Small Cap Value heads Rejoice !!!

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MotoTrojan
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Re: Small Cap Value heads Rejoice !!!

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Kaktus wrote: Sun Aug 23, 2020 11:36 am
MotoTrojan wrote: Sun Aug 23, 2020 8:50 am
Kaktus wrote: Sun Aug 23, 2020 5:39 am I am curious to hear what you who follow the different indexes think about the possible probable differences for return on "small cap" versus "large cap" could be over say twenty years IF it turned out to be a good run for small cap. I mean what ball-park figures do you use?
To give some local colour: here in Sweden we can nowadays buy into index stock funds with the biggest companies on the Stockholm exchange with no fee at all while a small cap fund still charge around 1.5% pa.
Thats a really heavy handicap to overcome year after year. Does anyone think it likely?
I wouldn't pay 1.5% for a good small-value fund, let alone just small-cap.

Here is a backtest from 1972 to August of 2018 (roughly when small-value peaked). Note this test is already not very fair as much of the early small & small-value data uses Fama French results which aren't live funds and don't account for trading costs, so actual returns would be even lower.

As you can see the difference between US Total Market and Small-cap was 1.5%. Small-value did reward you handsomely and would be worth the cost, but who knows what the premium will be in the future after trading costs and that 1.5% can be a huge drag.

I think it makes much more sense if you can get funds in the 0.07% to 0.25% realm, although for ex-US stocks this is closer to 0.36%-0.50% for many options. I do penny up 0.49% for QVAL and 0.59% for IVAL, but justified that by looking at decile backtests to see historic differential from say the top 3rd in price, where a solid value fund would expose you too, with the top decile; plus those only make up 10% each of portfolio and are complimented with more reasonable offerings.

https://www.portfoliovisualizer.com/bac ... ion3_3=100
Thanks. Good example. So even during this favourable period 1972-2018 for small cap a say 1.5 % cost handicap would not been worth it. That could be the take away.
So can I ask is the idea with QVAL to get a better, more precise, AA over sectors, or is it a bet on small cap?
Yeah, at 1.5% I personally think it is too steep a hurdle to be worth the risk.

QVAL is just a more concentrated/extreme bet on value as it pulls from the top decile on value, and from there takes the top half in a quality metric. It uses EBIT/TEV to weight for value which is a bit different than most of the other offerings (historically has done better). Because it only holds 40-50 stocks at any time, it is difficult for them to tilt as deeply to small-caps, so it uses a universe that eliminates the bottom 40th percentile in size (right now universe of stocks >$2B market cap, it's weighted average is $14.3B, so more mid-cap).

You can learn more on the methodology here: https://etfsite.alphaarchitect.com/wp-c ... _final.pdf

As you can see here since inception it is about tied with DFA's small-value fund, although DFA was outperforming for quite a while until 2018 when small-caps got hit. Similarly SLYV which has a softer tilt to value than QVAL and DFA both kept up with the S&P500 a bit longer and is not down as much in this timeframe. So deeper factor exposures theoretically help in the long-run, but when value does poorly, they will do even worse.

https://www.portfoliovisualizer.com/bac ... ion3_3=100
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Re: Small Cap Value heads Rejoice !!!

Post by Kaktus »

MotoTrojan, So you hope that the QVAL's "quantitaive picking" out of midcap will carry a penalty of .5% compared to total US long term?
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Re: Small Cap Value heads Rejoice !!!

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MotoTrojan wrote: Sun Aug 23, 2020 10:29 am Nice that sounds neat. I think it is a good move, even though I opted for FNDC as a core ex-US holding (softer tilts) along with IVAL.
FNDC could be interesting for me too. I see the 5 year performance is a bit better than DLS. Could be due to the TER I guess.
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Re: Small Cap Value heads Rejoice !!!

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YRT70 wrote: Sun Aug 23, 2020 10:06 am Thanks for the detailed answer Robert. Have you also looked at the Avantis SCV funds like AVUV?
I have not looked at AVUV as I don't have access to 'backtested' data to understand the likely long-term characteristics (factor loads) of the fund. Earlier in this thread Steve provided this analysis which is the most comprehensive I have seen anywhere.
Steve Reading wrote: Wed Aug 19, 2020 1:36 pm FWIW, a friend of mine (who works at D.E. Shaws actually) and I sat down with a Bloomberg terminal (and an R-based application for backtesting), replicated the methodology of Avantis funds, backtested them and regressed to figure out factor loads. We had data back to like the 70s. Easily the biggest waste of our time, idk why we thought something magical would come out. Loadings were pretty similar to things like VIOV.

We got the following loads (1973 to 2019):
EDIT: Sorry my friend mentioned not to share this information publicly. But the values are not much different than something like VIOV

Here are my personal thoughts on the methodology:
The size tilt should be very strong because they try to go for a strong value and quality tilt. Their value tilt should be reasonable although they subtract goodwill (FF doesn't) so it's possible they don't buy a lot of companies FF would consider cheap (creating a slight mismatch). I don't feel strongly about using goodwill or not. Similar story for quality: they use cash operating profitability so there will be a slight mismatch to FF (which I think uses operating profitability).
They have neg. momentum screens and negative investment screens so I wouldn't expect particularly strongly negative loadings on those.

I personally don't like that they use only one definition for value and one definition for quality. And I wish their neg. MOM screen was a little more sophisticated than just "hey let's just wait a couple of months before buying that value company". I also don't like that it's actively managed (if in the future, they decide they have enough evidence that value is not a useful factor any more, they literally can change that).

Summary
Hard to go wrong with AVUV, looks like a great product. A couple of things I don't like but they're minimal. Might use it as a TLH partner in the future.
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Robert T
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Re: Small Cap Value heads Rejoice !!!

Post by Robert T »

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FWIW – I was first interested in QVAL when I read this 2014 M* article by Sam Lee, and especially as the underling ‘index” had a similar long-term value load as my long-term target. After reading the article, I read the Quantitative Value book and downloaded the back-tested data from the AlphaArchitect website. The backtest results do indeed show very high relative returns.
https://www.morningstar.com/articles/67 ... d-strategy

What I was a little uncomfortable with was the large residual not explained by factor models and the large negative momentum load. The question it posed was will the large ‘alpha’ (unexplained residual) beyond regular factor exposure (which I target) continue or not? As the ‘’alpha’ was unexplained, it didn’t instill a lot of confidence that it would. If it didn’t and trended back to zero i.e. past returns simply explained by factor exposure then I would still achieve by target value load but would be left with large negative momentum which would erode returns relative to other options. It may well outperform (i.e. retain positive and significant alpha beyond factor exposure) and I hope it does for both Wes Gray and the investors in this fund. But in the end decided on other options – just the approach I took.
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MotoTrojan
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Re: Small Cap Value heads Rejoice !!!

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Robert T wrote: Sun Aug 23, 2020 2:26 pm .
FWIW – I was first interested in QVAL when I read this 2014 M* article by Sam Lee, and especially as the underling ‘index” had a similar long-term value load as my long-term target. After reading the article, I read the Quantitative Value book and downloaded the back-tested data from the AlphaArchitect website. The backtest results do indeed show very high relative returns.
https://www.morningstar.com/articles/67 ... d-strategy

What I was a little uncomfortable with was the large residual not explained by factor models and the large negative momentum load. The question it posed was will the large ‘alpha’ (unexplained residual) beyond regular factor exposure (which I target) continue or not? As the ‘’alpha’ was unexplained, it didn’t instill a lot of confidence that it would. If it didn’t and trended back to zero i.e. past returns simply explained by factor exposure then I would still achieve by target value load but would be left with large negative momentum which would erode returns relative to other options. It may well outperform (i.e. retain positive and significant alpha beyond factor exposure) and I hope it does for both Wes Gray and the investors in this fund. But in the end decided on other options – just the approach I took.
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Curious your thoughts on whether the residual alpha is simply because you compared to an FF HML factor model rather than one based on EBIT/TEV?
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Re: Small Cap Value heads Rejoice !!!

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I heard on a podcast and it does seem to be the case, the growth-value divide is now the widest it has ever been throughout the post-GFC period. There was a brief respite around early June which then reversed. QVAL divided by Vanguard Growth VUG, since Jan 2015;

Image

This chart also resembles the US Dollar versus other currencies, game over Jan 2018 onward.
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Re: Small Cap Value heads Rejoice !!!

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Forester wrote: Sun Aug 23, 2020 5:04 pm I heard on a podcast and it does seem to be the case, the growth-value divide is now the widest it has ever been throughout the post-GFC period. There was a brief respite around early June which then reversed. QVAL divided by Vanguard Growth VUG, since Jan 2015;

Image

This chart also resembles the US Dollar versus other currencies, game over Jan 2018 onward.
Wild. What podcast (same Resolve one you recommended?)?

Would be interested to see updated stats (AQR's May paper had info) on how much of this historic spread is on the growth-side vs. value-side relative to the long-term mean; my gut says both have advanced but growth in particular seems to have pulled away.
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Re: Small Cap Value heads Rejoice !!!

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MotoTrojan wrote: Sun Aug 23, 2020 5:23 pm
Forester wrote: Sun Aug 23, 2020 5:04 pm I heard on a podcast and it does seem to be the case, the growth-value divide is now the widest it has ever been throughout the post-GFC period. There was a brief respite around early June which then reversed. QVAL divided by Vanguard Growth VUG, since Jan 2015;

Image

This chart also resembles the US Dollar versus other currencies, game over Jan 2018 onward.
Wild. What podcast (same Resolve one you recommended?)?

Would be interested to see updated stats (AQR's May paper had info) on how much of this historic spread is on the growth-side vs. value-side relative to the long-term mean; my gut says both have advanced but growth in particular seems to have pulled away.
Market Huddle 21st August 1:30:15 https://youtu.be/4MzxZu-KTrc?t=5415
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Re: Small Cap Value heads Rejoice !!!

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Robert T wrote: Sun Aug 23, 2020 2:26 pm .
FWIW – I was first interested in QVAL when I read this 2014 M* article by Sam Lee, and especially as the underling ‘index” had a similar long-term value load as my long-term target. After reading the article, I read the Quantitative Value book and downloaded the back-tested data from the AlphaArchitect website. The backtest results do indeed show very high relative returns.
https://www.morningstar.com/articles/67 ... d-strategy

What I was a little uncomfortable with was the large residual not explained by factor models and the large negative momentum load. The question it posed was will the large ‘alpha’ (unexplained residual) beyond regular factor exposure (which I target) continue or not? As the ‘’alpha’ was unexplained, it didn’t instill a lot of confidence that it would. If it didn’t and trended back to zero i.e. past returns simply explained by factor exposure then I would still achieve by target value load but would be left with large negative momentum which would erode returns relative to other options. It may well outperform (i.e. retain positive and significant alpha beyond factor exposure) and I hope it does for both Wes Gray and the investors in this fund. But in the end decided on other options – just the approach I took.
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Weird, I've looked at the QVAL data and regressed on FF5 + Momentum and did not find the alpha to be statistically significant.

I did find the momentum to be extremely negative (and most definitely statistically significant). And the fit to be modest (R^2 = 0.89), probably due to the large ideosyncratic risk in the fund (only holds ~50 stocks).

Could you post what results you got from your regressions? Thanks
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Re: Small Cap Value heads Rejoice !!!

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Robert T wrote: Sun Aug 23, 2020 2:23 pm
YRT70 wrote: Sun Aug 23, 2020 10:06 am Thanks for the detailed answer Robert. Have you also looked at the Avantis SCV funds like AVUV?
I have not looked at AVUV as I don't have access to 'backtested' data to understand the likely long-term characteristics (factor loads) of the fund. Earlier in this thread Steve provided this analysis which is the most comprehensive I have seen anywhere.
Steve Reading wrote: Wed Aug 19, 2020 1:36 pm FWIW, a friend of mine (who works at D.E. Shaws actually) and I sat down with a Bloomberg terminal (and an R-based application for backtesting), replicated the methodology of Avantis funds, backtested them and regressed to figure out factor loads. We had data back to like the 70s. Easily the biggest waste of our time, idk why we thought something magical would come out. Loadings were pretty similar to things like VIOV.

We got the following loads (1973 to 2019):
EDIT: Sorry my friend mentioned not to share this information publicly. But the values are not much different than something like VIOV

Here are my personal thoughts on the methodology:
The size tilt should be very strong because they try to go for a strong value and quality tilt. Their value tilt should be reasonable although they subtract goodwill (FF doesn't) so it's possible they don't buy a lot of companies FF would consider cheap (creating a slight mismatch). I don't feel strongly about using goodwill or not. Similar story for quality: they use cash operating profitability so there will be a slight mismatch to FF (which I think uses operating profitability).
They have neg. momentum screens and negative investment screens so I wouldn't expect particularly strongly negative loadings on those.

I personally don't like that they use only one definition for value and one definition for quality. And I wish their neg. MOM screen was a little more sophisticated than just "hey let's just wait a couple of months before buying that value company". I also don't like that it's actively managed (if in the future, they decide they have enough evidence that value is not a useful factor any more, they literally can change that).

Summary
Hard to go wrong with AVUV, looks like a great product. A couple of things I don't like but they're minimal. Might use it as a TLH partner in the future.
.
In another thread, I took a look at the Avantis U.S. Small Cap Value ETF, AVUV, and compared it to other Small Value investments that I owned. Just eyeballing Morningstar data, it came closest to the iShares S&P 600 Small Cap Value ETF, IJS. It seemed that Avantis loaded a bit better on Value and that IJS loaded a bit better on Size. The differences weren't compelling enough for me to switch out IJS for AVUV.

I also compared the Avantis International Small Cap Value ETF with the Wisdom Tree Small Cap Dividend fund and decided to stick with the Wisdom Tree product despite the higher expense ratio.

So Avantis looks good but I chose in each case to not make a switch.
A fool and his money are good for business.
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Re: Small Cap Value heads Rejoice !!!

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Steve Reading wrote: Sun Aug 23, 2020 5:55 pm Could you post what results you got from your regressions? Thanks
When I earlier looked at this (admittedly years ago now), I got similar results to Sam Lee for the same/similar time period using FF factors, and AQR's quality factor (QMJ). The alpha was statistically significant. From earlier notes on why I don't own QVAL - that serve as a refresher when/if I asked myself the question again.

From the article / My earlier estimates (1974-2013)
1.08 / 1.08 = Market
0.37 / 0.35 = size
0.41 / 0.39 = Value
-0.34 / -035 = Momentum
0.40 / 0.42 = Quality
5.02 / 3.21 = Annual alpha
0.84 / 0.84 = R^2

If the alpha is not statistically different from zero when extending the series to 2020, it means that it must have been strongly negative over the period 2014 to 2020 to get to a 'zero' average for the full period. And indeed, portfolio visualizer suggests this was the case - QVAL annual alpha from November 2014 to June 2020 = -8.2%. This just reiterates the earlier concerns I had. For the two periods the alpha (unexplained residual) varied from +3.2% to -8.2% (a large number relative to its factor exposure). Compare this to RAFI US 1500 Small-mid from 2/1979 to 12/2013 (earliest data I have) the annual alpha = 0.06 (with higher R^2 = 0.96 vs. 0.84), and from the above link, with live returns from November 2014 to June 2020, annual alpha = -0.68. So between these two periods there is an annual alpha range of +3.2% to -8.2% for QVAL, and 0.06% to -0.68% for PRFZ. My preference is for the closer to zero alpha and higher R^2 option. The larger variation may be due to the larger idiosyncratic risk (from smaller stock holdings in QVAL). Using AlphaArchitect's HML factor (base on EBIT/TEV) from portfolio visualizer still leaves a larger unexplained portion of QVAL than the RAFI series.

QVAL may perform very well over its lifetime and certainly had higher returns than RAFI US 1500 Small mid in the back-test 1979-2013: 16.9% vs. 15.6%, but just didn't fit well within the framework I try to use for making decisions, relative to alternatives (close to zero alpha, high R^2). And I am not 100% small value (not trying to maximize expected returns) but trying to target a more moderate factor exposure.

Robert
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Re: Small Cap Value heads Rejoice !!!

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Robert T wrote: Mon Aug 24, 2020 4:58 am
Steve Reading wrote: Sun Aug 23, 2020 5:55 pm Could you post what results you got from your regressions? Thanks
When I earlier looked at this (admittedly years ago now), I got similar results to Sam Lee for the same/similar time period using FF factors, and AQR's quality factor (QMJ). The alpha was statistically significant. From earlier notes on why I don't own QVAL - that serve as a refresher when/if I asked myself the question again.

From the article / My earlier estimates (1974-2013)
1.08 / 1.08 = Market
0.37 / 0.35 = size
0.41 / 0.39 = Value
-0.34 / -035 = Momentum
0.40 / 0.42 = Quality
5.02 / 3.21 = Annual alpha
0.84 / 0.84 = R^2

If the alpha is not statistically different from zero when extending the series to 2020, it means that it must have been strongly negative over the period 2014 to 2020 to get to a 'zero' average for the full period. And indeed, portfolio visualizer suggests this was the case - QVAL annual alpha from November 2014 to June 2020 = -8.2%. This just reiterates the earlier concerns I had. For the two periods the alpha (unexplained residual) varied from +3.2% to -8.2% (a large number relative to its factor exposure). Compare this to RAFI US 1500 Small-mid from 2/1979 to 12/2013 (earliest data I have) the annual alpha = 0.06 (with higher R^2 = 0.96 vs. 0.84), and from the above link, with live returns from November 2014 to June 2020, annual alpha = -0.68. So between these two periods there is an annual alpha range of +3.2% to -8.2% for QVAL, and 0.06% to -0.68% for PRFZ. My preference is for the closer to zero alpha and higher R^2 option. The larger variation may be due to the larger idiosyncratic risk (from smaller stock holdings in QVAL). Using AlphaArchitect's HML factor (base on EBIT/TEV) from portfolio visualizer still leaves a larger unexplained portion of QVAL than the RAFI series.

QVAL may perform very well over its lifetime and certainly had higher returns than RAFI US 1500 Small mid in the back-test 1979-2013: 16.9% vs. 15.6%, but just didn't fit well within the framework I try to use for making decisions, relative to alternatives (close to zero alpha, high R^2). And I am not 100% small value (not trying to maximize expected returns) but trying to target a more moderate factor exposure.

Robert
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Robert, thank you for your thoughts. I ultimately decided against these funds for very similar reasons.
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MotoTrojan
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Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

Robert T wrote: Mon Aug 24, 2020 4:58 am
Steve Reading wrote: Sun Aug 23, 2020 5:55 pm Could you post what results you got from your regressions? Thanks
When I earlier looked at this (admittedly years ago now), I got similar results to Sam Lee for the same/similar time period using FF factors, and AQR's quality factor (QMJ). The alpha was statistically significant. From earlier notes on why I don't own QVAL - that serve as a refresher when/if I asked myself the question again.

From the article / My earlier estimates (1974-2013)
1.08 / 1.08 = Market
0.37 / 0.35 = size
0.41 / 0.39 = Value
-0.34 / -035 = Momentum
0.40 / 0.42 = Quality
5.02 / 3.21 = Annual alpha
0.84 / 0.84 = R^2

If the alpha is not statistically different from zero when extending the series to 2020, it means that it must have been strongly negative over the period 2014 to 2020 to get to a 'zero' average for the full period. And indeed, portfolio visualizer suggests this was the case - QVAL annual alpha from November 2014 to June 2020 = -8.2%. This just reiterates the earlier concerns I had. For the two periods the alpha (unexplained residual) varied from +3.2% to -8.2% (a large number relative to its factor exposure). Compare this to RAFI US 1500 Small-mid from 2/1979 to 12/2013 (earliest data I have) the annual alpha = 0.06 (with higher R^2 = 0.96 vs. 0.84), and from the above link, with live returns from November 2014 to June 2020, annual alpha = -0.68. So between these two periods there is an annual alpha range of +3.2% to -8.2% for QVAL, and 0.06% to -0.68% for PRFZ. My preference is for the closer to zero alpha and higher R^2 option. The larger variation may be due to the larger idiosyncratic risk (from smaller stock holdings in QVAL). Using AlphaArchitect's HML factor (base on EBIT/TEV) from portfolio visualizer still leaves a larger unexplained portion of QVAL than the RAFI series.

QVAL may perform very well over its lifetime and certainly had higher returns than RAFI US 1500 Small mid in the back-test 1979-2013: 16.9% vs. 15.6%, but just didn't fit well within the framework I try to use for making decisions, relative to alternatives (close to zero alpha, high R^2). And I am not 100% small value (not trying to maximize expected returns) but trying to target a more moderate factor exposure.

Robert
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Very interesting. I had presumed the strong positive alpha leading to a strong negative alpha recently was just extra value exposure unexplained by FF due to use of EBIT/TEV, but you bring up a good point that there is a large residual with the Alpha Architect factors themselves.

Wonder why Gray hasn't had an article to discuss the factor exposure more in-depth.
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Re: Small Cap Value heads Rejoice !!!

Post by garlandwhizzer »

If the alpha is not statistically different from zero when extending the series to 2020, it means that it must have been strongly negative over the period 2014 to 2020 to get to a 'zero' average for the full period. And indeed, portfolio visualizer suggests this was the case - QVAL annual alpha from November 2014 to June 2020 = -8.2%.
The existence of alpha which is unexplained by factor models simply tells you that the factor theory is imperfect. Imperfect by a margin that varies over time and the degree of which is not predictable in advance. It is an interesting fact that often one finds that a very compellingly aligned factor portfolio with multiple strong factor loads like QVAL in the above example winds up sucking big time in terms of real results. This is true for single factor funds, double factor funds (SCV), and even the theoretically very attractive multi-factor funds. All of these approaches have suffered in recent years. Factor true believers are confident that this will change in the future but the rest of us lack that faith. One reason for our skepticism is the sometimes nasty negative alpha that factor funds can generate. RZV, another factor fund with very high loads to value and to size, has been a total disaster for investors since its inception 17 years ago.

I believe that factor models themselves are inherently flawed and are not to be counted on as accurate oracles of the future in real funds. I really don't care what the models predict. What I care about is: do factor funds put more dollars in my pocket than single factor TSM? In recent years the answer to that question has been a resounding no. If factor portfolios actually performed in the future as their prospective factor load predicted, we'd all be fully invested in factor approaches by now. Investors prefer returns and risk adjusted returns to a theoretical model that has never existed in the real world. Alpha is the market's way of reminding factor theorists that they are coming from a place of imperfect and sometimes deeply flawed knowledge as in the case of RZV and QVAL.

Having said that, I believe relative to to LCG tech darlings at the present time which I believe to be riding an unsustainable wave of mindless MOM investing that now is a good time be sure your portfolio isn't tilted too heavily to these past winners. Value has gotten so cheap relative to growth that at some point in the not too distant future I expect for value to make up much, if not all, of its lost ground. Whether it will go beyond that and once again produce the promised long term outperformance or not is still uncertain in my mind, but market history says that market leadership doesn't stay in one place, LCG tech, forever.

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Re: Small Cap Value heads Rejoice !!!

Post by acegolfer »

garlandwhizzer wrote: Mon Aug 24, 2020 2:27 pm
I believe that factor models themselves are inherently flawed and are not to be counted on as accurate oracles of the future in real funds. I really don't care what the models predict.
This is an unfair claim against factor model. Factor models are to explain cross section returns. It was not designed to make prediction.
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Re: Small Cap Value heads Rejoice !!!

Post by Robert T »

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On factor models, this is from a post I wrote over 13 year ago that I think is still valid – at least for me viewtopic.php?p=38609#p38609 They have helped me tremendously with my investment process. Not for everybody.
Robert T wrote: Sat Jun 09, 2007 9:36 pm FWIW – here is what I view to be the three main disadvantages and three main advantages of the approach (obviously I think the advantages way exceed the disadvantages).

Disadvantages:
  • Upfront time cost: to determine factor loadings on potential funds and to select funds in a way that achieves portfolio factor loading targets takes some time.

    Just a model: Its far from an exact science and should be viewed as just a model (but a good one IMO). There are some statistical criticisms (multi-collinearity and simultaneity biases) that may affect results dependent on how the model is used. Given there is a small portion of the variability in returns not explained by the model (about 5 percent sometimes more) this may show up in tracking error against a benchmark constructed from the model results.

    Data limitations: The fund and index data series that are available are often fairly short (and not representative of all market conditions) so factor loading estimates may not be truly representative of fund/index characteristics. Factor loadings do sometimes drift over time but hopefully not too significantly if index funds are used.
Advantages:
  • Provides a clear framework for investment decisions: Provides a clear framework for portfolio decisions. Its based on rigorous peer reviewed research and not on hunches or gut feel. The research has been reviewed, critiqued, and used by researchers and practitioners for fifteen years and still stands up fairly well.

    Simplifies: It simplifies an extraordinary complex system into five main risk factors. Once an investor has selected the appropriate exposure to these risks through selection of factor loading targets (based on willingness, ability, and need to take risk), then security (fund) selection is simplified to minimizing cost to achieve factor loading targets. With the multitude of new ETF product coming to market the simple screening questions is – will it lower the cost of achieving an already fixed set of portfolio factor loading targets?

    Helps keep emotions in check: IMO it (i) significantly reduces the likelihood of continual tweaking of a portfolio with new products, changing market conditions etc..; and (ii) significantly increases the likelihood of staying the course in both good and bad markets. A couple of messages from Swensen captures some of the reason failry well “lightly held positions invite casual reversal, exposing vacillating investors to the costly consequences of market whipsaw.” The upfront cost can be an important investment cost to ensure more committed positions. “Without a rigorous process that is informed by thorough analysis and implemented with discipline, investment portfolios respond to human instinct, tending to follow whims and fashion”. IMO the approach provides the thorough analysis that also helps implementation discipline.
All factors have periods of underperformance. I think we quickly forget that in the 17 year period from 1965 to 1981 the S&P500 underperformed T-bills: 6.3% vs. 6.7%. Estimated factor loads don’t predict the future size of factor premiums.

Robert
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Re: Small Cap Value heads Rejoice !!!

Post by nedsaid »

garlandwhizzer wrote: Mon Aug 24, 2020 2:27 pm
If the alpha is not statistically different from zero when extending the series to 2020, it means that it must have been strongly negative over the period 2014 to 2020 to get to a 'zero' average for the full period. And indeed, portfolio visualizer suggests this was the case - QVAL annual alpha from November 2014 to June 2020 = -8.2%.
The existence of alpha which is unexplained by factor models simply tells you that the factor theory is imperfect. Imperfect by a margin that varies over time and the degree of which is not predictable in advance. It is an interesting fact that often one finds that a very compellingly aligned factor portfolio with multiple strong factor loads like QVAL in the above example winds up sucking big time in terms of real results. This is true for single factor funds, double factor funds (SCV), and even the theoretically very attractive multi-factor funds. All of these approaches have suffered in recent years. Factor true believers are confident that this will change in the future but the rest of us lack that faith. One reason for our skepticism is the sometimes nasty negative alpha that factor funds can generate. RZV, another factor fund with very high loads to value and to size, has been a total disaster for investors since its inception 17 years ago.

Nedsaid: Hence my comments that the "bad" factor products have been outperforming the "good" factor products. Biggest example is Vanguard Small Cap Value Index which has outperformed the DFA Small Value fund, the Vanguard Fund has a lot of Mid-Caps and an awful lot of Core stocks. Sometimes too much factor loading is a bad thing. The "cool kids" with their parent's sports cars, perfectly styled hair, fashionable clothes, and designer sunglasses all invested in the "good" factor products while us "nerds" with the bad haircuts, high water pants, the tape holding our glasses together, and the pocket protectors invested in the "good enough" or "bad" factor products. The goofy, dweeby nerds had the last laugh.


I believe that factor models themselves are inherently flawed and are not to be counted on as accurate oracles of the future in real funds. I really don't care what the models predict. What I care about is: do factor funds put more dollars in my pocket than single factor TSM? In recent years the answer to that question has been a resounding no. If factor portfolios actually performed in the future as their prospective factor load predicted, we'd all be fully invested in factor approaches by now. Investors prefer returns and risk adjusted returns to a theoretical model that has never existed in the real world. Alpha is the market's way of reminding factor theorists that they are coming from a place of imperfect and sometimes deeply flawed knowledge as in the case of RZV and QVAL.

Nedsaid: Larry Swedroe's articles and books aren't helping. The more known something gets, the less effective it becomes. Despite all the pins stuck in the Larry Swedroe voodoo dolls trying to get him to give up on Small Value, Larry hasn't budged an inch. I was hoping for and praying for Larry's tearful confession that he was wrong all along. Lake THAT is going to happen. Like the Fonz, Larry is never wrong. I remember that episode on Happy Days when the Fonz tried and failed to get it out. "I was w-w-w-w-w-w-w. I was w-w-w-w-w-w-w." One of my favorite episodes.

Having said that, I believe relative to to LCG tech darlings at the present time which I believe to be riding an unsustainable wave of mindless MOM investing that now is a good time be sure your portfolio isn't tilted too heavily to these past winners. Value has gotten so cheap relative to growth that at some point in the not too distant future I expect for value to make up much, if not all, of its lost ground. Whether it will go beyond that and once again produce the promised long term outperformance or not is still uncertain in my mind, but market history says that market leadership doesn't stay in one place, LCG tech, forever.

Nedsaid: My psy-ops on Garland didn't work. He had intellectually capitulated but was way too smart to sell his Small Value investments. I read recently that he bought more. I guess he went back to that good old Small Value religion. He held steady after showing signs of buckling. All my teasing just reinforced his resolve. By the way, I expect a reversion to the mean to Value but have no idea when it will happen. It could be a sudden and violent move, as they say you have to be on board when the train leaves the station.

Just to let people know, today I took a bit off the top of the US Total Stock Market Index and with the proceeds but 1/2 into U.S. Bond Index, 1/4 into an International Developed Markets Index, and 1/4 into a US Large Cap Value Index. Not a big amount, just another round of mild rebalancing. This is a continuation of a program that has been in force since the "taper tantrum" of July 2013. I am seven years into this. A few days ago, my managed account at American Century rebalanced from Large Growth into US Core Bonds. De-risk, I must even if it doesn't feel good doing it.

Nedsaid, a man of his sort-of convictions sort-of rebalanced with less than 1% of his portfolio. But then again, I was born to be mild. Bold I am not.


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Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

nedsaid wrote: Mon Aug 24, 2020 11:19 pm

Nedsaid: Hence my comments that the "bad" factor products have been outperforming the "good" factor products. Biggest example is Vanguard Small Cap Value Index which has outperformed the DFA Small Value fund, the Vanguard Fund has a lot of Mid-Caps and an awful lot of Core stocks. Sometimes too much factor loading is a bad thing. The "cool kids" with their parent's sports cars, perfectly styled hair, fashionable clothes, and designer sunglasses all invested in the "good" factor products while us "nerds" with the bad haircuts, high water pants, the tape holding our glasses together, and the pocket protectors invested in the "good enough" or "bad" factor products. The goofy, dweeby nerds had the last laugh.
This feels like an oversimplification. The “bad” products simply had less factor exposure, thus they outperformed in the period with a negative premium. It would be no different had you held less of the “good” products, to the point that your exposure was equivalent. Given that people tilt to value because they expect the premium to be positive enough to make up for the negative times, the “good” products with deeper exposure should expect to win out eventually. I often see people comparing factor funds 1-for-1 during drawdowns and saying the one that did best in return must have the best factor construction; it’s often actually the opposite.
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Re: Small Cap Value heads Rejoice !!!

Post by nedsaid »

MotoTrojan wrote: Tue Aug 25, 2020 7:42 am
nedsaid wrote: Mon Aug 24, 2020 11:19 pm

Nedsaid: Hence my comments that the "bad" factor products have been outperforming the "good" factor products. Biggest example is Vanguard Small Cap Value Index which has outperformed the DFA Small Value fund, the Vanguard Fund has a lot of Mid-Caps and an awful lot of Core stocks. Sometimes too much factor loading is a bad thing. The "cool kids" with their parent's sports cars, perfectly styled hair, fashionable clothes, and designer sunglasses all invested in the "good" factor products while us "nerds" with the bad haircuts, high water pants, the tape holding our glasses together, and the pocket protectors invested in the "good enough" or "bad" factor products. The goofy, dweeby nerds had the last laugh.
This feels like an oversimplification. The “bad” products simply had less factor exposure, thus they outperformed in the period with a negative premium. It would be no different had you held less of the “good” products, to the point that your exposure was equivalent. Given that people tilt to value because they expect the premium to be positive enough to make up for the negative times, the “good” products with deeper exposure should expect to win out eventually. I often see people comparing factor funds 1-for-1 during drawdowns and saying the one that did best in return must have the best factor construction; it’s often actually the opposite.
In a Large Cap Growth environment, it isn't surprising that the "bad" factor products would outperform the "good" ones. The reason that I wrote this is that I faithfully followed Paul Merriman's advice back in 2007-2008. I bought the Vanguard Small Cap Value Index ETF and the Micro-Cap Index ETF based on his advice only to learn days later from this forum and Morningstar that I had this all wrong. I learned from Larry Swedroe that Bridgeway and DFA were superior to what I bought.

Just pointing out that factor tilting isn't so easy, lots of nuance involved. The sort of Small Value Vanguard Small Value Index based on the CRSP index has outperformed the deeper value DFA product. Again, this should not be surprising.

I went from being brilliant to an idiot back to being brilliant again.
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Re: Small Cap Value heads Rejoice !!!

Post by acegolfer »

MotoTrojan wrote: Tue Aug 25, 2020 7:42 am
nedsaid wrote: Mon Aug 24, 2020 11:19 pm

Nedsaid: Hence my comments that the "bad" factor products have been outperforming the "good" factor products. Biggest example is Vanguard Small Cap Value Index which has outperformed the DFA Small Value fund, the Vanguard Fund has a lot of Mid-Caps and an awful lot of Core stocks. Sometimes too much factor loading is a bad thing. The "cool kids" with their parent's sports cars, perfectly styled hair, fashionable clothes, and designer sunglasses all invested in the "good" factor products while us "nerds" with the bad haircuts, high water pants, the tape holding our glasses together, and the pocket protectors invested in the "good enough" or "bad" factor products. The goofy, dweeby nerds had the last laugh.
This feels like an oversimplification. The “bad” products simply had less factor exposure, thus they outperformed in the period with a negative premium. It would be no different had you held less of the “good” products, to the point that your exposure was equivalent. Given that people tilt to value because they expect the premium to be positive enough to make up for the negative times, the “good” products with deeper exposure should expect to win out eventually. I often see people comparing factor funds 1-for-1 during drawdowns and saying the one that did best in return must have the best factor construction; it’s often actually the opposite.
According to nedsaid, the riskier funds are the "good" products and less riskier funds are the "bad" products.
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Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

nedsaid wrote: Tue Aug 25, 2020 9:24 am
MotoTrojan wrote: Tue Aug 25, 2020 7:42 am
nedsaid wrote: Mon Aug 24, 2020 11:19 pm

Nedsaid: Hence my comments that the "bad" factor products have been outperforming the "good" factor products. Biggest example is Vanguard Small Cap Value Index which has outperformed the DFA Small Value fund, the Vanguard Fund has a lot of Mid-Caps and an awful lot of Core stocks. Sometimes too much factor loading is a bad thing. The "cool kids" with their parent's sports cars, perfectly styled hair, fashionable clothes, and designer sunglasses all invested in the "good" factor products while us "nerds" with the bad haircuts, high water pants, the tape holding our glasses together, and the pocket protectors invested in the "good enough" or "bad" factor products. The goofy, dweeby nerds had the last laugh.
This feels like an oversimplification. The “bad” products simply had less factor exposure, thus they outperformed in the period with a negative premium. It would be no different had you held less of the “good” products, to the point that your exposure was equivalent. Given that people tilt to value because they expect the premium to be positive enough to make up for the negative times, the “good” products with deeper exposure should expect to win out eventually. I often see people comparing factor funds 1-for-1 during drawdowns and saying the one that did best in return must have the best factor construction; it’s often actually the opposite.
In a Large Cap Growth environment, it isn't surprising that the "bad" factor products would outperform the "good" ones. The reason that I wrote this is that I faithfully followed Paul Merriman's advice back in 2007-2008. I bought the Vanguard Small Cap Value Index ETF and the Micro-Cap Index ETF based on his advice only to learn days later from this forum and Morningstar that I had this all wrong. I learned from Larry Swedroe that Bridgeway and DFA were superior to what I bought.

Just pointing out that factor tilting isn't so easy, lots of nuance involved. The sort of Small Value Vanguard Small Value Index based on the CRSP index has outperformed the deeper value DFA product. Again, this should not be surprising.

I went from being brilliant to an idiot back to being brilliant again.
Again, the facts presented do not prove Larry/DFA wrong at all, if anything it proves they were right; the "good" products did exactly what was advertised, they achieved a deeper exposure to the factors, which meant more underperformance.

The only brilliant move would've been to not hold any small-value at all, but of course it was better in this time-span to hold a weaker "bad" one, effectively reducing your tilt/exposure.
Last edited by MotoTrojan on Tue Aug 25, 2020 10:18 am, edited 1 time in total.
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Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

acegolfer wrote: Tue Aug 25, 2020 9:49 am
MotoTrojan wrote: Tue Aug 25, 2020 7:42 am
nedsaid wrote: Mon Aug 24, 2020 11:19 pm

Nedsaid: Hence my comments that the "bad" factor products have been outperforming the "good" factor products. Biggest example is Vanguard Small Cap Value Index which has outperformed the DFA Small Value fund, the Vanguard Fund has a lot of Mid-Caps and an awful lot of Core stocks. Sometimes too much factor loading is a bad thing. The "cool kids" with their parent's sports cars, perfectly styled hair, fashionable clothes, and designer sunglasses all invested in the "good" factor products while us "nerds" with the bad haircuts, high water pants, the tape holding our glasses together, and the pocket protectors invested in the "good enough" or "bad" factor products. The goofy, dweeby nerds had the last laugh.
This feels like an oversimplification. The “bad” products simply had less factor exposure, thus they outperformed in the period with a negative premium. It would be no different had you held less of the “good” products, to the point that your exposure was equivalent. Given that people tilt to value because they expect the premium to be positive enough to make up for the negative times, the “good” products with deeper exposure should expect to win out eventually. I often see people comparing factor funds 1-for-1 during drawdowns and saying the one that did best in return must have the best factor construction; it’s often actually the opposite.
According to nedsaid, the riskier funds are the "good" products and less riskier funds are the "bad" products.
I understood exactly what nedsaid was saying, and stand by my post. Read it again.
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Re: Small Cap Value heads Rejoice !!!

Post by acegolfer »

MotoTrojan wrote: Tue Aug 25, 2020 10:18 am
acegolfer wrote: Tue Aug 25, 2020 9:49 am
MotoTrojan wrote: Tue Aug 25, 2020 7:42 am
nedsaid wrote: Mon Aug 24, 2020 11:19 pm

Nedsaid: Hence my comments that the "bad" factor products have been outperforming the "good" factor products. Biggest example is Vanguard Small Cap Value Index which has outperformed the DFA Small Value fund, the Vanguard Fund has a lot of Mid-Caps and an awful lot of Core stocks. Sometimes too much factor loading is a bad thing. The "cool kids" with their parent's sports cars, perfectly styled hair, fashionable clothes, and designer sunglasses all invested in the "good" factor products while us "nerds" with the bad haircuts, high water pants, the tape holding our glasses together, and the pocket protectors invested in the "good enough" or "bad" factor products. The goofy, dweeby nerds had the last laugh.
This feels like an oversimplification. The “bad” products simply had less factor exposure, thus they outperformed in the period with a negative premium. It would be no different had you held less of the “good” products, to the point that your exposure was equivalent. Given that people tilt to value because they expect the premium to be positive enough to make up for the negative times, the “good” products with deeper exposure should expect to win out eventually. I often see people comparing factor funds 1-for-1 during drawdowns and saying the one that did best in return must have the best factor construction; it’s often actually the opposite.
According to nedsaid, the riskier funds are the "good" products and less riskier funds are the "bad" products.
I understood exactly what nedsaid was saying, and stand by my post. Read it again.
I agreed with you and was repeating your post.

I think his definition is misleading/dangerous. Using his definition, a leveraged SP500 fund will be a "good" fund and VTI will be a "bad" fund.
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Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

acegolfer wrote: Tue Aug 25, 2020 10:19 am
MotoTrojan wrote: Tue Aug 25, 2020 10:18 am
acegolfer wrote: Tue Aug 25, 2020 9:49 am

According to nedsaid, the riskier funds are the "good" products and less riskier funds are the "bad" products.
I understood exactly what nedsaid was saying, and stand by my post. Read it again.
I agreed with you and was repeating your post.

I think his definition is misleading/dangerous. Using his definition, a leveraged SP500 fund will be a "good" fund and VTI will be a "bad" fund.
Ah gotcha apologies, thought you were implying I had it backwards. Yup that is another way to look at it.
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Re: Small Cap Value heads Rejoice !!!

Post by nedsaid »

MotoTrojan wrote: Tue Aug 25, 2020 10:16 am
nedsaid wrote: Tue Aug 25, 2020 9:24 am
MotoTrojan wrote: Tue Aug 25, 2020 7:42 am
nedsaid wrote: Mon Aug 24, 2020 11:19 pm

Nedsaid: Hence my comments that the "bad" factor products have been outperforming the "good" factor products. Biggest example is Vanguard Small Cap Value Index which has outperformed the DFA Small Value fund, the Vanguard Fund has a lot of Mid-Caps and an awful lot of Core stocks. Sometimes too much factor loading is a bad thing. The "cool kids" with their parent's sports cars, perfectly styled hair, fashionable clothes, and designer sunglasses all invested in the "good" factor products while us "nerds" with the bad haircuts, high water pants, the tape holding our glasses together, and the pocket protectors invested in the "good enough" or "bad" factor products. The goofy, dweeby nerds had the last laugh.
This feels like an oversimplification. The “bad” products simply had less factor exposure, thus they outperformed in the period with a negative premium. It would be no different had you held less of the “good” products, to the point that your exposure was equivalent. Given that people tilt to value because they expect the premium to be positive enough to make up for the negative times, the “good” products with deeper exposure should expect to win out eventually. I often see people comparing factor funds 1-for-1 during drawdowns and saying the one that did best in return must have the best factor construction; it’s often actually the opposite.
In a Large Cap Growth environment, it isn't surprising that the "bad" factor products would outperform the "good" ones. The reason that I wrote this is that I faithfully followed Paul Merriman's advice back in 2007-2008. I bought the Vanguard Small Cap Value Index ETF and the Micro-Cap Index ETF based on his advice only to learn days later from this forum and Morningstar that I had this all wrong. I learned from Larry Swedroe that Bridgeway and DFA were superior to what I bought.

Just pointing out that factor tilting isn't so easy, lots of nuance involved. The sort of Small Value Vanguard Small Value Index based on the CRSP index has outperformed the deeper value DFA product. Again, this should not be surprising.

I went from being brilliant to an idiot back to being brilliant again.
Again, the facts presented do not prove Larry/DFA wrong at all, if anything it proves they were right; the "good" products did exactly what was advertised, they achieved a deeper exposure to the factors, which meant more underperformance.

The only brilliant move would've been to not hold any small-value at all, but of course it was better in this time-span to hold a weaker "bad" one, effectively reducing your tilt/exposure.
If you want deeper Value and Size exposure, you want the "good" factor products. In a Large Growth stock market, it is no mystery why the "sort of" and the "bad" factor products have been outperforming the "good" factor products. I was ticked off because I bought what I had been told were good products only to be told later on that they weren't good enough. It is almost 100% guaranteed that if you buy an investment that within a week that you will read an article that states what you just did was a big mistake. There are lots of opinions out there, some say that the lower fees of Vanguard Small Cap Value Index ETF will beat DFA Small Cap Value even with DFA's better factor loading. Costs matter of course but I will pay up a bit for better factor exposure. But no matter what investments I choose, someone out there will say that I am 100% wrong.

If and when Small Value rebounds, the "good" factor products with deeper Size and Value exposure will outperform the "sort of" and the "bad" factor products. We see this on days that Small Value rebounds, the iShares S&P 600 Small Value Index ETF will outperform the Vanguard Small Cap Value Index ETF. I see this with my own eyes, I own both.

Larry/DFA will be vindicated at whatever point Small Value starts leading the stock market again. Not arguing that. Just ticked off that my choices, whatever they are, are just never good enough.
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Re: Small Cap Value heads Rejoice !!!

Post by nedsaid »

My comments about psy-ops on Garland Whizzer and sticking pins in Larry Swedroe voodoo dolls were in jest. Just making a point about markets and sentiment. Bull markets begin when the last optimist capitulates, I had fun with joking about Small Value capitulation, some weaker hands here have folded but those with stronger belief systems have stood firm. Rick Ferri has wobbled on Small Value but even he has not 100% capitulated but you can tell that he has thought about it. Another part of this is good old fashioned shaming, I was shamed here into rebalancing my portfolio on a more regular basis, rebalancing is next to Godliness here. I suppose what I was doing was commenting on wobblyness from those who once were all in on Small Value factor tilting, lots of people expressing angst here. Markets do what markets do, they don't operate according to our expectations or our timetables. The Large Growth trend seen in the markets could continue on for a while.
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Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

nedsaid wrote: Tue Aug 25, 2020 11:26 am My comments about psy-ops on Garland Whizzer and sticking pins in Larry Swedroe voodoo dolls were in jest. Just making a point about markets and sentiment. Bull markets begin when the last optimist capitulates, I had fun with joking about Small Value capitulation, some weaker hands here have folded but those with stronger belief systems have stood firm. Rick Ferri has wobbled on Small Value but even he has not 100% capitulated but you can tell that he has thought about it. Another part of this is good old fashioned shaming, I was shamed here into rebalancing my portfolio on a more regular basis, rebalancing is next to Godliness here. I suppose what I was doing was commenting on wobblyness from those who once were all in on Small Value factor tilting, lots of people expressing angst here. Markets do what markets do, they don't operate according to our expectations or our timetables. The Large Growth trend seen in the markets could continue on for a while.
I think you are going about this the wrong way. Small-value has had all the weak hands leave, you need to go after the reckless growth investors now and convince them they are throwing money into the fireplace and should move to SCV yesterday :P.
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Re: Small Cap Value heads Rejoice !!!

Post by Random Walker »

MotoTrojan wrote: Tue Aug 25, 2020 7:42 am This feels like an oversimplification. The “bad” products simply had less factor exposure, thus they outperformed in the period with a negative premium. It would be no different had you held less of the “good” products, to the point that your exposure was equivalent. Given that people tilt to value because they expect the premium to be positive enough to make up for the negative times, the “good” products with deeper exposure should expect to win out eventually. I often see people comparing factor funds 1-for-1 during drawdowns and saying the one that did best in return must have the best factor construction; it’s often actually the opposite.
I agree. Moreover, generally the goal of factor investing is to diversify away from the market factor; all of us have plenty of that in our long only equity portfolios. A fund with deeper exposures allows the portfolio to reach its factor targets by taking on less market factor exposure. This is a stronger move in the direction of risk parity.

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Re: Small Cap Value heads Rejoice !!!

Post by PicassoSparks »

I keep thinking about the half life of facts. How durable do we think the factor models are? The five factor model is only 6 years old and is a revision of a three factor model which is from 1992. Since the publication there has been an explosion of factor research (the Factor Zoo) and people finding varyingly useful and useless factors. I’m troubled by this paper which suggests that the mostly likely collection of published factors is from different models and the most likely combination of factors is an as yet unpublished collection.

https://papers.ssrn.com/sol3/papers.cfm ... id=3481736
We have applied our approach to the study of more than two quadrillion factor model specifications and have found that: 1) only a handful of factors (the Fama and French (1992) “high-minus-low” proxy for the value premium, and the adjusted versions of both market and size factors of Daniel, Mota, Rottke, and Santos (2020)) seem to be robust explanators of the cross-sections of asset returns; 2) jointly, the three robust factors provide a model that is, compared to the previous empirical literature, one order of magnitude more likely to have generated the observed asset returns (its posterior probability is about 85–88%); 3) nevertheless, with very high probability the “true” latent SDF is dense in the space of factors proposed in the previous literature, that is, capturing its characteristics requires the use of 24–25 factors (at the posterior mean of the SDF sparsity); and 4) however, despite being dense in the space of factors, the SDF-implied maximum Sharpe ratio is not excessive, suggesting a high degree of commonality, in terms of captured risks, among the factors in the zoo.
I guess this is the additional risk we take on when deviating from the market for smart beta, first the compensated risk of a factor tilt and second the uncompensated risk that the cutting edge model we are following is subject to serious revision as study continues.
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Re: Small Cap Value heads Rejoice !!!

Post by Random Walker »

PicassoSparks wrote: Tue Aug 25, 2020 5:04 pm I keep thinking about the half life of facts. How durable do we think the factor models are? The five factor model is only 6 years old and is a revision of a three factor model which is from 1992. Since the publication there has been an explosion of factor research (the Factor Zoo) and people finding varyingly useful and useless factors. I’m troubled by this paper which suggests that the mostly likely collection of published factors is from different models and the most likely combination of factors is an as yet unpublished collection.

https://papers.ssrn.com/sol3/papers.cfm ... id=3481736
We have applied our approach to the study of more than two quadrillion factor model specifications and have found that: 1) only a handful of factors (the Fama and French (1992) “high-minus-low” proxy for the value premium, and the adjusted versions of both market and size factors of Daniel, Mota, Rottke, and Santos (2020)) seem to be robust explanators of the cross-sections of asset returns; 2) jointly, the three robust factors provide a model that is, compared to the previous empirical literature, one order of magnitude more likely to have generated the observed asset returns (its posterior probability is about 85–88%); 3) nevertheless, with very high probability the “true” latent SDF is dense in the space of factors proposed in the previous literature, that is, capturing its characteristics requires the use of 24–25 factors (at the posterior mean of the SDF sparsity); and 4) however, despite being dense in the space of factors, the SDF-implied maximum Sharpe ratio is not excessive, suggesting a high degree of commonality, in terms of captured risks, among the factors in the zoo.
I guess this is the additional risk we take on when deviating from the market for smart beta, first the compensated risk of a factor tilt and second the uncompensated risk that the cutting edge model we are following is subject to serious revision as study continues.
I think quite durable. The advance from CAPM with about 65-70% explanatory power, to FF 3 factor with about 90% explanatory power, to adding momentum/profitability/investment >95% explanatory power has really been an evolution and fine tuning. It’s not like a new model eradicates the prior ones. Instead an older model works pretty well except for a few anomalies, and then a new model can account for some of the anomalies. Some new factor may subsume an older factor, as value becomes redundant when investment and profitability are used, but that doesn’t eradicate the explanatory power of the prior model.

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Re: Small Cap Value heads Rejoice !!!

Post by rkhusky »

A factor model having high explanatory power is irrelevant as to whether you should invest in the factors. The important element is that you should believe that the factors will result in a positive premium in the future. A factor model can work just fine with negative premiums.
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Re: Small Cap Value heads Rejoice !!!

Post by nedsaid »

MotoTrojan wrote: Tue Aug 25, 2020 12:30 pm
nedsaid wrote: Tue Aug 25, 2020 11:26 am My comments about psy-ops on Garland Whizzer and sticking pins in Larry Swedroe voodoo dolls were in jest. Just making a point about markets and sentiment. Bull markets begin when the last optimist capitulates, I had fun with joking about Small Value capitulation, some weaker hands here have folded but those with stronger belief systems have stood firm. Rick Ferri has wobbled on Small Value but even he has not 100% capitulated but you can tell that he has thought about it. Another part of this is good old fashioned shaming, I was shamed here into rebalancing my portfolio on a more regular basis, rebalancing is next to Godliness here. I suppose what I was doing was commenting on wobblyness from those who once were all in on Small Value factor tilting, lots of people expressing angst here. Markets do what markets do, they don't operate according to our expectations or our timetables. The Large Growth trend seen in the markets could continue on for a while.
I think you are going about this the wrong way. Small-value has had all the weak hands leave, you need to go after the reckless growth investors now and convince them they are throwing money into the fireplace and should move to SCV yesterday :P.
Actually, I have joked about trying to create a Large Growth euphoria. I have joked about the one stock portfolio, Google. Also have "recommended" the FAANG stocks in jest. Pretty much, we need capitulation with the Small Value folks and utter euphoria with the Large Growth investors to get this turned around. Bull markets end when the last pessimist tosses in the towel and goes all in on stocks, conversely bear markets end when the last optimist sells his stocks. Bull markets need a big supply of pessimists who can later be convinced to be optimists. Bear markets need a big supply of optimists that over time become pessimistic. Bear markets are sort of like water torture, they seem bottomless and never seem to end.
A fool and his money are good for business.
Random Walker
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Re: Small Cap Value heads Rejoice !!!

Post by Random Walker »

rkhusky wrote: Wed Aug 26, 2020 7:05 am A factor model having high explanatory power is irrelevant as to whether you should invest in the factors. The important element is that you should believe that the factors will result in a positive premium in the future. A factor model can work just fine with negative premiums.
Ya, I’ve noticed that lately, ouch! :-)

Dave
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Steve Reading
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Re: Small Cap Value heads Rejoice !!!

Post by Steve Reading »

nedsaid wrote: Wed Aug 26, 2020 8:02 am
MotoTrojan wrote: Tue Aug 25, 2020 12:30 pm
nedsaid wrote: Tue Aug 25, 2020 11:26 am My comments about psy-ops on Garland Whizzer and sticking pins in Larry Swedroe voodoo dolls were in jest. Just making a point about markets and sentiment. Bull markets begin when the last optimist capitulates, I had fun with joking about Small Value capitulation, some weaker hands here have folded but those with stronger belief systems have stood firm. Rick Ferri has wobbled on Small Value but even he has not 100% capitulated but you can tell that he has thought about it. Another part of this is good old fashioned shaming, I was shamed here into rebalancing my portfolio on a more regular basis, rebalancing is next to Godliness here. I suppose what I was doing was commenting on wobblyness from those who once were all in on Small Value factor tilting, lots of people expressing angst here. Markets do what markets do, they don't operate according to our expectations or our timetables. The Large Growth trend seen in the markets could continue on for a while.
I think you are going about this the wrong way. Small-value has had all the weak hands leave, you need to go after the reckless growth investors now and convince them they are throwing money into the fireplace and should move to SCV yesterday :P.
Actually, I have joked about trying to create a Large Growth euphoria. I have joked about the one stock portfolio, Google. Also have "recommended" the FAANG stocks in jest. Pretty much, we need capitulation with the Small Value folks and utter euphoria with the Large Growth investors to get this turned around. Bull markets end when the last pessimist tosses in the towel and goes all in on stocks, conversely bear markets end when the last optimist sells his stocks. Bull markets need a big supply of pessimists who can later be convinced to be optimists. Bear markets need a big supply of optimists that over time become pessimistic. Bear markets are sort of like water torture, they seem bottomless and never seem to end.
I believe I speak for all of us:

Thank you for your efforts using "alternative" methods to re-start the SCV premium. Your hard work does not go unnoticed :mrgreen:
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
Dominic
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Re: Small Cap Value heads Rejoice !!!

Post by Dominic »

rkhusky wrote: Wed Aug 26, 2020 7:05 am A factor model having high explanatory power is irrelevant as to whether you should invest in the factors. The important element is that you should believe that the factors will result in a positive premium in the future. A factor model can work just fine with negative premiums.
I do hold some SCV, but this is important.

Sectors can explain global equity returns, but I would never buy a "tech factor" fund. (I might consider a utilities, REITs, energy, or consumer staples fund expecting lower beta or better inflation protection, but that's different.)
muffins14
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Re: Small Cap Value heads Rejoice !!!

Post by muffins14 »

Getting back on topic, I am rejoicing today. Time for my bi-weekly purchase and SCV is down again :wink:
MotoTrojan
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Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

muffins14 wrote: Wed Aug 26, 2020 11:33 am Getting back on topic, I am rejoicing today. Time for my bi-weekly purchase and SCV is down again :wink:
Told the wife we are done contributing for 2020... so I hope you keep rejoicing all the way to 2021!
MotoTrojan
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Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

Dominic wrote: Wed Aug 26, 2020 11:04 am
rkhusky wrote: Wed Aug 26, 2020 7:05 am A factor model having high explanatory power is irrelevant as to whether you should invest in the factors. The important element is that you should believe that the factors will result in a positive premium in the future. A factor model can work just fine with negative premiums.
I do hold some SCV, but this is important.

Sectors can explain global equity returns, but I would never buy a "tech factor" fund. (I might consider a utilities, REITs, energy, or consumer staples fund expecting lower beta or better inflation protection, but that's different.)
I would consider buying a factor-based tech fund though! After reading The Fundamental Index, I was quite interested to see if there was a fundamentally weighted NASDAQ ETF out there as the results in the book's backtest were quite impressive... nope...

I suppose the fundamentals are easily available enough for the index that I could build it or a proxy myself in M1 if I wanted to. There are equal-weight options but hefty ER.

According to AQR even within tech value stocks have a huge spread to growth.
muffins14
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Re: Small Cap Value heads Rejoice !!!

Post by muffins14 »

For what it's worth, I find it interesting that VFMF, which has reasonable size (0.42 +/- 0.018) and value (0.48 +/- 0.017) loadings happens to hold some of the "big tech" stocks as well. Apple, Microsoft, and Alphabet are in the top 6 holdings, though maybe moreso due to momentum than value, but interesting nonetheless.
JimmyJammy
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Re: Small Cap Value heads Rejoice !!!

Post by JimmyJammy »

The fund I've been in for 10 years is VBR. I think some day it will outperform the S&P but likely not for 2 or 3 years. (Of course, some people have said it's not really a small cap fund? oh well).

I do feel more comfortable adding into this one on the dips, however, as opposed to the normal index.
MotoTrojan
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Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

JimmyJammy wrote: Wed Aug 26, 2020 4:19 pm The fund I've been in for 10 years is VBR. I think some day it will outperform the S&P but likely not for 2 or 3 years. (Of course, some people have said it's not really a small cap fund? oh well).

I do feel more comfortable adding into this one on the dips, however, as opposed to the normal index.
VBR is a perfectly suitable small-value fund which has had similar HML exposure to the S&P600 value and even DFA's DFSVX depending on what factor model you use. It get's docked (even by me sometimes, I do hold a lot in my 401k) because CRSP uses the bottom 15% of the market to define small, rather than bottom 10% as many other indices use. This causes it to have a lower SMB (size) factor exposure, but it really isn't that far off the S&P600 (DFA does go much deeper because they don't use market-cap weight).

I think it is a great choice, especially for the rock-bottom expense-ratio.

https://www.portfoliovisualizer.com/fac ... sion=false
burritoLover
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Re: Small Cap Value heads Rejoice !!!

Post by burritoLover »

What are thoughts on diversifying small cap value beyond a single fund? Mine is all VBR but when I compare it to IJS, only 18% of companies are shared among those two funds. Also there was mention of IJS having more of an unintentional profitability tilt in addition to being more value-y.
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Forester
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Re: Small Cap Value heads Rejoice !!!

Post by Forester »

burritoLover wrote: Wed Aug 26, 2020 5:27 pm What are thoughts on diversifying small cap value beyond a single fund? Mine is all VBR but when I compare it to IJS, only 18% of companies are shared among those two funds. Also there was mention of IJS having more of an unintentional profitability tilt in addition to being more value-y.
You could split your value three ways;

QVAL - large cap value
ZIG - quantamental long deep value / short growth
IJS (or other SCV fund)

+ IVAL as a fourth leg if you want to spread your bets beyond the USA.
burritoLover
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Re: Small Cap Value heads Rejoice !!!

Post by burritoLover »

Forester wrote: Wed Aug 26, 2020 5:52 pm
burritoLover wrote: Wed Aug 26, 2020 5:27 pm What are thoughts on diversifying small cap value beyond a single fund? Mine is all VBR but when I compare it to IJS, only 18% of companies are shared among those two funds. Also there was mention of IJS having more of an unintentional profitability tilt in addition to being more value-y.
You could split your value three ways;

QVAL - large cap value
ZIG - quantamental long deep value / short growth
IJS (or other SCV fund)

+ IVAL as a fourth leg if you want to spread your bets beyond the USA.
Yeah, I want to stick with U.S. small cap value but thinking maybe half VBR, half IJS
"Your money is like a bar of soap. The more you handle it, the less you’ll have." - Gene Fama
MotoTrojan
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Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

burritoLover wrote: Wed Aug 26, 2020 5:58 pm
Forester wrote: Wed Aug 26, 2020 5:52 pm
burritoLover wrote: Wed Aug 26, 2020 5:27 pm What are thoughts on diversifying small cap value beyond a single fund? Mine is all VBR but when I compare it to IJS, only 18% of companies are shared among those two funds. Also there was mention of IJS having more of an unintentional profitability tilt in addition to being more value-y.
You could split your value three ways;

QVAL - large cap value
ZIG - quantamental long deep value / short growth
IJS (or other SCV fund)

+ IVAL as a fourth leg if you want to spread your bets beyond the USA.
Yeah, I want to stick with U.S. small cap value but thinking maybe half VBR, half IJS
Just over-complication in my humble opinion as they are near identical exposures. QVAL would be a much better way to go as it holds super concentrated exposure and uses EBIT/TEV to weight which is very uncommon among other funds (ZIG also uses this but is less systematic). AVUV is also an interesting fund with some nice features, but frankly I would just pick one between AVUV/VBR/IJS and call it a day.

Also I would use VIOV or SLYV over IJS; same index but 10bp cheaper expense ratio.

Don't add complexity with no benefit.
MotoTrojan
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Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

Forester wrote: Wed Aug 26, 2020 5:52 pm
burritoLover wrote: Wed Aug 26, 2020 5:27 pm What are thoughts on diversifying small cap value beyond a single fund? Mine is all VBR but when I compare it to IJS, only 18% of companies are shared among those two funds. Also there was mention of IJS having more of an unintentional profitability tilt in addition to being more value-y.
You could split your value three ways;

QVAL - large cap value
ZIG - quantamental long deep value / short growth
IJS (or other SCV fund)

+ IVAL as a fourth leg if you want to spread your bets beyond the USA.
Carlisle is one of my favorite people to listen to but I don't like the lack of transparency on ZIG and the expense is spicy to say the least. Maybe someday I'll throw $10K into it just for fun and to support him.
Pepper11
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Re: Small Cap Value heads Rejoice !!!

Post by Pepper11 »

I am trying to follow this thread and I frankly cant tell if many of these posts are hyperbole or not - if Small Values continued decline and Large Growths surge are really making people more confident that ever that they now buy SCV at a discounted price.
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nedsaid
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Re: Small Cap Value heads Rejoice !!!

Post by nedsaid »

Pepper11 wrote: Wed Aug 26, 2020 11:41 pm I am trying to follow this thread and I frankly cant tell if many of these posts are hyperbole or not - if Small Values continued decline and Large Growths surge are really making people more confident that ever that they now buy SCV at a discounted price.
In all seriousness, the valuation gap between Growth and Value is at all time highs. My source is Larry Swedroe and you can get his comments off of his Twitter feed. My best guess is that Cliff Asness at AQR is saying the same thing. The hyperbole is mostly from me, I am needling those who once were rock solid for Small/Value tilting who are now vacillating, Rick Ferri being chief among them. Rick was influential along with Paul Merriman in convincing me about the academic research. Larry Swedroe came to my attention after I had increased my Small/Value tilting in 2008-2009. I probably became aware of Larry in 2012 or so.

The problem is, the reversion of the mean from Growth to Value and from Large to Small has always happened in the past but there is no guarantee this will happen in the future. Growth and Value take turns in leading the stock market as do Large and Small. The Large Growth trend in the market could be permanent but market history suggests that it wont be. These trends can last longer than anyone would believe but in more recent market history, these seem to last about a decade. So one could say that we are due for a reversion pretty soon as we are about 11 years in this trend. Markets don't have to follow our timetables or our expectations, markets do what markets do. The Large Growth trend could continue for a while.
A fool and his money are good for business.
YRT70
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Re: Small Cap Value heads Rejoice !!!

Post by YRT70 »

burritoLover wrote: Wed Aug 26, 2020 5:58 pm
Forester wrote: Wed Aug 26, 2020 5:52 pm
burritoLover wrote: Wed Aug 26, 2020 5:27 pm What are thoughts on diversifying small cap value beyond a single fund? Mine is all VBR but when I compare it to IJS, only 18% of companies are shared among those two funds. Also there was mention of IJS having more of an unintentional profitability tilt in addition to being more value-y.
You could split your value three ways;

QVAL - large cap value
ZIG - quantamental long deep value / short growth
IJS (or other SCV fund)

+ IVAL as a fourth leg if you want to spread your bets beyond the USA.
Yeah, I want to stick with U.S. small cap value but thinking maybe half VBR, half IJS
VIOV or SLYV instead of IJS would be more logical as they have the lower expenses ratio.

Or you could consider AVUV which I think gives a bit deeper value exposure.
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