Larry Swedroe: Why The Size Premium Should Persist

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Random Walker
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Larry Swedroe: Why The Size Premium Should Persist

Post by Random Walker » Wed Mar 20, 2019 2:32 pm

https://alphaarchitect.com/2019/03/20/w ... d-persist/

This is a great article. As the title suggests, Larry specifically reviews reasons to expect size premium to persist in the future. More generally though, he covers a lot of important ground: why risk factor premiums should not disappear after publication, reasons a factor might take a haircut, the likelihood of underperformance over different time periods, the significance of diversifying across factors especially around retirement. I especially strongly recommend reading the summary at the end; 4 very significant paragraphs for any equity investor.

Dave

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Re: Larry Swedroe: Why The Size Premium Should Persist

Post by typical.investor » Wed Mar 20, 2019 10:51 pm

Random Walker wrote:
Wed Mar 20, 2019 2:32 pm
https://alphaarchitect.com/2019/03/20/w ... d-persist/

This is a great article. As the title suggests, Larry specifically reviews reasons to expect size premium to persist in the future. More generally though, he covers a lot of important ground: why risk factor premiums should not disappear after publication, reasons a factor might take a haircut, the likelihood of underperformance over different time periods, the significance of diversifying across factors especially around retirement. I especially strongly recommend reading the summary at the end; 4 very significant paragraphs for any equity investor.

Dave
It just seems like more rah-rah-rah.
Diversification becomes especially important as you approach and enter retirement, when the order of returns matters a great deal.
The article doesn't exam how correlations can increase (especially in bad times just like we see with corporates and stocks), and how the distributions of factor returns and momentum in factor returns means your bad period might not just be limited to value.

The article for support showing momentum and value returns in Japan doesn't mention how it hasn't worked globally recently.

So it really just assumes the conclusion that diversification of factor investing will help you deal with the sequence of return risk, instead of really looking at everything we know.

I don't believe you can have the potential of better than market returns without the potential to have worse. Larry works in sales of financial products. He presents positions that will support it.

I don't see much here to support the assertion that diversifying across factors will help alleviate sequence of return risk. I think it potentially might and I think it might potentially aggravate it.

Also, I suspect that there is a significant risk that while factor returns may not disappear, that the cycles may be longer. Some have suggested that value - growth reversion cycles are getting much longer.

So without looking at momentum in factors, which Larry didn't, and without looking at increasing correlation of factors, which Larry didn't, on what grounds can one really say diversifying across factors will help alleviate sequence of return risk?

I do tilt value with my money. I do use multi-factor funds. But I don't assume it will necessarily help me deal with sequence of returns. Basically factors are risks and I am an insurer for risks other people don't want to take. We can assume that a pool of risks will save us, but how well did that work for real estate - didn't show up in the backtests did it? To me accepting factor investing is simply accepting more risk no matter how you slice and dice it, backtest or package it. That's how you earn a premium, or not depending on your holding period. But I don't think it's Russian Roulette, so I am willing to play and accept whatever outcome.

Except largely for momentum which I have doubts about. Looks great but which funds really capture it? Shouldn't AQR's? Doesn't look like they do? Held MTUM but momentum returns seem so very particular to implementation, I suspect that every fund will have it's day, long term though I do have doubts are real funds in that space.

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Re: Larry Swedroe: Why The Size Premium Should Persist

Post by Random Walker » Wed Mar 20, 2019 11:10 pm

Typical investor,
Most of your criticisms are related to diversifying across factors, factor correlations, sequence of returns risk. Although he refers to those issues in the summary, that is not the main point of the article. The main thrust, and where he goes into substantially more detail, is the size factor. Larry has written elsewhere about the other issues you reference.

Dave

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Re: Larry Swedroe: Why The Size Premium Should Persist

Post by DonIce » Wed Mar 20, 2019 11:19 pm

The article gives a long list of the disadvantages of small companies. These disadvantages mean greater risk, which it is implied should incur higher eventual premium. The premium is not well quantified but I think the general assumption is that over very long time periods, you should average a few % higher annual return in exchange for the higher risk.

Rather than increasing risk and return by choosing small cap stocks instead of total market, why not instead increase risk by sticking with total market but using a higher % equity allocation? The risks of this approach seem lower while offering the same return.

Personally I think the higher returns of small companies have little to do with the higher risk, but instead with the fact that a small subset of these small companies will grow into big companies, and the investor gets to capitalize on that growth. Meanwhile megacaps are bounded by the fact that they have already saturated the economy and they can only grow with roughly the rate of overall economic growth and perhaps by outcompeting other companies (which has no net benefit for the investor since a diversified holding will include all the companies that are in competition with one another).

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Re: Larry Swedroe: Why The Size Premium Should Persist

Post by typical.investor » Wed Mar 20, 2019 11:35 pm

DonIce wrote:
Wed Mar 20, 2019 11:19 pm
The article gives a long list of the disadvantages of small companies. These disadvantages mean greater risk, which it is implied should incur higher eventual premium. The premium is not well quantified but I think the general assumption is that over very long time periods, you should average a few % higher annual return in exchange for the higher risk.

Rather than increasing risk and return by choosing small cap stocks instead of total market, why not instead increase risk by sticking with total market but using a higher % equity allocation? The risks of this approach seem lower while offering the same return.
The answer by factor proponents, and often correctly so, is that diversifying with factors can offer the same return at lower risk. Or higher return at the same risk. I think Larry shows that in his books and articles.

However, a closer look at factor returns will also show correlations can increase and returns can persist. So you can have the advantages of the above but at the risk of it failing and for too long for you. Larry skirts that discussion. The general reply is that "yeah but when factors fail it's not so bad". We don't have a lot of data on how factors behave when institutional money is targeting them. I can't see how leveraged long/short funds targeting factor returns on a massive scale won't move the needle in terms of return cycles, but think the average investor can't compare to the holding period of a sovereign wealth fund or inter-generational investors.

Anyway, I expect factors to work unless they don't, and that both cases are possible in the average investing horizon. I will tilt toward will though.

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Re: Larry Swedroe: Why The Size Premium Should Persist

Post by Random Walker » Thu Mar 21, 2019 12:16 am

DonIce wrote:
Wed Mar 20, 2019 11:19 pm
Rather than increasing risk and return by choosing small cap stocks instead of total market, why not instead increase risk by sticking with total market but using a higher % equity allocation? The risks of this approach seem lower while offering the same return.
The reason not to do this is portfolio efficiency. Size and market are distinct, separate, weakly correlated factors. Most all of our portfolios are dominated by market risk. For example a typical 60/40 portfolio has 85-90% of its risk wrapped up in the market factor. One can create a more efficient portfolio by diversifying across independent and unique sources of risk and return. Below is a link to 3 of the best pages of investment reading I have ever seen that explains the rationale.


http://thebamalliance.com/pdfs/Effectiv ... wedroe.pdf

Dave

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Re: Larry Swedroe: Why The Size Premium Should Persist

Post by DonIce » Thu Mar 21, 2019 12:31 am

Random Walker wrote:
Thu Mar 21, 2019 12:16 am
The reason not to do this is portfolio efficiency. Size and market are distinct, separate, weakly correlated factors. Most all of our portfolios are dominated by market risk. For example a typical 60/40 portfolio has 85-90% of its risk wrapped up in the market factor. One can create a more efficient portfolio by diversifying across independent and unique sources of risk and return. Below is a link to 3 of the best pages of investment reading I have ever seen that explains the rationale.


http://thebamalliance.com/pdfs/Effectiv ... wedroe.pdf

Dave
I agree about the independent and unique sources of risk and return (see my thread about uncorrelated asset classes). However, the returns of a small cap or value fund are still dominated by market beta. If you look at the correlations of small cap or value factor ETFs with the return of the total market, they are usually in the range of 0.6-0.9 (that is, highly correlated). Investing in different assets that are all highly correlated does not add meaningful diversification. That's like buying VTI and VOO and thinking that you are a lot more diversified than if you had just bought VTI.

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Re: Larry Swedroe: Why The Size Premium Should Persist

Post by SevenBridgesRoad » Thu Mar 21, 2019 12:34 am

Random Walker wrote:
Wed Mar 20, 2019 2:32 pm
https://alphaarchitect.com/2019/03/20/w ... d-persist/

This is a great article. As the title suggests, Larry specifically reviews reasons to expect size premium to persist in the future. More generally though, he covers a lot of important ground: why risk factor premiums should not disappear after publication, reasons a factor might take a haircut, the likelihood of underperformance over different time periods, the significance of diversifying across factors especially around retirement. I especially strongly recommend reading the summary at the end; 4 very significant paragraphs for any equity investor.

Dave
RW/Dave: This may have been answered before, but can you discuss any relationship you have with Larry Swedroe? I like his articles, but why is it that you always are first to link his newest. And then typically defend each article if folks respond with alternative comments? This is a truly honest question from a place of curiosity. What's the deal?
Retired 2018 | Every day I choose how I spend my energy | One Vanguard TDF except for bunch of individual stocks...still recovering from my Fidelity AUM days years ago | Now sleeping well at night

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Re: Larry Swedroe: Why The Size Premium Should Persist

Post by pdavi21 » Thu Mar 21, 2019 1:36 am

SevenBridgesRoad wrote:
Thu Mar 21, 2019 12:34 am
Random Walker wrote:
Wed Mar 20, 2019 2:32 pm
https://alphaarchitect.com/2019/03/20/w ... d-persist/

This is a great article. As the title suggests, Larry specifically reviews reasons to expect size premium to persist in the future. More generally though, he covers a lot of important ground: why risk factor premiums should not disappear after publication, reasons a factor might take a haircut, the likelihood of underperformance over different time periods, the significance of diversifying across factors especially around retirement. I especially strongly recommend reading the summary at the end; 4 very significant paragraphs for any equity investor.

Dave
RW/Dave: This may have been answered before, but can you discuss any relationship you have with Larry Swedroe? I like his articles, but why is it that you always are first to link his newest. And then typically defend each article if folks respond with alternative comments? This is a truly honest question from a place of curiosity. What's the deal?
Maybe he is Larry Swedroe. Or Dave Swedroe.
"We spend a great deal of time studying history, which, let's face it, is mostly the history of stupidity." -Stephen Hawking

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Re: Larry Swedroe: Why The Size Premium Should Persist

Post by typical.investor » Thu Mar 21, 2019 1:39 am

pdavi21 wrote:
Thu Mar 21, 2019 1:36 am
SevenBridgesRoad wrote:
Thu Mar 21, 2019 12:34 am
Random Walker wrote:
Wed Mar 20, 2019 2:32 pm
https://alphaarchitect.com/2019/03/20/w ... d-persist/

This is a great article. As the title suggests, Larry specifically reviews reasons to expect size premium to persist in the future. More generally though, he covers a lot of important ground: why risk factor premiums should not disappear after publication, reasons a factor might take a haircut, the likelihood of underperformance over different time periods, the significance of diversifying across factors especially around retirement. I especially strongly recommend reading the summary at the end; 4 very significant paragraphs for any equity investor.

Dave
RW/Dave: This may have been answered before, but can you discuss any relationship you have with Larry Swedroe? I like his articles, but why is it that you always are first to link his newest. And then typically defend each article if folks respond with alternative comments? This is a truly honest question from a place of curiosity. What's the deal?
Maybe he is Larry Swedroe. Or Dave Swedroe.
That's silly. I understand that Dave is an individual investor who believes factor investing is best for his money. I don't think there is anything beyond that.

I appreciate Dave's contributions because they help me think about what is best. And I appreciate Larry's sales pitch too, even if I don't buy in completely.

I don’t doubt Dave’s intentions.

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Re: Larry Swedroe: Why The Size Premium Should Persist

Post by Random Walker » Thu Mar 21, 2019 7:35 am

DonIce wrote:
Thu Mar 21, 2019 12:31 am
Random Walker wrote:
Thu Mar 21, 2019 12:16 am
The reason not to do this is portfolio efficiency. Size and market are distinct, separate, weakly correlated factors. Most all of our portfolios are dominated by market risk. For example a typical 60/40 portfolio has 85-90% of its risk wrapped up in the market factor. One can create a more efficient portfolio by diversifying across independent and unique sources of risk and return. Below is a link to 3 of the best pages of investment reading I have ever seen that explains the rationale.


http://thebamalliance.com/pdfs/Effectiv ... wedroe.pdf

Dave
I agree about the independent and unique sources of risk and return (see my thread about uncorrelated asset classes). However, the returns of a small cap or value fund are still dominated by market beta. If you look at the correlations of small cap or value factor ETFs with the return of the total market, they are usually in the range of 0.6-0.9 (that is, highly correlated). Investing in different assets that are all highly correlated does not add meaningful diversification. That's like buying VTI and VOO and thinking that you are a lot more diversified than if you had just bought VTI.
True. Most SV funds still have market betas of about 1. That is one reason why one should not only look at expense ratios when purchasing an asset class fund. If one buys a more expensive SV fund with deeper exposures to S and V, then he will need less of the more expensive factor fund to achieve the tilts he wants. So the increased expense is less than most people appreciate. Moreover, it also means assuming less market beta exposure to obtain the desired tilts to other factors. That’s a move in the direction of risk parity: a more efficient portfolio.

Dave

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Re: Larry Swedroe: Why The Size Premium Should Persist

Post by Random Walker » Thu Mar 21, 2019 7:50 am

SevenBridgesRoad wrote:
Thu Mar 21, 2019 12:34 am
Random Walker wrote:
Wed Mar 20, 2019 2:32 pm
https://alphaarchitect.com/2019/03/20/w ... d-persist/

This is a great article. As the title suggests, Larry specifically reviews reasons to expect size premium to persist in the future. More generally though, he covers a lot of important ground: why risk factor premiums should not disappear after publication, reasons a factor might take a haircut, the likelihood of underperformance over different time periods, the significance of diversifying across factors especially around retirement. I especially strongly recommend reading the summary at the end; 4 very significant paragraphs for any equity investor.

Dave
RW/Dave: This may have been answered before, but can you discuss any relationship you have with Larry Swedroe? I like his articles, but why is it that you always are first to link his newest. And then typically defend each article if folks respond with alternative comments? This is a truly honest question from a place of curiosity. What's the deal?
I have no financial interest. I am a client of Larry’s firm. I am simply strongly interested in investing and have effectively converted from ER focused DIY Boglehead to portfolio efficiency focused client of advisor Factorhead. So, yes there may be some confirmation bias in my posting of his articles. That being said, I do think his essays are the best short reading I can find on the internet to learn about investing and discuss on this forum. When I occasionally find something else I think worthwhile from another author, I post it as well. If you’re really curious about my interest (obsession?) with portfolio efficiency, take a peek at a couple of previous threads on volatility drag and expanding on the rewards of multi asset class investing. Also, if interested, I’ve previously posted on my transition from DIY ultra low ER TSMer to client of an advisor.

viewtopic.php?t=231257

viewtopic.php?t=199092

viewtopic.php?t=213282

Dave

P.S. Larry’s articles are usually 2-3 pages long, so I think they are good for quick read and discussion on this board. I would love to have ongoing discussions about many of the BH books: Ellis’ Winning The Loser’s Game, Gibson’s Asset Allocation, Bernstein’s 4 Pillars, etc.

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Re: Larry Swedroe: Why The Size Premium Should Persist

Post by pezblanco » Thu Mar 21, 2019 9:44 am

I wish that Larry had made some comment on the recent article suggesting that there isn't a size effect at all. It is so prominent that I have to believe he must be aware of it:

Fact, Fiction, and The Size Effect by Alquist et al (two AQR researchers and a Yale professor)

https://poseidon01.ssrn.com/delivery.ph ... 29&EXT=pdf

This blog post by Cliff Asness basically indicates that he thinks that the size effect is seriously put into question by the above paper:

https://www.aqr.com/Insights/Perspectiv ... to-Trouble

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Re: Larry Swedroe: Why The Size Premium Should Persist

Post by SevenBridgesRoad » Thu Mar 21, 2019 10:11 am

Random Walker wrote:
Thu Mar 21, 2019 7:50 am
SevenBridgesRoad wrote:
Thu Mar 21, 2019 12:34 am
Random Walker wrote:
Wed Mar 20, 2019 2:32 pm
https://alphaarchitect.com/2019/03/20/w ... d-persist/

This is a great article. As the title suggests, Larry specifically reviews reasons to expect size premium to persist in the future. More generally though, he covers a lot of important ground: why risk factor premiums should not disappear after publication, reasons a factor might take a haircut, the likelihood of underperformance over different time periods, the significance of diversifying across factors especially around retirement. I especially strongly recommend reading the summary at the end; 4 very significant paragraphs for any equity investor.

Dave
RW/Dave: This may have been answered before, but can you discuss any relationship you have with Larry Swedroe? I like his articles, but why is it that you always are first to link his newest. And then typically defend each article if folks respond with alternative comments? This is a truly honest question from a place of curiosity. What's the deal?
I have no financial interest. I am a client of Larry’s firm. I am simply strongly interested in investing and have effectively converted from ER focused DIY Boglehead to portfolio efficiency focused client of advisor Factorhead. So, yes there may be some confirmation bias in my posting of his articles. That being said, I do think his essays are the best short reading I can find on the internet to learn about investing and discuss on this forum. When I occasionally find something else I think worthwhile from another author, I post it as well. If you’re really curious about my interest (obsession?) with portfolio efficiency, take a peek at a couple of previous threads on volatility drag and expanding on the rewards of multi asset class investing. Also, if interested, I’ve previously posted on my transition from DIY ultra low ER TSMer to client of an advisor.

viewtopic.php?t=231257

viewtopic.php?t=199092

viewtopic.php?t=213282

Dave

P.S. Larry’s articles are usually 2-3 pages long, so I think they are good for quick read and discussion on this board. I would love to have ongoing discussions about many of the BH books: Ellis’ Winning The Loser’s Game, Gibson’s Asset Allocation, Bernstein’s 4 Pillars, etc.
Hey Dave, thanks for the response. I read the threads you provided and that helped pull your story together for me. I didn’t think anything underhanded was going on, and your story further convinced of that. As you say, you are somewhat obsessed with portfolio efficiency and multi asset class investing. You appear to be deeply interested in ongoing discussions of these topics and find this board a good place to do this. Since you are a bit of a salmon swimming against the stream of BHs, you get some push back here, but always handle it with patience and civility. I found it interesting the number of times you bump threads. It’s like you’re saying, come on guys, let’s talk some more about this after the conversation dies out. In some ways you seem more interested in the whole process than the outcome.

I’m more like bengal22 posted in one of the threads: “Do you think about volatility drag on your portfolio? No.” However, I do enjoy the articles you post and find the threads interesting.

You clearly find value in paying Larry. In Larry, you get another true believer to bounce around your favorite topics (or maybe there's a element of a therapeutic relationship?), in addition to portfolio activities he performs.

Thanks again for answering my question.
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Re: Larry Swedroe: Why The Size Premium Should Persist

Post by pezblanco » Thu Mar 21, 2019 10:22 am

pezblanco wrote:
Thu Mar 21, 2019 9:44 am
I wish that Larry had made some comment on the recent article suggesting that there isn't a size effect at all. It is so prominent that I have to believe he must be aware of it:

Fact, Fiction, and The Size Effect by Alquist et al (two AQR researchers and a Yale professor)

https://poseidon01.ssrn.com/delivery.ph ... 29&EXT=pdf

This blog post by Cliff Asness basically indicates that he thinks that the size effect is seriously put into question by the above paper:

https://www.aqr.com/Insights/Perspectiv ... to-Trouble
I just received a reply from Larry about the above post. I told him that I would share it with BHs unless he objected (which he hasn't).

I know and talk to the AQR guys very well and pen pal of Asness.
The size effect is polluted by the lottery effect--the fact that small growth (with low profits and high investment) suck as investments. Screen those lottery stocks out and you get size premium. Also note the way it is calculated is "wrong" making it look smaller
all other factors are 30-40-30 but for some reason FF chose 50-50. Use 30-40-30 and size premium gets larger
Might read my factor book which talks about these things
Only so much can put in a blog post, people forget that
Larry


I'll have reread his book on factors which I found to be excellent and should be required reading for anyway choosing to do any sort of factor tilt (i.e. anyone not using a 3-Fund Portfolio).

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Re: Larry Swedroe: Why The Size Premium Should Persist

Post by Random Walker » Thu Mar 21, 2019 10:29 am

SevenBridgesRoad wrote:
Thu Mar 21, 2019 10:11 am
In some ways you seem more interested in the whole process than the outcome.
I think that may well be true. I seem to remember an interview of Bob Knight, the Indiana basketball coach. He was asked about some of his temper tantrums when his team was winning. He said something to the effect that he has a vision in his head about how the game should be played. And he was coaching his team to play to his vision and not caring as much about the result. To some extent that’s how I’m thinking about my investing. So, I do sort of have a vision of how individual assets within a portfolio should complement each other. We can’t confuse strategy and outcome, and we have to judge strategy ex ante. Over the last decade, my outcome has lagged.

Dave

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Re: Larry Swedroe: Why The Size Premium Should Persist

Post by marcopolo » Thu Mar 21, 2019 10:48 am

Random Walker wrote:
Thu Mar 21, 2019 10:29 am
SevenBridgesRoad wrote:
Thu Mar 21, 2019 10:11 am
In some ways you seem more interested in the whole process than the outcome.
I think that may well be true. I seem to remember an interview of Bob Knight, the Indiana basketball coach. He was asked about some of his temper tantrums when his team was winning. He said something to the effect that he has a vision in his head about how the game should be played. And he was coaching his team to play to his vision and not caring as much about the result. To some extent that’s how I’m thinking about my investing. So, I do sort of have a vision of how individual assets within a portfolio should complement each other. We can’t confuse strategy and outcome, and we have to judge strategy ex ante. Over the last decade, my outcome has lagged.

Dave
While I have so far chosen not to follow this tyupe of strategy, I do find the discussions very interesting.

One of the things that hangs me up about the strategy is how to gauge success. I understand the point about not confusing strategy with outcome. But, so how does one gauge the effectiveness of the strategy, is it purely theoretical, or is there some measurable metrics?

Is there anything that could happen that would lead one to conclude that the strategy was the right choice, or that it was flawed? Or, is one left to simply have faith?

If over the next 10 years, this strategy is wildly successful, can we say it was a good strategy, or would that also be confusing strategy with outcome. I seem to only see that phrase used when a favored strategy underperformed, when it out performs, we seem to get presented with all sort of historical result showing how successful it was. Do you see any inherent conflict in that?
Once in a while you get shown the light, in the strangest of places if you look at it right.

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Re: Larry Swedroe: Why The Size Premium Should Persist

Post by Taylor Larimore » Thu Mar 21, 2019 11:00 am

Over the last decade, my outcome has lagged.
Dave:

Your honesty is appreciated. Perhaps it is time to take a wider view.

Best wishes
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Larry Swedroe: Why The Size Premium Should Persist

Post by Random Walker » Thu Mar 21, 2019 12:54 pm

Taylor Larimore wrote:
Thu Mar 21, 2019 11:00 am
Over the last decade, my outcome has lagged.
Dave:

Your honesty is appreciated. Perhaps it is time to take a wider view.

Best wishes
Taylor
Tough call. As I’ve written before, costs are certain and the benefits are only potential. The worst behavioral mistake is usually to throw out a plan after periods of underperformance. Rick Ferri has written that tilting is likely productive, but it’s a lifetime commitment. And of course John Bogle’s famous advice is “Stay The Course”.

Dave

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Re: Larry Swedroe: Why The Size Premium Should Persist

Post by nisiprius » Thu Mar 21, 2019 1:58 pm

Asking why the size premium should persist is putting the cart before the horse. We have to begin by asking if there is a size premium. Some skeptical opinions by AQR have already mentioned. They are not the only skeptics.

Research Affiliates has a piece on Busting the Myth About Size. They say
In our opinion the preponderance of evidence does not support the existence of a size premium....
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Last edited by nisiprius on Thu Mar 21, 2019 5:24 pm, edited 1 time in total.
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Re: Larry Swedroe: Why The Size Premium Should Persist

Post by Random Walker » Thu Mar 21, 2019 2:26 pm

Seems to me that common sense would indicate a size premium. The expected return for a company is its cost of capital. If I were lending money, I charge more for a small company with fewer streams of income than a larger more diverse one with multiple streams. Moreover small stocks are less liquid, and liquidity should deserve a premium as well.

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Re: Larry Swedroe: Why The Size Premium Should Persist

Post by Day9 » Thu Mar 21, 2019 2:49 pm

I mentioned this in another thread but Asness authored the crudely titled paper "Size Matters, If you Control Your Junk" arguing that there is a size premium as long as you filter out low quality companies. Sorry to be so victorian about this but paper titles like that show what a male-dominated field finance is.
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Re: Larry Swedroe: Why The Size Premium Should Persist

Post by vineviz » Thu Mar 21, 2019 3:06 pm

nisiprius wrote:
Thu Mar 21, 2019 1:58 pm
Asking why the size premium should persist is putting the cart before the horse. We have to begin by asking if there is a size premium. Some skeptical opinions by AQR have already mentioned. They are not the only skeptics.
These skepticisms have been dealt with frequently and at length before. I'm sure a quick search of the forum would uncover those threads if you are curious about the strengths and weaknesses of the AQR paper.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Larry Swedroe: Why The Size Premium Should Persist

Post by DonIce » Thu Mar 21, 2019 3:10 pm

Random Walker wrote:
Thu Mar 21, 2019 2:26 pm
Seems to me that common sense would indicate a size premium. The expected return for a company is its cost of capital. If I were lending money, I charge more for a small company with fewer streams of income than a larger more diverse one with multiple streams. Moreover small stocks are less liquid, and liquidity should deserve a premium as well.

Dave
I'm not sure I follow this argument. You are basically saying the more disadvantages a company faces, the greater should be the returns of investing in it. By that argument, why not just invest in the worst companies that are mired in debt, have negative earnings, and poor prospects for future performance? Surely the risk is highest with such companies, and therefore you should collect the highest risk premium.

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Re: Larry Swedroe: Why The Size Premium Should Persist

Post by Random Walker » Thu Mar 21, 2019 3:23 pm

DonIce wrote:
Thu Mar 21, 2019 3:10 pm
Random Walker wrote:
Thu Mar 21, 2019 2:26 pm
Seems to me that common sense would indicate a size premium. The expected return for a company is its cost of capital. If I were lending money, I charge more for a small company with fewer streams of income than a larger more diverse one with multiple streams. Moreover small stocks are less liquid, and liquidity should deserve a premium as well.

Dave
I'm not sure I follow this argument. You are basically saying the more disadvantages a company faces, the greater should be the returns of investing in it. By that argument, why not just invest in the worst companies that are mired in debt, have negative earnings, and poor prospects for future performance? Surely the risk is highest with such companies, and therefore you should collect the highest risk premium.
Yes! (To a large extent) Bad looking companies have that risk appear in the form of lower stock prices, with associated higher expected returns. I think Fama junior once wrote something to the effect that passive value investing requires investing in companies that are hard to stomach looking at.

Dave

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Re: Larry Swedroe: Why The Size Premium Should Persist

Post by DonIce » Thu Mar 21, 2019 3:28 pm

Random Walker wrote:
Thu Mar 21, 2019 3:23 pm
Yes! (To a large extent) Bad looking companies have that risk appear in the form of lower stock prices, with associated higher expected returns. I think Fama junior once wrote something to the effect that passive value investing requires investing in companies that are hard to stomach looking at.
And yet people simultaneously believe in a quality factor, where they are rewarded for holding companies with good results and a superior financial condition. They can't both be true since they are literally opposites. Either you get rewarded more for holding bad companies, or you get rewarded more for holding good companies.

Other factors are similarly contradictory with each other.

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Re: Larry Swedroe: Why The Size Premium Should Persist

Post by vineviz » Thu Mar 21, 2019 4:28 pm

DonIce wrote:
Thu Mar 21, 2019 3:28 pm
They can't both be true since they are literally opposites. Either you get rewarded more for holding bad companies, or you get rewarded more for holding good companies.
Quality and value not "opposites", literally or otherwise. Those factors sort on completely different metrics.

Also, we might use "good" or "bad" colloquially in discussing factors but it's important to know that none of the research depends on classifying stocks as good or bad much less doing so in an absolutist or binary manner.

Factors represent sources of risk to which some investors don't want to be exposed. Those investors are willing to pay other investors to shoulder that risk. It's really not any more complicated than that.
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Re: Larry Swedroe: Why The Size Premium Should Persist

Post by nisiprius » Thu Mar 21, 2019 5:23 pm

vineviz wrote:
Thu Mar 21, 2019 3:06 pm
nisiprius wrote:
Thu Mar 21, 2019 1:58 pm
Asking why the size premium should persist is putting the cart before the horse. We have to begin by asking if there is a size premium. Some skeptical opinions by AQR have already mentioned. They are not the only skeptics.
These skepticisms have been dealt with frequently and at length before. I'm sure a quick search of the forum would uncover those threads if you are curious about the strengths and weaknesses of the AQR paper.
I was talking about the Research Affiliates paper. I have no doubt there will be informed opinions on both sides. That's exactly my point: there are informed opinions on both sides.
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Re: Larry Swedroe: Why The Size Premium Should Persist

Post by vineviz » Thu Mar 21, 2019 5:55 pm

nisiprius wrote:
Thu Mar 21, 2019 5:23 pm
I have no doubt there will be informed opinions on both sides. That's exactly my point: there are informed opinions on both sides.
Please don't fall into the "fair and balanced" trap of assuming that just because you can find two opposing view points that both viewpoints are equally well supported or are equally credible.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Larry Swedroe: Why The Size Premium Should Persist

Post by knpstr » Thu Mar 21, 2019 6:12 pm

pezblanco wrote:
Thu Mar 21, 2019 10:22 am
Might read my factor book which talks about these things
Larry
I had a series of PMs with Larry about a previous thread. In those messages he also suggest I buy his "factor book". Which I plan on not doing.
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Re: Larry Swedroe: Why The Size Premium Should Persist

Post by pezblanco » Thu Mar 21, 2019 6:25 pm

knpstr wrote:
Thu Mar 21, 2019 6:12 pm
pezblanco wrote:
Thu Mar 21, 2019 10:22 am
Might read my factor book which talks about these things
Larry
I had a series of PMs with Larry about a previous thread. In those messages he also suggest I buy his "factor book". Which I plan on not doing.
Ignorance is bliss ...

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Re: Larry Swedroe: Why The Size Premium Should Persist

Post by hdas » Thu Mar 21, 2019 6:32 pm

pezblanco wrote:
Thu Mar 21, 2019 6:25 pm
knpstr wrote:
Thu Mar 21, 2019 6:12 pm
pezblanco wrote:
Thu Mar 21, 2019 10:22 am
Might read my factor book which talks about these things
Larry
I had a series of PMs with Larry about a previous thread. In those messages he also suggest I buy his "factor book". Which I plan on not doing.
Ignorance is bliss ...
I recommend instead Andrew Ang's book, much better imo. :greedy
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

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Re: Larry Swedroe: Why The Size Premium Should Persist

Post by nisiprius » Thu Mar 21, 2019 6:36 pm

The DFA US Micro Cap Portfolio fund, DFSCX, was launched literally within the same year, 1981, as the publication of the original paper that brought the size effect to wide notice--"The relationship between return and market value of common stocks," by Rolf Banz.

It is managed by a fund company well known for its commitment to factor-based passive investing. It has a deep exposure to the size factor. I'm not sure if there are any older small-cap funds, but this is a very old one. It has thirty-six years of history and $6 billion in assets behind it. Morningstar describes its fee level as "low." Because it is an actual fund using real money, questions about dataset accuracy, delisting bias, etc. need not be debated; what we see is what investors got.

I feel that it is a reasonable way to look at the size factor in real life.

I'm going to compare it to the Vanguard 500 index fund, VFINX.

Portfolio 1 (blue)
DFSCX DFA US Micro Cap I 100.00%

Portfolio 2 (red)
VFINX Vanguard 500 Index Investor 100.00%

Source

Image

Since inception, did the DFA US Micro Cap portfolio, DFSCX, outperform the Vanguard 500 Index Fund? Yes, it did, eventually--after about fifteen years of underperformance, but, yes.

Over its lifetime, though, to say it outperformed the Vanguard 500 Index fund looks rather like a technicality, the difference being only 0.23% 0.21% annualized. [0.21% is a more accurate calculation of the "geometric difference."]

Owners paid for that extra 0.23% in the form of quite noticeably higher standard deviation, one form of risk: 19.59% versus 14.83%. As a result, the two measures of risk-adjusted return, the Sharpe and Sortino ratios, were lower for DFSCX.
Last edited by nisiprius on Fri Mar 22, 2019 9:12 pm, edited 6 times in total.
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Re: Larry Swedroe: Why The Size Premium Should Persist

Post by knpstr » Thu Mar 21, 2019 6:38 pm

pezblanco wrote:
Thu Mar 21, 2019 6:25 pm
knpstr wrote:
Thu Mar 21, 2019 6:12 pm
pezblanco wrote:
Thu Mar 21, 2019 10:22 am
Might read my factor book which talks about these things
Larry
I had a series of PMs with Larry about a previous thread. In those messages he also suggest I buy his "factor book". Which I plan on not doing.
Ignorance is bliss ...
Of course I am ignorant and it is why I had a long 1-on-1 interaction with him asking questions.
Hope you can say the same about yourself.
"A fool thinks himself to be wise, but a wise man knows himself to be a fool."
Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius

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Re: Larry Swedroe: Why The Size Premium Should Persist

Post by cheezit » Thu Mar 21, 2019 6:45 pm

nisiprius wrote:
Thu Mar 21, 2019 6:36 pm
The DFA US Micro Cap Portfolio fund, DFSCX, was launched literally within the same year, 1981, as the publication of the original paper that brought the size effect to wide notice--"The relationship between return and market value of common stocks," by Rolf Banz.

It is managed by a fund company well known for its commitment to factor-based passive investing. It has a deep exposure to the size factor. I'm not sure if there are any older small-cap funds, but this is a very old one. It has thirty-six years of history and $6 billion in assets behind it. Morningstar describes its fee level as "low." I feel that it is a reasonable look at the size factor in real life.

I'm going to compare it to the Vanguard 500 index fund, VFINX.

Portfolio 1 (blue)
DFSCX DFA US Micro Cap I 100.00%

Portfolio 2 (red)
VFINX Vanguard 500 Index Investor 100.00%

Source

Image

Since inception, did the DFA US Micro Cap portfolio, DFSCX, outperform the Vanguard 500 Index Fund? Yes, it did, eventually--after about fifteen years of underperformance, but, yes.

Over its lifetime, though, to say it outperformed the Vanguard 500 Index fund looks rather like a technicality, the difference being only 0.23% annualized.

Owners paid for that extra 0.23% in the form of quite noticeably higher standard deviation, one form of risk: 19.59% versus 14.83%. As a result, the two measures of risk-adjusted return, the Sharpe and Sortino ratios, were lower for DFSCX.
Is there a reason your graph and tables start in 1985 when the fund's inception was in 1981? Perhaps because PV's "backtest portfolio" feature is limited to 1985-present (unlike PV's "backtest asset allocation" which lets you pick a start date as early as 1972)? :twisted:

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Re: Larry Swedroe: Why The Size Premium Should Persist

Post by BigJohn » Thu Mar 21, 2019 7:25 pm

Random Walker wrote:
Thu Mar 21, 2019 2:26 pm
Seems to me that common sense would indicate a size premium. The expected return for a company is its cost of capital. If I were lending money, I charge more for a small company with fewer streams of income than a larger more diverse one with multiple streams. Moreover small stocks are less liquid, and liquidity should deserve a premium as well.

Dave
Maybe I’m confused but I thought a factor premium implied higher return on a risk adjusted basis. These arguments in defense of the size premium seem based on an argument that more risk should give more return. If the premium is in fact based on taking more risk, why could I not achieve a similar objective with an increase in stock allocation?

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Re: Larry Swedroe: Why The Size Premium Should Persist

Post by Taylor Larimore » Thu Mar 21, 2019 7:37 pm

Random Walker wrote:
Thu Mar 21, 2019 2:26 pm
Seems to me that common sense would indicate a size premium. The expected return for a company is its cost of capital. If I were lending money, I charge more for a small company with fewer streams of income than a larger more diverse one with multiple streams. Moreover small stocks are less liquid, and liquidity should deserve a premium as well.

Dave
Dave:

You might want to reassess your conclusions:
If I were lending money, I charge more for a small company with fewer streams of income than a larger more diverse on with multiple streams.
The higher cost of capital is one reason that small companies are likely to be less profitable.
Moreover small stocks are less liquid, and liquidity should deserve a premium as well.
The fact that small stocks are less liquid makes them less desirable than large stocks.

Best wishes.
Taylor, CCL
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Re: Larry Swedroe: Why The Size Premium Should Persist

Post by Random Walker » Thu Mar 21, 2019 8:32 pm

BigJohn wrote:
Thu Mar 21, 2019 7:25 pm
Random Walker wrote:
Thu Mar 21, 2019 2:26 pm
Seems to me that common sense would indicate a size premium. The expected return for a company is its cost of capital. If I were lending money, I charge more for a small company with fewer streams of income than a larger more diverse one with multiple streams. Moreover small stocks are less liquid, and liquidity should deserve a premium as well.

Dave
Maybe I’m confused but I thought a factor premium implied higher return on a risk adjusted basis. These arguments in defense of the size premium seem based on an argument that more risk should give more return. If the premium is in fact based on taking more risk, why could I not achieve a similar objective with an increase in stock allocation?
I believe the size factor is entirely risk based, I I don’t believe there is any reason to expect higher risk adjusted return. I think there is reason to expect higher risk and higher commensurate return. In an efficient market all risky assets should provide about the same risk adjusted returns. The reason to add small instead of just more market factor is that size is a unique and independent type of risk from the market factor; there is a potential diversification benefit. The more less than perfectly correlated sources of risk and return in a portfolio, the more efficient. Also the more expensive! No free lunches; improved diversification comes at increased cost, and each investor needs to decide where to draw the line.
So, let’s throw value in there too. I could have one portfolio 60%TSM/40%TBM or say 40%SV/60%TBM. Both portfolios may have similar expected return, but the SV tilted portfolio has its risks spread across market, size, value, term, credit whereas the TSM portfolio has its risks spread across market, term, credit. Moreover, with the bigger bond allocation, the tilted portfolio will likely have narrower SD and smaller max drawdown.

Dave

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Re: Larry Swedroe: Why The Size Premium Should Persist

Post by Random Walker » Thu Mar 21, 2019 8:34 pm

Hi Taylor,
Wouldn’t the higher cost of capital and decreased liquidity be priced by an efficient market. Both are less desirable qualities, thus the stock price should be less, and thus expected return higher?

Dave

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Re: Larry Swedroe: Why The Size Premium Should Persist

Post by DonIce » Thu Mar 21, 2019 8:38 pm

nisiprius wrote:
Thu Mar 21, 2019 6:36 pm
It is managed by a fund company well known for its commitment to factor-based passive investing. It has a deep exposure to the size factor. I'm not sure if there are any older small-cap funds, but this is a very old one. It has thirty-six years of history and $6 billion in assets behind it. Morningstar describes its fee level as "low." Because it is an actual fund using real money, questions about dataset accuracy, delisting bias, etc. need not be debated; what we see is what investors got.

I feel that it is a reasonable way to look at the size factor in real life.

I'm going to compare it to the Vanguard 500 index fund, VFINX.

...
Good post. Any similarly long histories available for the other factors that people discuss, other than size?

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Re: Larry Swedroe: Why The Size Premium Should Persist

Post by pezblanco » Thu Mar 21, 2019 8:53 pm

knpstr wrote:
Thu Mar 21, 2019 6:38 pm
pezblanco wrote:
Thu Mar 21, 2019 6:25 pm
knpstr wrote:
Thu Mar 21, 2019 6:12 pm
pezblanco wrote:
Thu Mar 21, 2019 10:22 am
Might read my factor book which talks about these things
Larry
I had a series of PMs with Larry about a previous thread. In those messages he also suggest I buy his "factor book". Which I plan on not doing.
Ignorance is bliss ...
Of course I am ignorant and it is why I had a long 1-on-1 interaction with him asking questions.
Hope you can say the same about yourself.
"A fool thinks himself to be wise, but a wise man knows himself to be a fool."
Larry is a very kind man and he spends quite a bit of his time gratis trying to help people. He did this with me ... so your hope is fulfilled.
He didn't try to get me to be a client and knew full well that my portfolio was not in the range of the clients his firm deals with. To do that and to then brag that you picked his brain and now don't need to buy his book smacks of .... (fill in your favorite adjective).

Oh and thank you for your sophomoric wise saying ... a deep thought indeed.

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Re: Larry Swedroe: Why The Size Premium Should Persist

Post by pezblanco » Thu Mar 21, 2019 8:55 pm

hdas wrote:
Thu Mar 21, 2019 6:32 pm
pezblanco wrote:
Thu Mar 21, 2019 6:25 pm
knpstr wrote:
Thu Mar 21, 2019 6:12 pm
pezblanco wrote:
Thu Mar 21, 2019 10:22 am
Might read my factor book which talks about these things
Larry
I had a series of PMs with Larry about a previous thread. In those messages he also suggest I buy his "factor book". Which I plan on not doing.
Ignorance is bliss ...
I recommend instead Andrew Ang's book, much better imo. :greedy
I'll check it out ... the reality is that factors are theoretically very simple to understand ... at least to anyone that has ever done an ANOVA on a data set or take a statistics course that covers that subject. You just need to know the results of the regression and how they arranged the data, right?

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Re: Larry Swedroe: Why The Size Premium Should Persist

Post by ETadvisor » Thu Mar 21, 2019 8:56 pm

nisiprius wrote:
Thu Mar 21, 2019 6:36 pm
The DFA US Micro Cap Portfolio fund, DFSCX, was launched literally within the same year, 1981, as the publication of the original paper that brought the size effect to wide notice--"The relationship between return and market value of common stocks," by Rolf Banz.

It is managed by a fund company well known for its commitment to factor-based passive investing. It has a deep exposure to the size factor. I'm not sure if there are any older small-cap funds, but this is a very old one. It has thirty-six years of history and $6 billion in assets behind it. Morningstar describes its fee level as "low." Because it is an actual fund using real money, questions about dataset accuracy, delisting bias, etc. need not be debated; what we see is what investors got.

I feel that it is a reasonable way to look at the size factor in real life.

I'm going to compare it to the Vanguard 500 index fund, VFINX.

Portfolio 1 (blue)
DFSCX DFA US Micro Cap I 100.00%

Portfolio 2 (red)
VFINX Vanguard 500 Index Investor 100.00%

Source

Image

Since inception, did the DFA US Micro Cap portfolio, DFSCX, outperform the Vanguard 500 Index Fund? Yes, it did, eventually--after about fifteen years of underperformance, but, yes.

Over its lifetime, though, to say it outperformed the Vanguard 500 Index fund looks rather like a technicality, the difference being only 0.23% annualized.

Owners paid for that extra 0.23% in the form of quite noticeably higher standard deviation, one form of risk: 19.59% versus 14.83%. As a result, the two measures of risk-adjusted return, the Sharpe and Sortino ratios, were lower for DFSCX.
I can live with this to continue titling small cap blend albeit with Russell 2000. I will stay the course and I have over 15 years until retirement.

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Re: Larry Swedroe: Why The Size Premium Should Persist

Post by knpstr » Thu Mar 21, 2019 9:09 pm

pezblanco wrote:
Thu Mar 21, 2019 8:53 pm
Larry is a very kind man and he spends quite a bit of his time gratis trying to help people. He did this with me ... so your hope is fulfilled.
He didn't try to get me to be a client and knew full well that my portfolio was not in the range of the clients his firm deals with. To do that and to then brag that you picked his brain and now don't need to buy his book smacks of .... (fill in your favorite adjective).

Oh and thank you for your sophomoric wise saying ... a deep thought indeed.
To be clear I wasn't bragging about anything.
Another clarification: my hope was that you realize that you are ignorant, (as I am). Not that you also had a PM conversation with Larry.

I'll try to do better with my sophomoric sayings. I see you preferred yours to mine! :beer
Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius

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Re: Larry Swedroe: Why The Size Premium Should Persist

Post by Taylor Larimore » Thu Mar 21, 2019 9:19 pm

Random Walker wrote:
Thu Mar 21, 2019 8:34 pm
Hi Taylor,
Wouldn’t the higher cost of capital and decreased liquidity be priced by an efficient market. Both are less desirable qualities, thus the stock price should be less, and thus expected return higher?

Dave
Dave:

You are correct that a "higher cost of capital and decreased liquidity" should result in less profit. However, "less profit" normally results in less return.

Perhaps this is why last year U.S. small-value stocks had the lowest return of all Morningstar style categories.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Larry Swedroe: Why The Size Premium Should Persist

Post by skeptical » Thu Mar 21, 2019 9:41 pm

nisiprius wrote:
Thu Mar 21, 2019 6:36 pm
The DFA US Micro Cap Portfolio fund, DFSCX, was launched literally within the same year, 1981, as the publication of the original paper that brought the size effect to wide notice--"The relationship between return and market value of common stocks," by Rolf Banz.

It is managed by a fund company well known for its commitment to factor-based passive investing. It has a deep exposure to the size factor. I'm not sure if there are any older small-cap funds, but this is a very old one. It has thirty-six years of history and $6 billion in assets behind it. Morningstar describes its fee level as "low." Because it is an actual fund using real money, questions about dataset accuracy, delisting bias, etc. need not be debated; what we see is what investors got.

I feel that it is a reasonable way to look at the size factor in real life.

I'm going to compare it to the Vanguard 500 index fund, VFINX.

Portfolio 1 (blue)
DFSCX DFA US Micro Cap I 100.00%

Portfolio 2 (red)
VFINX Vanguard 500 Index Investor 100.00%

Source

Image

Since inception, did the DFA US Micro Cap portfolio, DFSCX, outperform the Vanguard 500 Index Fund? Yes, it did, eventually--after about fifteen years of underperformance, but, yes.

Over its lifetime, though, to say it outperformed the Vanguard 500 Index fund looks rather like a technicality, the difference being only 0.23% annualized.

Owners paid for that extra 0.23% in the form of quite noticeably higher standard deviation, one form of risk: 19.59% versus 14.83%. As a result, the two measures of risk-adjusted return, the Sharpe and Sortino ratios, were lower for DFSCX.
M* goes back to 12/23/1981 and shows results that are the same, ending with $604K vs $563K for DFSCX vs VFIAX.

For those in taxable, DFSCX also has 4% to 5% a year in cap gains (at least for the last few years), which knocks off 100 basis points per year in taxes. With that, and the 50 basis points for fund expenses, plus whatever you pay for the advisor, you are now in 200 to 250 basis point expense territory.

I have seen other comments that state that there are funds such as VBR (Vanguard SCV) which do not generate cap gains, but feedback on VBR is that it does not have as high a SCV factor load. Not sure how you can do stock picking of SCV stocks over time without the cap gains.

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Re: Larry Swedroe: Why The Size Premium Should Persist

Post by stlutz » Thu Mar 21, 2019 10:04 pm

Suppose I own stock in my employer, Consolidated Megacorp Industries. CMI decides to break itself up into 7 different companies. The contention in this whole "smallcap is riskier" discussion is that owning those 7 companies is significantly riskier than before the breakup and therefore should earn a return premium.

How exactly is that so? On one hand, company A can't rely on company B to bail it out in the way that division A can rely on division B. But on the other hand, company A can't take down companies B, C, D, E, F, and G in the way that division A can drag the whole company down (think GE Capital). The consolidated megacorp on one hand has more management risk--bad decisions by a CEO can screw up a whole company while you have 7 different management teams with the broken up companies. Conversely, the megacorp can probably attract better management talent than can any of the broken up companies.

So, I can't figure out how breaking a company up into pieces makes it more risky.

If breaking companies up is the easy way to higher returns, then investors should be demanding that Facebook, Apple, and Google all be broken up--the factor folks should be activist investors on this front as it seems like a pretty easy path to higher shareholder returns.

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Re: Larry Swedroe: Why The Size Premium Should Persist

Post by HEDGEFUNDIE » Fri Mar 22, 2019 4:20 am

stlutz wrote:
Thu Mar 21, 2019 10:04 pm
Suppose I own stock in my employer, Consolidated Megacorp Industries. CMI decides to break itself up into 7 different companies. The contention in this whole "smallcap is riskier" discussion is that owning those 7 companies is significantly riskier than before the breakup and therefore should earn a return premium.

How exactly is that so? On one hand, company A can't rely on company B to bail it out in the way that division A can rely on division B. But on the other hand, company A can't take down companies B, C, D, E, F, and G in the way that division A can drag the whole company down (think GE Capital). The consolidated megacorp on one hand has more management risk--bad decisions by a CEO can screw up a whole company while you have 7 different management teams with the broken up companies. Conversely, the megacorp can probably attract better management talent than can any of the broken up companies.

So, I can't figure out how breaking a company up into pieces makes it more risky.

If breaking companies up is the easy way to higher returns, then investors should be demanding that Facebook, Apple, and Google all be broken up--the factor folks should be activist investors on this front as it seems like a pretty easy path to higher shareholder returns.
Activist investors call for the breakup of large companies all the time. When was the last time you heard of an investor demanding that a company get larger through acquisition?

The value drivers here are (1) management focus and attention on core markets, and (2) avoiding value destruction through executive-driven empire building.

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Re: Larry Swedroe: Why The Size Premium Should Persist

Post by BigJohn » Fri Mar 22, 2019 1:15 pm

Random Walker wrote:
Thu Mar 21, 2019 8:32 pm
I believe the size factor is entirely risk based, I I don’t believe there is any reason to expect higher risk adjusted return. I think there is reason to expect higher risk and higher commensurate return. In an efficient market all risky assets should provide about the same risk adjusted returns. The reason to add small instead of just more market factor is that size is a unique and independent type of risk from the market factor; there is a potential diversification benefit. The more less than perfectly correlated sources of risk and return in a portfolio, the more efficient.
Dave
Dave, thanks for the response. I still struggle with this as a real unique and independent type of risk or that it gives a diversification benefit. To me it seems to be a concentration of your risk in one small corner of the market which is the opposite of diversification. I suspect that this is based in my skepticism of the validity of the statistical analysis (ie tortured numbers) as well as my strong belief is the "skating where the puck was" phenomena. So while I hope you get your incremental return, I'll just stick with TSM/TISM.

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Re: Larry Swedroe: Why The Size Premium Should Persist

Post by garlandwhizzer » Fri Mar 22, 2019 1:24 pm

I think nisi's post makes a very important point. It is one thing for academic backtesting using cost-free long/short portfolios (which do not exist now and have never existed in real life) to declare that a premium such as small is robust, consistent, pervasive across markets, etc.. It is quite another for funds that seek to exploit this factor or others to actually produce outperformance for investors after costs in the real investing world. The academic evidence in the former case is strong. The evidence for improving after cost real world investing returns with factor approaches is inconsistent even over some very long time frames as nisi points out. Clearly a size factor should exist at least due to increased risk, but apparently that doesn't guarantee that it is harvestable. Trading frictions and trading costs increase more and illiquidity becomes a greater and greater issue in sales and purchases of shares as company size gets smaller and smaller. This in addition to increased fund fees may help to explain the gulf between academic backtesting and real world investing results.

Garland Whizzer

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