Small Value: 15 years of underperforming

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Elysium
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Small Value: 15 years of underperforming

Post by Elysium » Thu Nov 22, 2018 6:25 pm

Small Value is now underperforming Small Growth for the last 15 years. Not a lot of insight there. But, the idea SV is superior to SG may not actually have anything, other than all asset classes may perform differently depending on period used.

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Re: Small Value: 15 years of underperforming

Post by palaheel » Thu Nov 22, 2018 6:49 pm

Growth being better than Value certainly happens. This table shows the odds from a longer study involving multiple 1, 5, 15, etc periods:

https://paulmerriman.com/wp-content/upl ... isons.pdf

SCV was the best asset class for 56% of the 15 year periods, SCG for less than 8%. The starting point differs for different asset classes, so there's a lot of missing information. The US information goes back to roughly 1928.
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Re: Small Value: 15 years of underperforming

Post by columbia » Thu Nov 22, 2018 6:53 pm

That’s the problem with depending on a particular asset class to outperform another: it might not ever happen again, much less do so to one’s increased benefit.

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Re: Small Value: 15 years of underperforming

Post by nisiprius » Thu Nov 22, 2018 6:56 pm

I'm pretty skeptical about factor-based investing, I don't practice it, and I agree with you that the evidence for the superiority of small-cap value is weak, compared the confident rhetoric of advocates. However:

Blue: Vanguard Small-Cap Value Index Fund, VISVX
Red: Vanguard Small-Cap Growth Index Fund, VISGX
Yellow: Vanguard Total Stock Market Index Fund, VTSMX

Source

Image

a) Technically you're right that small-cap value had a lower return than small-cap growth, but the annualized difference was only 0.39%. Personally I'd prefer to word this as "roughly tied" or "failed to outperform" rather than "underperformed." If I had faith in a strategy I wouldn't be too upset by an "underperformance" of -0.39%.

Given all the talk about small-cap value being so great, and small-cap growth being "the black hole of investing," the failure to see much difference between them does cast doubt on the robustness of any supposed effects.

b) Both small-cap value and small-cap growth outperformed Total Stock, as measured simply by dollars. If you're pointing to raw dollars and don't care about risk, a small-cap value tilt was still beneficial. It is only when you look at risk-adjusted return as measured by the Sharpe ratio that you find that the stock market as a whole was better than either of them (0.60 for the whole market, 0.53 for small-cap value, 0.54 for small-cap growth).

c) You didn't say why you chose 15 years. You really need to say why you chose 15 years. The salient characteristic of 1998-style factor-based strategies is that they had one brief shining moment in 2000-2002, and they really did shine:

Blue: Vanguard Small-Cap Value Index Fund, VISVX
Red: Vanguard Small-Cap Growth Index Fund, VISGX
Yellow: Vanguard Total Stock Market Index Fund, VTSMX
Image

So, I have noticed, advocates of factor investing almost always include 2000-2002 in their time frame without giving a reason why, and skeptics almost always exclude it, again without saying why.

In any case, 2000-2002 happened. And going up when the stock market was going down is pretty impressive. Unfortunately, financial data is characterized by extreme burstiness. The averages over even long time periods are dominated by rare exceptional periods within the data. The unanswerable question about small-cap value is whether we have good reason to believe that a small-cap value investor, patient enough to hold on for decades is pretty sure to catch another period like 2000-2002.
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Re: Small Value: 15 years of underperforming

Post by Socrates » Thu Nov 22, 2018 7:12 pm

Vanguard small cap value index is much more midcap than small cap value
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Re: Small Value: 15 years of underperforming

Post by JoMoney » Thu Nov 22, 2018 7:25 pm

Depending how you measure it / what index you use, Small-Growth had better performance over 20+ years, and the slightly larger Mid-Caps did even better than 'small'
Image
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Re: Small Value: 15 years of underperforming

Post by palaheel » Thu Nov 22, 2018 7:30 pm

nisiprius wrote:
Thu Nov 22, 2018 6:56 pm

b) Both small-cap value and small-cap growth outperformed Total Stock, as measured simply by dollars. If you're pointing to raw dollars and don't care about risk, a small-cap value tilt was still beneficial. It is only when you look at risk-adjusted return as measured by the Sharpe ratio that you find that the stock market as a whole was better than either of them (0.60 for the whole market, 0.53 for small-cap value, 0.54 for small-cap growth).
Please help my understanding of risk-adjusted returns. You said that a performance difference of 0.39% over 15 years is not very significant. I agree. The Sharpe ratio difference of whole market and SCV is 0.07. What would be the line between "not very significant" and "starting to be significant"?
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Re: Small Value: 15 years of underperforming

Post by samsdad » Thu Nov 22, 2018 7:32 pm

<whispers>
small cap blend!

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Re: Small Value: 15 years of underperforming

Post by columbia » Thu Nov 22, 2018 7:35 pm

Socrates28 wrote:
Thu Nov 22, 2018 7:12 pm
Vanguard small cap value index is much more midcap than small cap value
Whenever the VG SCV is accused of not being small and value enough, IJS is mentioned. It also underperformed SCG:


https://www.portfoliovisualizer.com/bac ... ion3_3=100

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Re: Small Value: 15 years of underperforming

Post by palaheel » Thu Nov 22, 2018 7:41 pm

Socrates28 wrote:
Thu Nov 22, 2018 7:12 pm
Vanguard small cap value index is much more midcap than small cap value
VBR is more midcap. VIOV is small cap.
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Re: Small Value: 15 years of underperforming

Post by deltaneutral83 » Thu Nov 22, 2018 8:00 pm

palaheel wrote:
Thu Nov 22, 2018 7:41 pm
Socrates28 wrote:
Thu Nov 22, 2018 7:12 pm
Vanguard small cap value index is much more midcap than small cap value
VBR is more midcap. VIOV is small cap.
Yep. I use VIOV but the liquidity is enough to get my attention which means the average BH is probably not interested. B/A is frequently 12-18 cents on $127-$150 which is where it's traded in 2018.

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Re: Small Value: 15 years of underperforming

Post by stlutz » Thu Nov 22, 2018 8:07 pm

Okay, so here is a comparison of Vanguard Small Growth and Value with DFA Small Value thrown in from 6/98 through 9/18:

https://www.portfoliovisualizer.com/bac ... ion3_3=100

Results:

VG Small Value: 9.06%
VG Small Growth: 9.45%

DFA Small Value: 9.87%

I pulled down the monthly returns from the Ken French data library (http://mba.tuck.dartmouth.edu/pages/fac ... brary.html), I get the following annualized returns for the same period:

Small Value: 12.28%
Small Growth: 7.58%

So, this is the problem with the whole smallcap value thing: Theoretically over this period the value premium in smallcaps was 4.70% per year. That's quite large. The actual premium when using index funds was -.39%.

That's the problem with the big premiums people are looking for by tilting to value in the small cap face. The theoretical numbers simply don't correlate to what real-world mutual funds are investing on (or can invest in). In fact, if you run a factor regression on Vanguard Small Growth, it has a modestly positive loading on value!

A fair number of people believe that the value premium is much larger in small caps than it is in large caps. This appears not to be the case--this result is based on more of a quirk in how the databases were used as opposed to representing real world return differences. In the real world, there is no small cap growth "black hole".

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Re: Small Value: 15 years of underperforming

Post by nisiprius » Thu Nov 22, 2018 9:04 pm

palaheel wrote:
Thu Nov 22, 2018 7:30 pm
nisiprius wrote:
Thu Nov 22, 2018 6:56 pm

b) Both small-cap value and small-cap growth outperformed Total Stock, as measured simply by dollars. If you're pointing to raw dollars and don't care about risk, a small-cap value tilt was still beneficial. It is only when you look at risk-adjusted return as measured by the Sharpe ratio that you find that the stock market as a whole was better than either of them (0.60 for the whole market, 0.53 for small-cap value, 0.54 for small-cap growth).
Please help my understanding of risk-adjusted returns. You said that a performance difference of 0.39% over 15 years is not very significant. I agree. The Sharpe ratio difference of whole market and SCV is 0.07. What would be the line between "not very significant" and "starting to be significant"?
Don't know. Probably not significant on the Sharpe ratio, but significant in the sense of the performance difference being accounted for by risk.

I don't know how to get an objective handle on this, but one thing that's been showing up in my matter-scatter explorations is that, almost without exception, strategies touted as superior have both slightly higher return and slightly higher risk. The risk is virtually always slightly higher. Risk is harder to notice and doesn't show up in 1-3-5-10-year return tables. The Sharpe ratio at least gives you a way to correct for that.

The point is not that Total Stock funds has a significantly higher Sharpe ratio than the small-cap funds, it's that the outperformance in dollars of the small-cap funds is illusory once risk is taken into account.

People sometimes say "you can't eat Sharpe ratio" but that isn't true. In a balanced portfolio with both stocks and bonds, if you increase the Sharpe ratio within the stock allocation, and then adjust the stock/bond allocation to match the standard deviation of the original portfolio, you end up--every time I've tried it--with higher return for the same portfolio. Not higher as in "oh, boy, I want it," but higher in the sense of "the first portfolio had no demonstrable benefit compared to the second."
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Re: Small Value: 15 years of underperforming

Post by vineviz » Thu Nov 22, 2018 9:06 pm

columbia wrote:
Thu Nov 22, 2018 7:35 pm
Socrates28 wrote:
Thu Nov 22, 2018 7:12 pm
Vanguard small cap value index is much more midcap than small cap value
Whenever the VG SCV is accused of not being small and value enough, IJS is mentioned. It also underperformed SCG:


https://www.portfoliovisualizer.com/bac ... ion3_3=100
Why not compare IJS to the equivalent growth index, IJT?

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Re: Small Value: 15 years of underperforming

Post by Random Musings » Thu Nov 22, 2018 9:28 pm

JoMoney wrote:
Thu Nov 22, 2018 7:25 pm
Depending how you measure it / what index you use, Small-Growth had better performance over 20+ years, and the slightly larger Mid-Caps did even better than 'small'
Image
As an individual investor, your personal "experiences" in investing in these asset classes, even assuming you stayed the course, would depend on your time you started investing in those asset classes and your cash flow inputs into those asset classes during that time. So many different stories to tell!!

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Re: Small Value: 15 years of underperforming

Post by columbia » Thu Nov 22, 2018 9:47 pm

vineviz wrote:
Thu Nov 22, 2018 9:06 pm
columbia wrote:
Thu Nov 22, 2018 7:35 pm
Socrates28 wrote:
Thu Nov 22, 2018 7:12 pm
Vanguard small cap value index is much more midcap than small cap value
Whenever the VG SCV is accused of not being small and value enough, IJS is mentioned. It also underperformed SCG:


https://www.portfoliovisualizer.com/bac ... ion3_3=100
Why not compare IJS to the equivalent growth index, IJT?

https://www.portfoliovisualizer.com/bac ... ion2_2=100

Growth spanked value (for those two ETFs) during the timeframe specified in the OP. We’re now discussing a different timeframe?

https://www.portfoliovisualizer.com/bac ... ion2_2=100

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Re: Small Value: 15 years of underperforming

Post by whodidntante » Thu Nov 22, 2018 10:04 pm

Happy Thanksgiving, whether your portfolio is float weighted or not!

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Re: Small Value: 15 years of underperforming

Post by stan1 » Thu Nov 22, 2018 10:44 pm

C'mon y'all:

Clearly everyone should have bought AAPL in 1985 and kept their resolve in the early years.

That's part of the fun side of back testing.

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Re: Small Value: 15 years of underperforming

Post by grabiner » Thu Nov 22, 2018 10:56 pm

nisiprius wrote:
Thu Nov 22, 2018 6:56 pm
c) You didn't say why you chose 15 years. You really need to say why you chose 15 years. The salient characteristic of 1998-style factor-based strategies is that they had one brief shining moment in 2000-2002, and they really did shine:

Blue: Vanguard Small-Cap Value Index Fund, VISVX
Red: Vanguard Small-Cap Growth Index Fund, VISGX
Yellow: Vanguard Total Stock Market Index Fund, VTSMX
Image

So, I have noticed, advocates of factor investing almost always include 2000-2002 in their time frame without giving a reason why, and skeptics almost always exclude it, again without saying why.
The advantage of these small-cap funds in 2000-2002 is not a factor effect, but the choice of indexes. Vanguard Small-Cap Growth tracked the S&P 600 Growth index. S&P requires companies to have a history of earnings before adding them to the index, so it missed the Internet bubble (both on the way up and on the way down). Other small-cap growth funds did badly in 2000-2002; so did Vanguard Small-Cap Index, which tracked the Russell 2000 at that time and thus rode the Internet bubble down.

Value did outperform growth in 2000-2002.
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Re: Small Value: 15 years of underperforming

Post by JBTX » Thu Nov 22, 2018 11:20 pm

stlutz wrote:
Thu Nov 22, 2018 8:07 pm
Okay, so here is a comparison of Vanguard Small Growth and Value with DFA Small Value thrown in from 6/98 through 9/18:

https://www.portfoliovisualizer.com/bac ... ion3_3=100

Results:

VG Small Value: 9.06%
VG Small Growth: 9.45%

DFA Small Value: 9.87%

I pulled down the monthly returns from the Ken French data library (http://mba.tuck.dartmouth.edu/pages/fac ... brary.html), I get the following annualized returns for the same period:

Small Value: 12.28%
Small Growth: 7.58%

So, this is the problem with the whole smallcap value thing: Theoretically over this period the value premium in smallcaps was 4.70% per year. That's quite large. The actual premium when using index funds was -.39%.

That's the problem with the big premiums people are looking for by tilting to value in the small cap face. The theoretical numbers simply don't correlate to what real-world mutual funds are investing on (or can invest in). In fact, if you run a factor regression on Vanguard Small Growth, it has a modestly positive loading on value!

A fair number of people believe that the value premium is much larger in small caps than it is in large caps. This appears not to be the case--this result is based on more of a quirk in how the databases were used as opposed to representing real world return differences. In the real world, there is no small cap growth "black hole".
I'd like to know what caused the difference in the French data and index returns of anybody knows.

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Re: Small Value: 15 years of underperforming

Post by grabiner » Thu Nov 22, 2018 11:32 pm

stlutz wrote:
Thu Nov 22, 2018 8:07 pm
Okay, so here is a comparison of Vanguard Small Growth and Value with DFA Small Value thrown in from 6/98 through 9/18:

https://www.portfoliovisualizer.com/bac ... ion3_3=100

Results:

VG Small Value: 9.06%
VG Small Growth: 9.45%

DFA Small Value: 9.87%

I pulled down the monthly returns from the Ken French data library (http://mba.tuck.dartmouth.edu/pages/fac ... brary.html), I get the following annualized returns for the same period:

Small Value: 12.28%
Small Growth: 7.58%

So, this is the problem with the whole smallcap value thing: Theoretically over this period the value premium in smallcaps was 4.70% per year. That's quite large. The actual premium when using index funds was -.39%.
Two issues. Vanguard's index choice in 2000-2002 happened to avoid the growth disaster; French's statistic includes the entire market. Also, French's value stocks are more value-oriented than the value indexes Vanguard has used.
That's the problem with the big premiums people are looking for by tilting to value in the small cap face. The theoretical numbers simply don't correlate to what real-world mutual funds are investing on (or can invest in). In fact, if you run a factor regression on Vanguard Small Growth, it has a modestly positive loading on value!
I believe that is the effect of 2000-2002 and the S&P indexes again. This was a period in which value greatly outperformed growth, and the S&P 600 outperformed the total small-cap market, so both the growth and value halves of the S&P 600 showed up with a value effect.
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Re: Small Value: 15 years of underperforming

Post by Dead Man Walking » Thu Nov 22, 2018 11:47 pm

VTMSX - Vanguard Tax-managed Small Cap- has outperformed all of the funds mentioned in this thread over the last 15 years according to Morningstar. It is a blend fund. Full disclosure - I own this fund in my taxable account because it tends to provide excellent performance in the small cap space.

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Re: Small Value: 15 years of underperforming

Post by Northern Flicker » Fri Nov 23, 2018 2:06 am

palaheel wrote:
Thu Nov 22, 2018 7:41 pm
Socrates28 wrote:
Thu Nov 22, 2018 7:12 pm
Vanguard small cap value index is much more midcap than small cap value
VBR is more midcap. VIOV is small cap.
VBR is about 1/3 midcap and 2/3 small-cap. Some divisions between the two have it 40% midcap but it certainly is well less than half midcap.
Last edited by Northern Flicker on Fri Nov 23, 2018 2:15 am, edited 1 time in total.
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Re: Small Value: 15 years of underperforming

Post by hilink73 » Fri Nov 23, 2018 2:10 am

columbia wrote:
Thu Nov 22, 2018 7:35 pm
Socrates28 wrote:
Thu Nov 22, 2018 7:12 pm
Vanguard small cap value index is much more midcap than small cap value
Whenever the VG SCV is accused of not being small and value enough, IJS is mentioned.
We should define that as a law. :D

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Re: Small Value: 15 years of underperforming

Post by Northern Flicker » Fri Nov 23, 2018 2:11 am

So, I have noticed, advocates of factor investing almost always include 2000-2002 in their time frame without giving a reason why, and skeptics almost always exclude it, again without saying why.
We could ask the inverted questions about the 1990’s.

And another question is what role the increased liquidity and ease of holding a diversified portfolio of SCV is playing. How much of the SCV risk premium associated with an individual SCV stock is diversifiable by holding a portfolio of SCV stocks? Diversifiable risks are not rewarded.
Last edited by Northern Flicker on Fri Nov 23, 2018 3:24 pm, edited 1 time in total.
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Re: Small Value: 15 years of underperforming

Post by stlutz » Fri Nov 23, 2018 5:54 am

grabiner wrote:
Thu Nov 22, 2018 11:32 pm
stlutz wrote:
Thu Nov 22, 2018 8:07 pm
Okay, so here is a comparison of Vanguard Small Growth and Value with DFA Small Value thrown in from 6/98 through 9/18:

https://www.portfoliovisualizer.com/bac ... ion3_3=100

Results:

VG Small Value: 9.06%
VG Small Growth: 9.45%

DFA Small Value: 9.87%

I pulled down the monthly returns from the Ken French data library (http://mba.tuck.dartmouth.edu/pages/fac ... brary.html), I get the following annualized returns for the same period:

Small Value: 12.28%
Small Growth: 7.58%

So, this is the problem with the whole smallcap value thing: Theoretically over this period the value premium in smallcaps was 4.70% per year. That's quite large. The actual premium when using index funds was -.39%.
Two issues. Vanguard's index choice in 2000-2002 happened to avoid the growth disaster; French's statistic includes the entire market. Also, French's value stocks are more value-oriented than the value indexes Vanguard has used.
That's the problem with the big premiums people are looking for by tilting to value in the small cap face. The theoretical numbers simply don't correlate to what real-world mutual funds are investing on (or can invest in). In fact, if you run a factor regression on Vanguard Small Growth, it has a modestly positive loading on value!
I believe that is the effect of 2000-2002 and the S&P indexes again. This was a period in which value greatly outperformed growth, and the S&P 600 outperformed the total small-cap market, so both the growth and value halves of the S&P 600 showed up with a value effect.
Not really. If one looks at just the past 10 years, sma. ll growth has only a slightly negative value load of -.15. Much less than the positive value load that VG SV has of about .4.

The extremely poor F/F SG returns are driven by stocks that aren't institutionally investible.

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Re: Small Value: 15 years of underperforming

Post by Robert T » Fri Nov 23, 2018 8:36 am

.
"What matters over the long-haul is factor exposure and expense" - not fund names. Focus on factor exposure not on what a fund is named (the latter confuses the discussion IMO).

The "Vanguard Small Growth fund" had a positive value load. i.e. not a value fund in the FF sense, on average, over this period. It also had a larger positive momentum and size load than the Vanguard Small Value Fund. As the size premium and momentum premium were larger than the value premium over this period - the "Vanguard Small Growth fund" outperformed https://www.portfoliovisualizer.com/fac ... F22%2F2018

The DFA Small Value fund underperformed the FF Small Value Series by 1.18% annualized as it had a lower size and value load, greater exposure to negative momentum, and fund management expenses (expense ratio).

Focus on the target factor exposure you want, then structure your portfolio to achieve it. Comparisons of funds with various names, while it can be entertaining, it is a bit meaningless on its own IMO.

Annualized returns (%): 6/1998 - 9/2018

VG Small Value = 9.06
VG Small Growth = 9.45

DFA Small Value = 9.87
FF Small Value = 11.05
FF Small Growth = 7.06

Factor exposure over the same period

Alpha / Market / Size / Value / Momentum

0.05 / 0.96 / 0.53 / 0.57 / -0.08 = VG Small Value
-0.01 / 1.06 / 0.68 / 0.09 / +0.08 = VG Small Growth
0.04 / 1.00 / 0.80 / 0.64 / -0.06 = DFA Small Value
0.09 / 0.97 / 0.87 / 0.76 / 0.00 = FF Small Value
-0.15 / 1.09 / 1.00 /-0.23 / -0.06 = FF Small Growth
.
Last edited by Robert T on Fri Nov 23, 2018 12:13 pm, edited 1 time in total.

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Re: Small Value: 15 years of underperforming

Post by Kenkat » Fri Nov 23, 2018 9:12 am

To everything (turn, turn, turn)
There is a season (turn, turn, turn)
And a time to every purpose, under heaven

A time for value, a time for growth
A time for large, a time for small
A time for bonds, a time for cash
A time to ask which car brand is better...

In the first half of the 2000s, Small Cap Growth was considered the ugly step-child of asset classes. This one? Poor risk adjusted returns historically, best to just avoid it altogether. And here we are now and it has outperformed. It seems a common trend that the more hated an asset class becomes, the better future performance will be from that point. Not knowing the timing of all of this means patience is a necessary part of any factor investing.
Last edited by Kenkat on Fri Nov 23, 2018 1:13 pm, edited 1 time in total.

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Re: Small Value: 15 years of underperforming

Post by jmk » Fri Nov 23, 2018 9:58 am

Robert T wrote:
Fri Nov 23, 2018 8:36 am

"What matters over the long-haul is factor exposure and expense" - not fund names. Focus on factor exposure not on what a fund is named (the latter confuses the discussion IMO).
I’m assuming then that Vanguard’s factor funds are the cheapest way to go then?

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Re: Small Value: 15 years of underperforming

Post by Elysium » Fri Nov 23, 2018 10:37 am

nisiprius wrote:
Thu Nov 22, 2018 6:56 pm
c) You didn't say why you chose 15 years. You really need to say why you chose 15 years. The salient characteristic of 1998-style factor-based strategies is that they had one brief shining moment in 2000-2002, and they really did shine:
Hi Nisiprius, I chose last 15 years from 2003 because that is when most people probably started overweighting SCV after being convinced about the superiority of factor based investing. Especially the idea SCV is the best and SCG is the worst. 2000-02 period played a huge role in convincing folks about this superiority along with the FF theory and backtested data. I had my first investment in SCV in 2002, and it became a steady allocation of 10% to 15%, it still is and I am not going to abandon it at this point as I am not betting the farm on it. That said, I am not seeing the large outperformance of FF data series, or expecting any of the funds to deliver close to it.

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Re: Small Value: 15 years of underperforming

Post by Random Walker » Fri Nov 23, 2018 10:47 am

jmk wrote:
Fri Nov 23, 2018 9:58 am
Robert T wrote:
Fri Nov 23, 2018 8:36 am

"What matters over the long-haul is factor exposure and expense" - not fund names. Focus on factor exposure not on what a fund is named (the latter confuses the discussion IMO).
I’m assuming then that Vanguard’s factor funds are the cheapest way to go then?
Price is one thing, and price per unit factor exposure is another. In creating a portfolio, the investor should target a certain factor exposure. If he has a choice between a less expensive factor fund with more shallow exposure and a more expensive fund with deeper exposure, he could well be better off with the more expensive fund; he will need less of the more expensive fund to gain the same exposure. That means he will own more of the cheaper total market or core fund. What matters is the total expense of the portfolio as a whole. Also, here is an under appreciated fact. The goal of factor investing is to diversify away from market beta. If the investor uses less of a more expensive fund with deeper factor exposure, overall he is taking on less exposure to market beta to gain the same exposure to the other factors. This is a more efficient portfolio in the sense that it is more balanced across factors. So there are trade offs. Overall though, a more expensive fund with deeper factor exposures is not as expensive as it initially seems because you need less of it.

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Re: Small Value: 15 years of underperforming

Post by Random Walker » Fri Nov 23, 2018 10:56 am

A pretty extreme example of the above logic is the AQR Style Premia Fund. It’s expensive with an ER of something like 1.5%. But it is a long-short fund with no net exposure to market beta and exposure to value in both the long and short directions. So one way to view the lofty ER to make it more palatable is to view it as “only” 0.75% for long Value exposure and 0.75% for short value exposure. So you sort of get what I think I’ve heard described as the crystal meth of factor exposure for a higher price, but you don’t need a lot to get the desired portfolio effect. And you avoid adding more market beta.

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Re: Small Value: 15 years of underperforming

Post by Random Walker » Fri Nov 23, 2018 11:01 am

As far as appropriate time frames for evaluation, I like looking at all of them. Longest possible time frame certainly adds strength to persistence. But investing evolves and more recent shorter time frame may be more relevant. With regard to SV, I think it’s particularly interesting to look post 1992. The famous Fama French paper was published in that year.

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Re: Small Value: 15 years of underperforming

Post by hdas » Fri Nov 23, 2018 11:47 am

Looking at the monthly data since 2001, comparing iShares S&P Small-Cap 600 Value ETF (IJS) iShares S&P Small-Cap 600 Growth ETF (IJT) we have:

214 observations for each
The average monthly profit with it's standard deviation is:

Value - IJS > 0.9%, 5.36%
Growth - IJT > 0.9% 5.08%

Let us stop with the charade....

The more interesting, but still consistent with randomness is the difference between small and large comparing iShares S&P Small-Cap ETF (IJR) iShares Vanguard 500 Index Admiral (VFIAX), for the same time period we have:

214 observations for each
The average monthly profit with it's standard deviation is:

Small - IJR > 0.91%, 5.14%
Large - VFIAX > 0.59% 4.11%

A T score for the diff of means = 0.7 Still consistent with randomness.

One of the issues with this outperformance, is that most of it happens in the first 1/3 of the data. I can see this reverting and becoming flat going forward.

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Re: Small Value: 15 years of underperforming

Post by CULater » Fri Nov 23, 2018 12:03 pm

Nisiprius' consistent questions about the merits of "tilting" or factor investing have me convinced it probably isn't worth it -- I'm not exactly a convert but have begun falling off the fence. It might be worth it if you wanted to go to a bunch of trouble to find the right funds to use based on factor loadings and then are prepared to keep the faith for a long time. But I'm (a) too lazy, (b) too unsure of what I'm doing, and (3) not sure the right funds based on yesterday's data will be the right funds going forward to bother with this option either.
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Re: Small Value: 15 years of underperforming

Post by packer16 » Fri Nov 23, 2018 12:16 pm

What I have observed in factor investing like overall investing, the more complex you make it, the more probability of it not working. IMO opinion if you want factor exposure, stick to a few simple factors passively implemented, like SCV for example, that you think you have an edge over the market. The more exotic & more complex factor funds like QSPIX, IMO are relying on more decisions & thus more assumptions & thus more can go wrong & in this case has. I looked a QSPIX YTD performance & it is down by more than 10% v. flat for US indices. The idea of diversification is to reduce volatility & thus drawdown. It appears to have not worked here in part IMO due to the complexity of the decisions about the correct factor exposure & how the factors are performing versus more market-weighted alternatives. This is not a simple decision so I sympathize with the PM here but the real question do you want non-market weighted exposure to factors except in the cases you are sure you have an edge over the market?

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Re: Small Value: 15 years of underperforming

Post by Bill Bernstein » Fri Nov 23, 2018 12:22 pm

The most honest way to look at the empirical data is to pick the passive SV fund with the longest track record.

DFSVX incepted in 4/93, so we have a nearly quarter century of track record. To 10/31,

DFSVX 11.44%
S&P 500 index 9.40%

Two percent annualized over a quarter century ain't chopped liver.

For those who would cry "survivorship bias," note that DFA never kills funds. DFJSX, for example, despite a >30 year track record of miserable returns, is still around.

Also note that the mid 1990s was hardly a favorable period to start tilting towards value.

The real question is now that the SV space has gotten more crowded, is there any juice left in the SV orange? If you know the answer to that, please let me know.

Bill

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Re: Small Value: 15 years of underperforming

Post by Doc » Fri Nov 23, 2018 12:22 pm

vineviz wrote:
Thu Nov 22, 2018 9:06 pm
Why not compare IJS to the equivalent growth index, IJT?
Yes, it's good to compare two funds that haven't played "random index" over their life.
Random Musings wrote:
Thu Nov 22, 2018 9:28 pm
As an individual investor, your personal "experiences" in investing in these asset classes, even assuming you stayed the course, would depend on your time you started investing in those asset classes and your cash flow inputs into those asset classes during that time. So many different stories to tell!!
You guys need to stop relying only on growth charts and look at rolling returns to reflect the start/stop question.

Image


I used a 36 month period as an example. Go to M* to change it.

http://quotes.morningstar.com/chart/fun ... 22%3A36%7D

(A mutual fund is needed first to force the chart format. I used VBIRX )
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Re: Small Value: 15 years of underperforming

Post by randomguy » Fri Nov 23, 2018 12:59 pm

Elysium wrote:
Thu Nov 22, 2018 6:25 pm
Small Value is now underperforming Small Growth for the last 15 years. Not a lot of insight there. But, the idea SV is superior to SG may not actually have anything, other than all asset classes may perform differently depending on period used.

Sure but can't you say this about anything? If you think that for ever 15 year period SV will outperform, you will be disappointed. If you think that over 10+ rolling 15 year periods, you will end up with more money with SV than SG, so far your belief has been right.

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Re: Small Value: 15 years of underperforming

Post by Random Walker » Fri Nov 23, 2018 1:01 pm

Bill Bernstein wrote:
Fri Nov 23, 2018 12:22 pm

The real question is now that the SV space has gotten more crowded, is there any juice left in the SV orange? If you know the answer to that, please let me know.

Bill
Hi Bill, would mind giving us your thoughts on that? In my own mind, size is a risk premium and historically has delivered some liquidity premium too. I would think there should be some remaining premium because of the risk component and liquidity would take a hit. I view value as both risk and behavior. I would expect the risk component to continue to deliver a premium and maybe the behavior component to take a bit of a hit. That being said human behavior is incredibly persistent. Overall, I’d expect perhaps some decrease in the SV premium, but not eradication. Even without premia, do you see a diversification benefit to size and value? Thanks,

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Re: Small Value: 15 years of underperforming

Post by willthrill81 » Fri Nov 23, 2018 1:07 pm

Bill Bernstein wrote:
Fri Nov 23, 2018 12:22 pm
The real question is now that the SV space has gotten more crowded, is there any juice left in the SV orange? If you know the answer to that, please let me know.
If the SCV space is indeed 'crowded', wouldn't this inflate the valuations of this sector compared to historic levels? Valuations are higher today across the board compared to 'historic' norms, but you could still compare the valuations of SCV vs. TSM today to that of days gone by.
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Re: Small Value: 15 years of underperforming

Post by Grt2bOutdoors » Fri Nov 23, 2018 1:13 pm

Dead Man Walking wrote:
Thu Nov 22, 2018 11:47 pm
VTMSX - Vanguard Tax-managed Small Cap- has outperformed all of the funds mentioned in this thread over the last 15 years according to Morningstar. It is a blend fund. Full disclosure - I own this fund in my taxable account because it tends to provide excellent performance in the small cap space.

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Re: Small Value: 15 years of underperforming

Post by grabiner » Fri Nov 23, 2018 1:19 pm

Dead Man Walking wrote:
Thu Nov 22, 2018 11:47 pm
VTMSX - Vanguard Tax-managed Small Cap- has outperformed all of the funds mentioned in this thread over the last 15 years according to Morningstar. It is a blend fund. Full disclosure - I own this fund in my taxable account because it tends to provide excellent performance in the small cap space.
The advantage of this fund is again the result of index choice. It follows the S&P 600 index. Thus, like Vanguard Small-Cap Growth and Small-Cap Value, it missed the Internet bubble. And subsequently, the traditional index funds changed to indexes with a higher cap range, so Tax-Managed Small-Cap got the advantage of a lower size.

I don't hold this fund myself, but it is an excellent fund if you need to hold small-cap blend in a taxable account (I don't); it has never distributed a capital gain, and has 100% qualified dividends. In a tax-deferred account, use the ETF VIOO instead, since the tax management is not of any use and thus you have no reason to pay for it.
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Re: Small Value: 15 years of underperforming

Post by garlandwhizzer » Fri Nov 23, 2018 1:29 pm

stlutz wrote:

So, this is the problem with the whole smallcap value thing: Theoretically over this period the value premium in smallcaps was 4.70% per year. That's quite large. The actual premium when using index funds was -.39%.

That's the problem with the big premiums people are looking for by tilting to value in the small cap face. The theoretical numbers simply don't correlate to what real-world mutual funds are investing on (or can invest in).
1+

This to me is the crux of the issue. Factor indexes are not IMO reliable predictors of real world fund results. They are based on long/short portfolios which are not cost effective in the SC space due to illiquidity and trading frictions that do not show up at all in cost-free, long/short portfolios. DFSVX, a darling of factor enthusiasts, has underperformed VB which has much less exposure to size and value over the last 16 years running and, while underperforming, it has also managed to have higher volatility, greater maximum drawdown, and lower Sharpe Ratio. In short, the increased risk of SCV showed up but not the increased return, in fact lower returns. The idea that you can base portfolio selection entirely on attractive academic factor exposure and be assured of investing success in real funds is not reliable in my opinion. It is instructive in this regard to compare VPMCX, Vanguard's Primecap Fund which concentrates on LCG (not LC MOM) with DFSVX. If you had invested 10K at the inception of DFSVX in 1992, 25+ years ago, and at the same time invested 10K in VPMCX which pays no attention whatsoever to factors, you would be $64,000 richer today by selecting the fund that factor analysis suggests would be clearly the loser in this comparison. Another example is RZV, RYDEX S&P Small Cap S&P Pure Value ETF, a deep value micro-cap fund which has been an investing disaster since its creation 13 years ago in spite of the fact that it has maximal loads on size and maximal loads on value. Some factor adherents on the Forum argue that Vanguard's SCV fund fails to outperform its SCG fund because it doesn't load up enough on size and value. The real world experience of RZV suggests the opposite is true.

Why this gulf between factor backtesting research and funds that seek to exploit it? I suggest a couple of considerations. First, how is value defined? Warren Buffett believes that value is effectively harvested not by parameters like P/B, P/E, P/CF, etc., but rather by an in depth analysis on a company specific basis. P/B was the initial definition of value but in the information economy that doesn't seem to work so well any more. Most SCV funds have now abandoned that. Some have suggested screens for negative MOM, screens for junk, combining value with profitability, etc.. The nice thing about academic backtesting is that you can select whatever definition works best in the rearview mirror and suggest that this definition will work equally well going forward. That is not demonstrably true. Initially P/B did that. Now it doesn't. Likewise the more sophisticated SCV factor approaches chosen today may look outmoded as the ever dynamic market adjusts to them and arbitrates them away.

There is a great deal of uncertainty in the current state of factor knowledge. Asness is a factor expert for example and he now states that the size factor does not exist now and never has existed. Swedroe, another factor expert, states that the size factor does in fact exist now and has in the past. Who is right? Who is right about the optimal way to define value in the first place? Backtesting tells you what has worked in the past over a given time frame but will that continue to work over the next decade or two going forward? I think the answer to that is: uncertain.

So the question is not: is there a convincing narrative for the existence of SCV factors? There is a convincing narrative, increased risk plus behavioral. Nor is the question: has it worked over the long term in the past? It has as long as you include the bursting of the greatest LCG bubble in history (2000- 3), a bubble much greater than anything ever seen before or since. The question is: what parameters best define and allow effective cost-effective harvest of this premium in long only portfolios (short is a money loser in SC space), talking into account trading frictions and costs in the illiquid SC space? Many different funds take many different approaches to do this, some will do better than others like any other random distribution. IMO there is no guarantee going forward that whatever SCV fund you choose will automatically outperform. I suspect that some, like RZV which chose to maximize S and V loads, are likely to be costly failures.

Choosing a 100% factor based equity portfolio is making a bet. Like all bets it can either win or lose. Academic backtesting suggests a high level of certainty in outcome. Real fund results often do not live up to that.

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Re: Small Value: 15 years of underperforming

Post by packer16 » Fri Nov 23, 2018 1:56 pm

One thing I think folks miss is factors are correlations not causes of returns. As with any correlation they can change. The cause of the return (an under or over valuation) is correlated with factors but the cause can be determined by doing a more detailed valuation or appraisal. Active manager do these appraisals & on overage the amount of real over or undervaluation they estimate and can act on is less than the fees they charge. I do not understand the reliance on correlation more than actual valuations. The factors can be more easily calculated for a large number of securities (thus a portfolio can be run with lower costs) but IMO that makes them more arbitragable than more traditional valuations. I am amazed how folks base entire investment strategies on correlations then are surprised when these correlations change.

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Re: Small Value: 15 years of underperforming

Post by vineviz » Fri Nov 23, 2018 4:14 pm

nisiprius wrote:
Thu Nov 22, 2018 6:56 pm
c) You didn't say why you chose 15 years. You really need to say why you chose 15 years. The salient characteristic of 1998-style factor-based strategies is that they had one brief shining moment in 2000-2002, and they really did shine:

.....

So, I have noticed, advocates of factor investing almost always include 2000-2002 in their time frame without giving a reason why, and skeptics almost always exclude it, again without saying why.

In any case, 2000-2002 happened. And going up when the stock market was going down is pretty impressive. Unfortunately, financial data is characterized by extreme burstiness. The averages over even long time periods are dominated by rare exceptional periods within the data. The unanswerable question about small-cap value is whether we have good reason to believe that a small-cap value investor, patient enough to hold on for decades is pretty sure to catch another period like 2000-2002.
This is an important point. I know you beat the start date/end date drum a lot, but I don't think people can ever be reminded often enough of just how difficult the problem of studying data that include random fluctuations and/or cyclicality (like market return data) actually is.

I've built a custom time-series from Fama-French data that attempts to adjust for turnover costs and simulated fund expenses (basically extending back an S&P 600 Value Index to the beginning of 1964). Here is the cumulative return of that series minus large cap US stocks.

Image

I hope this illustrates how pointless the "small cap value is dead!" versus "small cap value is alive!" debates are. There have been multiple time periods when the SCV premium looked dead only to come roaring back. There have multiple time periods when the SCV premium looked like a sure thing only to dramatically disappoint.

Almost no matter what length of period you examine, the MEAN premium is greater than the MEDIAN premium including many periods were the mean is positive and the median is negative. This implies that the benefits (to the extent there are any) of overweighting SCV tend to be concentrated in relatively short periods of time: there have been twice as many years when SCV outperformed large caps by 12% or more than years where the converse was true, for example. Looking just at calendar years in which SCV underperformed, the median magnitude was -7.4% whereas in years of outperformance the median magnitude was 13.4%.

I guess what I'm saying is that investing in small cap value funds is probably NOT a strategy that will feel very rewarding for an investor who favors consistency over excitement. And for an investor who is more prone than most to second-guess their investment strategy, it might be outright costly.

SCV has underperformed for 4 of the past 5 years, which is emotionally taxing and makes medium-term comparisons look unfavorable. A string like this is not unusual, though, so I don't really understand why some people get so excited either way.
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Re: Small Value: 15 years of underperforming

Post by Random Walker » Fri Nov 23, 2018 4:31 pm

vineviz wrote:
Fri Nov 23, 2018 4:14 pm
I guess what I'm saying is that investing in small cap value funds is probably NOT a strategy that will feel very rewarding for an investor who favors consistency over excitement.
One can target a desired expected return, and compared to a TSM/TBM portfolio with given target return, create a SV/TBM portfolio with same target return and bigger allocation to bonds. This could well narrow the potential distribution of returns significantly, increase consistency, and decrease excitement.

Dave

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Re: Small Value: 15 years of underperforming

Post by willthrill81 » Fri Nov 23, 2018 4:35 pm

Any deviation from the TSM will result in underperformance of the TSM at some point in time, and this underperformance can go on for a long time. If you engage in factor investing, trend following, etc., you should understand this when you adopt your strategy.
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Re: Small Value: 15 years of underperforming

Post by unclescrooge » Fri Nov 23, 2018 4:49 pm

nisiprius wrote:
Thu Nov 22, 2018 6:56 pm
I'm pretty skeptical about factor-based investing, I don't practice it, and I agree with you that the evidence for the superiority of small-cap value is weak, compared the confident rhetoric of advocates. However:

Blue: Vanguard Small-Cap Value Index Fund, VISVX
Red: Vanguard Small-Cap Growth Index Fund, VISGX
Yellow: Vanguard Total Stock Market Index Fund, VTSMX

Source

Image

a) Technically you're right that small-cap value had a lower return than small-cap growth, but the annualized difference was only 0.39%. Personally I'd prefer to word this as "roughly tied" or "failed to outperform" rather than "underperformed." If I had faith in a strategy I wouldn't be too upset by an "underperformance" of -0.39%.

Given all the talk about small-cap value being so great, and small-cap growth being "the black hole of investing," the failure to see much difference between them does cast doubt on the robustness of any supposed effects.

b) Both small-cap value and small-cap growth outperformed Total Stock, as measured simply by dollars. If you're pointing to raw dollars and don't care about risk, a small-cap value tilt was still beneficial. It is only when you look at risk-adjusted return as measured by the Sharpe ratio that you find that the stock market as a whole was better than either of them (0.60 for the whole market, 0.53 for small-cap value, 0.54 for small-cap growth).

c) You didn't say why you chose 15 years. You really need to say why you chose 15 years. The salient characteristic of 1998-style factor-based strategies is that they had one brief shining moment in 2000-2002, and they really did shine:

Blue: Vanguard Small-Cap Value Index Fund, VISVX
Red: Vanguard Small-Cap Growth Index Fund, VISGX
Yellow: Vanguard Total Stock Market Index Fund, VTSMX
Image

So, I have noticed, advocates of factor investing almost always include 2000-2002 in their time frame without giving a reason why, and skeptics almost always exclude it, again without saying why.

In any case, 2000-2002 happened. And going up when the stock market was going down is pretty impressive. Unfortunately, financial data is characterized by extreme burstiness. The averages over even long time periods are dominated by rare exceptional periods within the data. The unanswerable question about small-cap value is whether we have good reason to believe that a small-cap value investor, patient enough to hold on for decades is pretty sure to catch another period like 2000-2002.
Lack of dispersion between vanguard's funds shows lack of differentiation between their strategies. Maybe their implementation of the strategies is flawed?

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Re: Small Value: 15 years of underperforming

Post by Elysium » Fri Nov 23, 2018 4:59 pm

Random Walker wrote:
Fri Nov 23, 2018 4:31 pm
One can target a desired expected return, and compared to a TSM/TBM portfolio with given target return, create a SV/TBM portfolio with same target return and bigger allocation to bonds. This could well narrow the potential distribution of returns significantly, increase consistency, and decrease excitement.
Dave
Hi Dave, What should we expect an ideal SV fund to return going forward in excess of TSM, so that we can build such a target allocation.

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