2.2     4.8%
I think it is hard to argue on the basis of these numbers that small cap value is significantly overvalued relative to mid or large cap value.

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Re: ownership of "small cap value" stocks

Post by aegis965 » Tue Sep 12, 2017 3:24 am

privatefarmer wrote:
Mon Sep 11, 2017 7:35 am
Anyhow, it may be meaningless data and I'm certainly no expert but it seems like from a very simple observation of the ownership of these small/value companies that most of the money invested in them is from investors chasing the factor-premium and this seems like it would not only eat up any factor premium but would possibly lead to a bubble.
Value bubble... Is that an oxymoron?
"Value investing is at its core the marriage of a contrarian streak and a calculator." —Seth Klarman

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Re: ownership of "small cap value" stocks

Post by privatefarmer » Tue Sep 12, 2017 3:30 am

aegis965 wrote:
Tue Sep 12, 2017 3:24 am
privatefarmer wrote:
Mon Sep 11, 2017 7:35 am
Anyhow, it may be meaningless data and I'm certainly no expert but it seems like from a very simple observation of the ownership of these small/value companies that most of the money invested in them is from investors chasing the factor-premium and this seems like it would not only eat up any factor premium but would possibly lead to a bubble.
Value bubble... Is that an oxymoron?
depends on how you define "value". what Morningstar, fidelity, or vanguard defines as value may not be what warren buffet or Charlie munger define as value. So, yes, there certainly could be a bubble amongst the stocks that value funds invest in as they use simple metrics like p/b or p/e to determine what is "value".

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Re: ownership of "small cap value" stocks

Post by privatefarmer » Tue Sep 12, 2017 3:34 am

gordoni2 wrote:
Tue Sep 12, 2017 2:22 am
Using Morningstar the owners of Apple (AAPL) appear to be:

31% large cap mutual funds
57% institutions

Thus AAPL appears "propped-up" by large-cap mutual funds in the same way Aaron's (AAN) is "propped-up" by small cap funds. When I did the numbers I get 45% of AAN held by small cap funds, so arguably AAN is "propped-up" to a greater extent than AAPL.

I think the heart of the issue though is whether small-cap value is overvalued. I don't think that can be answered by looking at ownership. I think it requires looking at P/E, P/B, growth rates, and so on, and comparing them to the mid and large cap market segments. Here are Vanguard's current numbers:

Code: Select all

                         P/E  P/B  5yr E growth
small cap value (VSIAX) 16.4  1.9     7.8%
small cap value (VTWV)  17.7  1.4     7.1%
small cap value (VIOV)  21.9  1.7     5.2%
mid cap value (VMVAX)   18.9  2.1     7.4%
large cap value (VVIAX) 18.8  2.2     4.8%
I think it is hard to argue on the basis of these numbers that small cap value is significantly overvalued relative to mid or large cap value.
So I may have a completely false understanding of all this, but I would expect AAPL to be mostly owned by large cap mutual funds and that is fine as they are essentially the same as TSM index funds, very little difference between an s/p 500 fund and a TSM fund. In other words, if everyone were to go from investing in TSM fund to investing in an s/p 500 fund, the value of AAPL would increase but not that significantly. However, if everyone went from a TSM fund to a SCV fund the value of these small companies would skyrocket. This is stating the obvious I know. But the fact is, these small companies are in fact largely owned by factor-based funds so it seems that a lot of $$$ has in fact gone from what would be TSM fund into the factor funds, thus inflating the prices of these companies.

All that being said, you look at the P/E of VSIAX and it seems fine so maybe there is nothing to worry about.

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Re: ownership of "small cap value" stocks

Post by aegis965 » Tue Sep 12, 2017 4:07 am

privatefarmer wrote:
Tue Sep 12, 2017 3:30 am
aegis965 wrote:
Tue Sep 12, 2017 3:24 am
privatefarmer wrote:
Mon Sep 11, 2017 7:35 am
Anyhow, it may be meaningless data and I'm certainly no expert but it seems like from a very simple observation of the ownership of these small/value companies that most of the money invested in them is from investors chasing the factor-premium and this seems like it would not only eat up any factor premium but would possibly lead to a bubble.
Value bubble... Is that an oxymoron?
depends on how you define "value". what Morningstar, fidelity, or vanguard defines as value may not be what warren buffet or Charlie munger define as value. So, yes, there certainly could be a bubble amongst the stocks that value funds invest in as they use simple metrics like p/b or p/e to determine what is "value".
I still can't get my head around the notion of a value bubble. I can imagine the value spread narrows but don't know how that becomes a bubble from there on. If the value spread narrows to an unprofitable degree, wouldn't most abandon this strategy? Am I misunderstanding something here?
"Value investing is at its core the marriage of a contrarian streak and a calculator." —Seth Klarman

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Re: ownership of "small cap value" stocks

Post by Longtermgrowth » Tue Sep 12, 2017 4:17 am

I remember a thread not long ago, stating that Vanguard recently changed the way they calculate P/E to something similar, or exactly like, Morningstar's Price/Prospective Earnings: forward-looking based on historical data.

When I check Vanguard's site tonight, it's saying those numbers posted above are from 7/31/17. So it will probably be lagging Morningstar's hopefully more current numbers.

Things can get a little more eye popping looking at some of these funds on etf.com with their P/E calculation method: "Weighted average ratio of prices of a fund’s stocks to trailing earnings of underlying stocks".

VSIAX/VBR: P/E: 32.03

VTWV: P/E: 90.71

VIOV: P/E 101.33

VMVAX/VOE: P/E: 29.16

VVIAX/VTV: P/E: 20.99

And I'll add IJS (iShares S&P Small-Cap 600 Value ETF) since it seems to be popular here: P/E: 103.87

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Re: ownership of "small cap value" stocks

Post by privatefarmer » Tue Sep 12, 2017 6:46 am

aegis965 wrote:
Tue Sep 12, 2017 4:07 am
privatefarmer wrote:
Tue Sep 12, 2017 3:30 am
aegis965 wrote:
Tue Sep 12, 2017 3:24 am
privatefarmer wrote:
Mon Sep 11, 2017 7:35 am
Anyhow, it may be meaningless data and I'm certainly no expert but it seems like from a very simple observation of the ownership of these small/value companies that most of the money invested in them is from investors chasing the factor-premium and this seems like it would not only eat up any factor premium but would possibly lead to a bubble.
Value bubble... Is that an oxymoron?
depends on how you define "value". what Morningstar, fidelity, or vanguard defines as value may not be what warren buffet or Charlie munger define as value. So, yes, there certainly could be a bubble amongst the stocks that value funds invest in as they use simple metrics like p/b or p/e to determine what is "value".
I still can't get my head around the notion of a value bubble. I can imagine the value spread narrows but don't know how that becomes a bubble from there on. If the value spread narrows to an unprofitable degree, wouldn't most abandon this strategy? Am I misunderstanding something here?
well anything can get into bubble-territory. just bc vanguard or Morningstar or some other company labels a stock as a "value" stock does NOT mean that it is guaranteed to be "cheap" relative to what it "should be" worth or its "intrinsic value" as buffett would say. As the post above illustrates, depending on how you calculate p/e, the number can range widely. didn't schiller even modify how he calculated 10-year p/e to using cyclical data? and if you are using a 10-year p/e that looks back at the last 10 years, you'd be including the '08/'09 crash where you had negative earnings, I would think that would totally mess up your calculation as the economy today Is in a totally different place than it was during the recession.

but, yes, you certainly can have a "value" bubble bc "value" is calculated differently depending on who's calculating it but if investor behavior has a role then greed followed by fear could easily create a bubble in value stocks.

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Re: ownership of "small cap value" stocks

Post by saltycaper » Tue Sep 12, 2017 6:47 am

privatefarmer wrote:
Tue Sep 12, 2017 12:22 am

I realize that this is only the top 10 funds but from this sample it's obvious that the ownership is almost exclusively factor-based funds.
That's key though. You can't look at that data and conclude that "~90% of the money invested in them is from 'factor-based' funds". It's simply not true. Not even the majority of shares are owned by factor-based funds, let alone 90%.
privatefarmer wrote:
Tue Sep 12, 2017 12:22 am

However, that does not mean that the ownership of the individual companies should be dominated by factor-based funds. What I am getting at is that these companies appear to be largely "propped up" by factor-based funds, when looking only at the funds that own these companies. If factor-based funds did not exist, these companies would have a MUCH lower valuation.
Just because small-cap funds, or factor-based funds, or any particular type of fund owns a substantial portion of a company, it does not follow that the valuation of the company would be lower if those funds did not exist. You don't know what would happen to those dollars, and you don't know what other dollars might be invested in the company if the "factor-based" dollars weren't there. Consider a situation where investors start pulling their money out of total market index funds. Does that mean we can be sure the price of large-cap companies will fall? No. We can't say for sure. Similarly, we can't say for sure what would happen to the price of small-cap stocks if these factor-based funds did not exist.
privatefarmer wrote:
But the fact is, these small companies are in fact largely owned by factor-based funds so it seems that a lot of $$$ has in fact gone from what would be TSM fund into the factor funds, thus inflating the prices of these companies.
We don't know where the money would have gone or if the prices are even "inflated."
"I guess I should warn you, if I turn out to be particularly clear, you've probably misunderstood what I've said." --Alan Greenspan

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Re: ownership of "small cap value" stocks

Post by privatefarmer » Tue Sep 12, 2017 7:11 am

saltycaper wrote:
Tue Sep 12, 2017 6:47 am
privatefarmer wrote:
Tue Sep 12, 2017 12:22 am

I realize that this is only the top 10 funds but from this sample it's obvious that the ownership is almost exclusively factor-based funds.
That's key though. You can't look at that data and conclude that "~90% of the money invested in them is from 'factor-based' funds". It's simply not true. Not even the majority of shares are owned by factor-based funds, let alone 90%.
well actually after analyzing it a bit more on Morningstar, they do list the types of funds that own each company. For ticker AAN, for example, only 12.5% of the funds are classified as "large blend" which I assume would be the TSM index funds, and the rest are classified as small/mid cap (what I am referring to as "factor-based" funds).

But I get your point. Looking at who owns a company is irrelevant. These companies could just as easily be owned by individual investors instead of funds and they could still be worth the same amount. Ie Bill Gates could've sold his shares of Microsoft to a small cap fund when it was just getting going and Microsoft would've largely been owned by that fund. Doesn't change anything about Microsoft, it still would've exploded assuming management didn't change. The fund that bought the shares would've simply been rewarded instead of Bill Gates.

What I do understand more clearly now, however, is that when you buy any fund that tilts away from the TSM you really are acting as an active investor/stock picker. Maybe won't have as high of transaction costs/turnover as an active stock picker but you still are making an active bet on one sector of the market. Which may be a fine and reasonable thing to do, after all active investors are the ones who set the market prices not TSM index investors and they are what make the market efficient.

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Re: ownership of "small cap value" stocks

Post by avalpert » Tue Sep 12, 2017 7:22 am

privatefarmer wrote:
Tue Sep 12, 2017 3:34 am
gordoni2 wrote:
Tue Sep 12, 2017 2:22 am
Using Morningstar the owners of Apple (AAPL) appear to be:

31% large cap mutual funds
57% institutions

Thus AAPL appears "propped-up" by large-cap mutual funds in the same way Aaron's (AAN) is "propped-up" by small cap funds. When I did the numbers I get 45% of AAN held by small cap funds, so arguably AAN is "propped-up" to a greater extent than AAPL.

I think the heart of the issue though is whether small-cap value is overvalued. I don't think that can be answered by looking at ownership. I think it requires looking at P/E, P/B, growth rates, and so on, and comparing them to the mid and large cap market segments. Here are Vanguard's current numbers:

Code: Select all

                         P/E  P/B  5yr E growth
small cap value (VSIAX) 16.4  1.9     7.8%
small cap value (VTWV)  17.7  1.4     7.1%
small cap value (VIOV)  21.9  1.7     5.2%
mid cap value (VMVAX)   18.9  2.1     7.4%
large cap value (VVIAX) 18.8  2.2     4.8%
I think it is hard to argue on the basis of these numbers that small cap value is significantly overvalued relative to mid or large cap value.
So I may have a completely false understanding of all this, but I would expect AAPL to be mostly owned by large cap mutual funds and that is fine as they are essentially the same as TSM index funds, very little difference between an s/p 500 fund and a TSM fund. In other words, if everyone were to go from investing in TSM fund to investing in an s/p 500 fund, the value of AAPL would increase but not that significantly. However, if everyone went from a TSM fund to a SCV fund the value of these small companies would skyrocket. This is stating the obvious I know. But the fact is, these small companies are in fact largely owned by factor-based funds so it seems that a lot of $$$ has in fact gone from what would be TSM fund into the factor funds, thus inflating the prices of these companies.

All that being said, you look at the P/E of VSIAX and it seems fine so maybe there is nothing to worry about.
I'm not at all understanding why you would think small cap stocks wouldn't be owned mostly by small cap funds just as large cap stocks are owned mostly by large cap funds. By definition, market weight total cap funds will own the same percent of large cap and small cap funds - in each case, would you expect other funds targeting that segment to own the rest?

I think you started with a hypothesis and set out to prove it rather than disprove it so you are seeing what you want to see - if you don't like large cap comparisons look at small growth comparisons and tell what percentage of ownership is total market vs. small cap funds.

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Re: ownership of "small cap value" stocks

Post by avalpert » Tue Sep 12, 2017 7:24 am

aegis965 wrote:
Tue Sep 12, 2017 4:07 am
privatefarmer wrote:
Tue Sep 12, 2017 3:30 am
aegis965 wrote:
Tue Sep 12, 2017 3:24 am
privatefarmer wrote:
Mon Sep 11, 2017 7:35 am
Anyhow, it may be meaningless data and I'm certainly no expert but it seems like from a very simple observation of the ownership of these small/value companies that most of the money invested in them is from investors chasing the factor-premium and this seems like it would not only eat up any factor premium but would possibly lead to a bubble.
Value bubble... Is that an oxymoron?
depends on how you define "value". what Morningstar, fidelity, or vanguard defines as value may not be what warren buffet or Charlie munger define as value. So, yes, there certainly could be a bubble amongst the stocks that value funds invest in as they use simple metrics like p/b or p/e to determine what is "value".
I still can't get my head around the notion of a value bubble. I can imagine the value spread narrows but don't know how that becomes a bubble from there on. If the value spread narrows to an unprofitable degree, wouldn't most abandon this strategy? Am I misunderstanding something here?
If the value spread narrows, and they are indeed riskier, then the risk shows up and the returns are lower than the rest of the market - yes people would abandon the strategy, but in a bubble it wouldn't be until after it pops.

For what it is worth, I don't see the evidence of said bubble.

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Re: ownership of "small cap value" stocks

Post by avalpert » Tue Sep 12, 2017 7:28 am

privatefarmer wrote:
Tue Sep 12, 2017 7:11 am

What I do understand more clearly now, however, is that when you buy any fund that tilts away from the TSM you really are acting as an active investor/stock picker. Maybe won't have as high of transaction costs/turnover as an active stock picker but you still are making an active bet on one sector of the market.
Only if you use a specific definition of 'active investor' which is not generally what is meant in the 'active' vs 'passive' discussions (except when someone is trying to equivocate to make it seem like there is no real difference between active and passive and we are all active after all). Choosing to overweight exposure to 'value' and 'size' risks is no more 'active investing' than choosing to overweight exposure to 'beta' risk relative to the global stock/bond mix - are people who don't target holding stocks and bond at their approximate market weights active investors in your mind?

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Re: ownership of "small cap value" stocks

Post by aegis965 » Tue Sep 12, 2017 8:48 am

privatefarmer wrote:
Tue Sep 12, 2017 6:46 am
aegis965 wrote:
Tue Sep 12, 2017 4:07 am
privatefarmer wrote:
Tue Sep 12, 2017 3:30 am
aegis965 wrote:
Tue Sep 12, 2017 3:24 am
privatefarmer wrote:
Mon Sep 11, 2017 7:35 am
Anyhow, it may be meaningless data and I'm certainly no expert but it seems like from a very simple observation of the ownership of these small/value companies that most of the money invested in them is from investors chasing the factor-premium and this seems like it would not only eat up any factor premium but would possibly lead to a bubble.
Value bubble... Is that an oxymoron?
depends on how you define "value". what Morningstar, fidelity, or vanguard defines as value may not be what warren buffet or Charlie munger define as value. So, yes, there certainly could be a bubble amongst the stocks that value funds invest in as they use simple metrics like p/b or p/e to determine what is "value".
I still can't get my head around the notion of a value bubble. I can imagine the value spread narrows but don't know how that becomes a bubble from there on. If the value spread narrows to an unprofitable degree, wouldn't most abandon this strategy? Am I misunderstanding something here?
well anything can get into bubble-territory. just bc vanguard or Morningstar or some other company labels a stock as a "value" stock does NOT mean that it is guaranteed to be "cheap" relative to what it "should be" worth or its "intrinsic value" as buffett would say. As the post above illustrates, depending on how you calculate p/e, the number can range widely. didn't schiller even modify how he calculated 10-year p/e to using cyclical data? and if you are using a 10-year p/e that looks back at the last 10 years, you'd be including the '08/'09 crash where you had negative earnings, I would think that would totally mess up your calculation as the economy today Is in a totally different place than it was during the recession.

but, yes, you certainly can have a "value" bubble bc "value" is calculated differently depending on who's calculating it but if investor behavior has a role then greed followed by fear could easily create a bubble in value stocks.
Most value funds use multiple value metrics to determine "value", I've seen some use six or even more to diversify their signal. I would say that many fund have been capturing the "generic" value. How do you reconcile this?
avalpert wrote:
Tue Sep 12, 2017 7:24 am
aegis965 wrote:
Tue Sep 12, 2017 4:07 am
privatefarmer wrote:
Tue Sep 12, 2017 3:30 am
aegis965 wrote:
Tue Sep 12, 2017 3:24 am
privatefarmer wrote:
Mon Sep 11, 2017 7:35 am
Anyhow, it may be meaningless data and I'm certainly no expert but it seems like from a very simple observation of the ownership of these small/value companies that most of the money invested in them is from investors chasing the factor-premium and this seems like it would not only eat up any factor premium but would possibly lead to a bubble.
Value bubble... Is that an oxymoron?
depends on how you define "value". what Morningstar, fidelity, or vanguard defines as value may not be what warren buffet or Charlie munger define as value. So, yes, there certainly could be a bubble amongst the stocks that value funds invest in as they use simple metrics like p/b or p/e to determine what is "value".
I still can't get my head around the notion of a value bubble. I can imagine the value spread narrows but don't know how that becomes a bubble from there on. If the value spread narrows to an unprofitable degree, wouldn't most abandon this strategy? Am I misunderstanding something here?
If the value spread narrows, and they are indeed riskier, then the risk shows up and the returns are lower than the rest of the market - yes people would abandon the strategy, but in a bubble it wouldn't be until after it pops.

For what it is worth, I don't see the evidence of said bubble.
I define a bubble as a market that ignores the intrinsic value of an asset (or assets) and goes with and keeps pricing in whatever unrealistic expectations there are. Do we have the same definition of a market bubble? I can't see the said scenario happen in value space in my definition of a bubble because value is a relative concept.

Thanks for both of your inputs btw, I have learned a lot.
"Value investing is at its core the marriage of a contrarian streak and a calculator." —Seth Klarman

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Re: ownership of "small cap value" stocks

Post by rkhusky » Tue Sep 12, 2017 2:28 pm

avalpert wrote:
Tue Sep 12, 2017 7:24 am
If the value spread narrows, and they are indeed riskier, then the risk shows up and the returns are lower than the rest of the market - yes people would abandon the strategy, but in a bubble it wouldn't be until after it pops.
For what it is worth, I don't see the evidence of said bubble.
People have been told that they need to be patient with small-value, that it could under-perform for years, that you need to be in for the long haul. If those holding small value are true believers, why would they sell after 10 or 20 years of under-performance?

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Re: ownership of "small cap value" stocks

Post by rkhusky » Tue Sep 12, 2017 2:31 pm

aegis965 wrote:
Tue Sep 12, 2017 8:48 am
I define a bubble as a market that ignores the intrinsic value of an asset (or assets) ...
The market determines the value of an asset. There is no value outside the market.
Last edited by rkhusky on Tue Sep 12, 2017 2:31 pm, edited 1 time in total.

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Re: ownership of "small cap value" stocks

Post by avalpert » Tue Sep 12, 2017 2:31 pm

rkhusky wrote:
Tue Sep 12, 2017 2:28 pm
avalpert wrote:
Tue Sep 12, 2017 7:24 am
If the value spread narrows, and they are indeed riskier, then the risk shows up and the returns are lower than the rest of the market - yes people would abandon the strategy, but in a bubble it wouldn't be until after it pops.
For what it is worth, I don't see the evidence of said bubble.
People have been told that they need to be patient with small-value, that it could under-perform for years, that you need to be in for the long haul. If those holding small value are true believers, why would they sell after 10 or 20 years of under-performance?
Participants in 'bubble' phases of an investment don't tend to be true believers or patient - they are in it for the quick buck chasing the next big thing, something spooks them and away they flee popping the bubble.

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Re: ownership of "small cap value" stocks

Post by rkhusky » Tue Sep 12, 2017 2:33 pm

avalpert wrote:
Tue Sep 12, 2017 2:31 pm
rkhusky wrote:
Tue Sep 12, 2017 2:28 pm
avalpert wrote:
Tue Sep 12, 2017 7:24 am
If the value spread narrows, and they are indeed riskier, then the risk shows up and the returns are lower than the rest of the market - yes people would abandon the strategy, but in a bubble it wouldn't be until after it pops.
For what it is worth, I don't see the evidence of said bubble.
People have been told that they need to be patient with small-value, that it could under-perform for years, that you need to be in for the long haul. If those holding small value are true believers, why would they sell after 10 or 20 years of under-performance?
Participants in 'bubble' phases of an investment don't tend to be true believers or patient - they are in it for the quick buck chasing the next big thing, something spooks them and away they flee popping the bubble.
Per the OP, are the current investors in small value true believers or in it for the quick buck?

avalpert
Posts: 6197
Joined: Sat Mar 22, 2008 4:58 pm

Re: ownership of "small cap value" stocks

Post by avalpert » Tue Sep 12, 2017 2:36 pm

rkhusky wrote:
Tue Sep 12, 2017 2:33 pm
avalpert wrote:
Tue Sep 12, 2017 2:31 pm
rkhusky wrote:
Tue Sep 12, 2017 2:28 pm
avalpert wrote:
Tue Sep 12, 2017 7:24 am
If the value spread narrows, and they are indeed riskier, then the risk shows up and the returns are lower than the rest of the market - yes people would abandon the strategy, but in a bubble it wouldn't be until after it pops.
For what it is worth, I don't see the evidence of said bubble.
People have been told that they need to be patient with small-value, that it could under-perform for years, that you need to be in for the long haul. If those holding small value are true believers, why would they sell after 10 or 20 years of under-performance?
Participants in 'bubble' phases of an investment don't tend to be true believers or patient - they are in it for the quick buck chasing the next big thing, something spooks them and away they flee popping the bubble.
Per the OP, are the current investors in small value true believers or in it for the quick buck?
Well I wasn't responding to the OP, I was responding to a question of what a 'value bubble' would look like. If I had to guess about today's investors I would expect it to be a mix of people in it for a quick buck, people 'diversifying' because they were told that is what you do, people who think value funds are cool and a small number who are true believers in a 'small' and 'value' risk premium.

rkhusky
Posts: 4405
Joined: Thu Aug 18, 2011 8:09 pm

Re: ownership of "small cap value" stocks

Post by rkhusky » Tue Sep 12, 2017 3:01 pm

avalpert wrote:
Tue Sep 12, 2017 2:36 pm
rkhusky wrote:
Tue Sep 12, 2017 2:33 pm
Per the OP, are the current investors in small value true believers or in it for the quick buck?
Well I wasn't responding to the OP, I was responding to a question of what a 'value bubble' would look like. If I had to guess about today's investors I would expect it to be a mix of people in it for a quick buck, people 'diversifying' because they were told that is what you do, people who think value funds are cool and a small number who are true believers in a 'small' and 'value' risk premium.
It would be interesting to know if this were true or not. Will hedge and/or quant funds stay in until they don't see short term gains or are they in for the long haul? Presumably funds like DFA SV are in for the long haul, but what about investors in DFA SV or similar? Investors in TSM presumably don't care about factors, at least in that part of their portfolio. If the majority of investors are in for the long haul, would that eliminate the premium? Does the premium depend on lots of impatient investors buying and selling?

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