Small Cap Value heads Rejoice !!!

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
manlymatt83
Posts: 200
Joined: Tue Jan 30, 2018 8:23 am

Re: Small Cap Value heads Rejoice !!!

Post by manlymatt83 »

... so is 50% TSM and 50% SCV until age 50 acceptable?
User avatar
vineviz
Posts: 7845
Joined: Tue May 15, 2018 1:55 pm

Re: Small Cap Value heads Rejoice !!!

Post by vineviz »

manlymatt83 wrote: Tue Sep 22, 2020 6:52 pm ... so is 50% TSM and 50% SCV until age 50 acceptable?
Acceptable to whom?
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
manlymatt83
Posts: 200
Joined: Tue Jan 30, 2018 8:23 am

Re: Small Cap Value heads Rejoice !!!

Post by manlymatt83 »

vineviz wrote: Tue Sep 22, 2020 6:55 pm
manlymatt83 wrote: Tue Sep 22, 2020 6:52 pm ... so is 50% TSM and 50% SCV until age 50 acceptable?
Acceptable to whom?
Me.
User avatar
Robert T
Posts: 2740
Joined: Tue Feb 27, 2007 9:40 pm
Location: 1, 0.2, 0.4, 0.5
Contact:

Re: Small Cap Value heads Rejoice !!!

Post by Robert T »

typical.investor wrote: Tue Sep 22, 2020 6:29 pm But what is that assumption of lower diversification based off of? Small rate movement? Lower yields? A change in how convexity behaves?
Near zero federal funds rate.

Worth a read. https://www.gmo.com/americas/research-l ... ly-letter/

From the article:
The inimitable charm of government bonds over the last 30 years or so has been their wonderful tendency to give capital gains when the world starts to fall apart. ... those capital gains came from an expectation that the Federal Reserve would reduce interest rates to combat any economic weakness. In each of the above events, such a reduction was possible. Today that is probably no longer true. And while you can argue as to whether I’m merely speculating about a hypothetical future problem, let’s look at what happened to the 10-year bonds in each of the G-10 markets during the Covid-19 crisis ... those markets where short rates were meaningfully above zero saw significant gains in their 10-year bond, even if none were quite as impressive as we saw in the U.S. Those markets where the short rate was already around zero or lower, though, told a very different story. The average bond return in those markets was -1.3% and none of them had a positive return in the period. So much for hedging the losses in the rest of the portfolio!
typical.investor
Posts: 2299
Joined: Mon Jun 11, 2018 3:17 am

Re: Small Cap Value heads Rejoice !!!

Post by typical.investor »

Robert T wrote: Tue Sep 22, 2020 7:00 pm
typical.investor wrote: Tue Sep 22, 2020 6:29 pm But what is that assumption of lower diversification based off of? Small rate movement? Lower yields? A change in how convexity behaves?
Near zero federal funds rate.

Worth a read. https://www.gmo.com/americas/research-l ... ly-letter/

From the article:
The inimitable charm of government bonds over the last 30 years or so has been their wonderful tendency to give capital gains when the world starts to fall apart. ... those capital gains came from an expectation that the Federal Reserve would reduce interest rates to combat any economic weakness. In each of the above events, such a reduction was possible. Today that is probably no longer true. And while you can argue as to whether I’m merely speculating about a hypothetical future problem, let’s look at what happened to the 10-year bonds in each of the G-10 markets during the Covid-19 crisis ... those markets where short rates were meaningfully above zero saw significant gains in their 10-year bond, even if none were quite as impressive as we saw in the U.S. Those markets where the short rate was already around zero or lower, though, told a very different story. The average bond return in those markets was -1.3% and none of them had a positive return in the period. So much for hedging the losses in the rest of the portfolio!
Thanks for the link. I don't see the concerns as particularly relevant though. OK, foreign bonds which were at negative rates didn't meaningfully drop in the crisis. So they conclude that US bonds at a low will behave similarly in the future. I see, but have two points in mind that don't support that conclusion. Not saying I know the answer but ...

1) The USD strengthened a great deal in the Covid-19 crisis. For the EU and Japan this effectively means they can more easily export to the US market. In fact, they are immediately more competitive globally than before. https://fred.stlouisfed.org/series/DTWEXBGS.

2) They are looking at 10 year bonds. Fine, but Japan for instance already controls the 10 year under YCC.

Anyway, look at 10 year rates for Switzerland (the country with the lowest short term rates and who GMO shows as having negative capital gains). Their 10 rates did drop in the crisis form -.047 at the beginning of the year to -1.03 in March. Personally, I would have rebalanced in that timeframe and it's difficult to believe there weren't NAV gains, but nonetheless, GMO shows a -3.4% return for 10 year Swiss bonds in the crisis. Which it true as rates jumped back up.

Why did Swiss rates jump in the crisis? Analysis shows this is a currency effect.
interest-rate spreads between Switzerland and the rest of the world shrunk to marginal differentials in the wake of the financial crisis, Switzerland’s huge current account surplus has since been insufficiently counterpoised by capital outflows. This has produced continual appreciation pressure
See https://kaiserpartner.bank/news/the-str ... e-to-stay/

Actually, I believe the EURO strengthen too and likely for the same reasons.

Anyway, longer term bonds behaved normally in Switzerland I think and did provide a buffer. The fact that rates then rose in Switzerland as it's currency strengthened due doesn't diminish their usefulness. I'm not recommending to hold unhedged foreign bonds, but if you had, you could have rebalanced out of them into cheap global assets. Sure, your long term bond fund might be showing a capital loss (depending on your timing and if you missed the point where they had a NAV gain), but the strength of the currency would still mean you are able to acquire foreign assets cheaply (presumably to rebalance into your target AA, and not as a currency timing scheme).

I wonder how much of this view is triggered by treasuries crashing in March due to liquidity pressure? Sure they lost NAV but were still good to rebalance from into equities which had lost more. That was my experience anyway.

And alternatives and value stocks that GMO gives as being better to long term bonds fared worse. So I don't see what their point is.
User avatar
Steve Reading
Posts: 2460
Joined: Fri Nov 16, 2018 10:20 pm

Re: Small Cap Value heads Rejoice !!!

Post by Steve Reading »

Robert T wrote: Tue Sep 22, 2020 4:15 pm So in this case there was a 'diversification benefit' by adding an additional source of risk "term risk" due to low correlation when the market tanked. A similar 'diversification benefit' story is often extended to 'within stock risk' e.g. some diversification benefits of adding small and value exposure as correlations <1.
The latter story is, of course, much harder to swallow.

The reason is that many, like myself, believe in Fama's perspective that in a multi-factor world, the market portfolio is efficient. The average market participant does and should hold the market. And the market portfolio contains both market and term risk. So it quite intuitive that adding term to a portfolio that has no term, would improve its risk-adjusted returns. After all, it's a little closer to the market portfolio.

But it's not so clear with equity factors that are long-short. The market portfolio has no value and size exposure; tilting pulls you away from the market allocation, supposedly efficient. Many threads have been opened in BHs about this subject and I've come to a specific conclusion myself. Others might come to others.

FWIW, my opinion is that tilting makes sense to the extent you are different than the average market participant (ex: your job is in tech, so a value tilt actually diversifies you). But it's not just a freebie, diversification, free lunch (ex: I wouldn't make a blanket recommendation that everyone just tilt, reduce stocks, and add bonds as a way to have a more "efficient" portfolio, as a prominent BH writer recommends).
"... 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
MotoTrojan
Posts: 10661
Joined: Wed Feb 01, 2017 8:39 pm

Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

manlymatt83 wrote: Tue Sep 22, 2020 6:52 pm ... so is 50% TSM and 50% SCV until age 50 acceptable?
Age 50 doesn’t mean much, when are you retiring? How’s your risk tolerance? Could you handle a 60% drawdown at age 49?

This isn’t something you can ask others to answer. I thought you wanted to end up 60/40 equity/bonds? You don’t go to that the day you retire.
manlymatt83
Posts: 200
Joined: Tue Jan 30, 2018 8:23 am

Re: Small Cap Value heads Rejoice !!!

Post by manlymatt83 »

MotoTrojan wrote: Tue Sep 22, 2020 9:33 pm
manlymatt83 wrote: Tue Sep 22, 2020 6:52 pm ... so is 50% TSM and 50% SCV until age 50 acceptable?
Age 50 doesn’t mean much, when are you retiring? How’s your risk tolerance? Could you handle a 60% drawdown at age 49?

This isn’t something you can ask others to answer. I thought you wanted to end up 60/40 equity/bonds? You don’t go to that the day you retire.
That’s my plan, but then I was reading all the other posts and got confused. :)

What I discussed earlier is what I’m sticking to, but will re-evaluate in 5 years.
muffins14
Posts: 364
Joined: Wed Oct 26, 2016 4:14 am

Re: Small Cap Value heads Rejoice !!!

Post by muffins14 »

Steve Reading wrote: Tue Sep 22, 2020 8:26 pm
The latter story is, of course, much harder to swallow.

The reason is that many, like myself, believe in Fama's perspective that in a multi-factor world, the market portfolio is efficient. The average market participant does and should hold the market. And the market portfolio contains both market and term risk. So it quite intuitive that adding term to a portfolio that has no term, would improve its risk-adjusted returns. After all, it's a little closer to the market portfolio.

But it's not so clear with equity factors that are long-short. The market portfolio has no value and size exposure; tilting pulls you away from the market allocation, supposedly efficient. Many threads have been opened in BHs about this subject and I've come to a specific conclusion myself. Others might come to others.

FWIW, my opinion is that tilting makes sense to the extent you are different than the average market participant (ex: your job is in tech, so a value tilt actually diversifies you). But it's not just a freebie, diversification, free lunch (ex: I wouldn't make a blanket recommendation that everyone just tilt, reduce stocks, and add bonds as a way to have a more "efficient" portfolio, as a prominent BH writer recommends).
Im curious, would you also think adding credit risk (corporate bonds) to a portfolio with term and equity would increase risk-adjusted returns?

It seems most tilters stick to equity factors plus term but eschew credit
YRT70
Posts: 687
Joined: Sat Apr 27, 2019 8:51 am

Re: "Tilting"

Post by YRT70 »

Taylor Larimore wrote: Tue Sep 22, 2020 8:50 pm Anyone who "tilted" TSM with additional Small Cap Value stocks is way behind investors who stuck with just TSM.
That's not true Taylor.

https://www.portfoliovisualizer.com/bac ... tion4_2=25

https://www.portfoliovisualizer.com/bac ... tion3_2=10
000
Posts: 2842
Joined: Thu Jul 23, 2020 12:04 am

Re: Small Cap Value heads Rejoice !!!

Post by 000 »

manlymatt83 wrote: Tue Sep 22, 2020 6:52 pm ... so is 50% TSM and 50% SCV until age 50 acceptable?
Before jumping on the SCV train, I strongly suggest doing an industry analysis of what's in your chosen SCV fund.
YRT70
Posts: 687
Joined: Sat Apr 27, 2019 8:51 am

Re: Small Cap Value heads Rejoice !!!

Post by YRT70 »

manlymatt83 wrote: Tue Sep 22, 2020 6:52 pm ... so is 50% TSM and 50% SCV until age 50 acceptable?
It can be if you have a high tolerance for risk and tracking error.

One thing to keep in mind: if you plan to start decumulating your SCV allocation at age 50, what would you do if SCV has underperformed the broad market for a long period at that time? If you start selling it then in order to buy TSM, you'd be selling low and buying high, which is generally not a good idea of course.
MotoTrojan
Posts: 10661
Joined: Wed Feb 01, 2017 8:39 pm

Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

YRT70 wrote: Wed Sep 23, 2020 6:46 am
manlymatt83 wrote: Tue Sep 22, 2020 6:52 pm ... so is 50% TSM and 50% SCV until age 50 acceptable?
It can be if you have a high tolerance for risk and tracking error.

One thing to keep in mind: if you plan to start decumulating your SCV allocation at age 50, what would you do if SCV has underperformed the broad market for a long period at that time? If you start selling it then in order to buy TSM, you'd be selling low and buying high, which is generally not a good idea of course.
This is one of the behavioral reasons I think I'll be keeping my relative tilt and just diluting with bonds (plus I think there is a small diversification benefit by having additional risk sources) but I am intrigued (maybe impressed) that Steve Reading plans to just wean off of his factor tilts regardless of recent performance/valuations.
MotoTrojan
Posts: 10661
Joined: Wed Feb 01, 2017 8:39 pm

Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

000 wrote: Wed Sep 23, 2020 2:33 am
manlymatt83 wrote: Tue Sep 22, 2020 6:52 pm ... so is 50% TSM and 50% SCV until age 50 acceptable?
Before jumping on the SCV train, I strongly suggest doing an industry analysis of what's in your chosen SCV fund.
Could you not say the same about someone who is 100% TSM? I would wager the average sector-exposure goes down at 50/50 market-cap/SCV (better balances among sectors).

Looking at the Exposure tab here on PV for my current portfolio (#1), what I plan to move to long-term (#2, replacing LCV w/ S&P500), and 100% S&P500 I don't see any egregious deltas. I actually end up with less financials (often lumped in with value traps these days), marginal energy increase (exposure in general is tiny), and a good bit more of materials & industrials (those are really the only ones that stand out), but overall the sectors look plenty diversified.

https://www.portfoliovisualizer.com/bac ... tion6_2=25
Last edited by MotoTrojan on Wed Sep 23, 2020 7:45 am, edited 1 time in total.
User avatar
Steve Reading
Posts: 2460
Joined: Fri Nov 16, 2018 10:20 pm

Re: Small Cap Value heads Rejoice !!!

Post by Steve Reading »

muffins14 wrote: Tue Sep 22, 2020 10:48 pm
Steve Reading wrote: Tue Sep 22, 2020 8:26 pm
The latter story is, of course, much harder to swallow.

The reason is that many, like myself, believe in Fama's perspective that in a multi-factor world, the market portfolio is efficient. The average market participant does and should hold the market. And the market portfolio contains both market and term risk. So it quite intuitive that adding term to a portfolio that has no term, would improve its risk-adjusted returns. After all, it's a little closer to the market portfolio.

But it's not so clear with equity factors that are long-short. The market portfolio has no value and size exposure; tilting pulls you away from the market allocation, supposedly efficient. Many threads have been opened in BHs about this subject and I've come to a specific conclusion myself. Others might come to others.

FWIW, my opinion is that tilting makes sense to the extent you are different than the average market participant (ex: your job is in tech, so a value tilt actually diversifies you). But it's not just a freebie, diversification, free lunch (ex: I wouldn't make a blanket recommendation that everyone just tilt, reduce stocks, and add bonds as a way to have a more "efficient" portfolio, as a prominent BH writer recommends).
Im curious, would you also think adding credit risk (corporate bonds) to a portfolio with term and equity would increase risk-adjusted returns?

It seems most tilters stick to equity factors plus term but eschew credit
I personally do think so and once I buy bonds, I will buy both treasuries/TIPs and global corporate bonds.
"... 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
MotoTrojan
Posts: 10661
Joined: Wed Feb 01, 2017 8:39 pm

Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

Steve Reading wrote: Wed Sep 23, 2020 7:42 am
muffins14 wrote: Tue Sep 22, 2020 10:48 pm
Im curious, would you also think adding credit risk (corporate bonds) to a portfolio with term and equity would increase risk-adjusted returns?

It seems most tilters stick to equity factors plus term but eschew credit
I personally do think so and once I buy bonds, I will buy both treasuries/TIPs and global corporate bonds.
Interesting. Got any sources that helped shape this viewpoint? What do you get from the corporate bond exposure than equities can't provide?
User avatar
Steve Reading
Posts: 2460
Joined: Fri Nov 16, 2018 10:20 pm

Re: Small Cap Value heads Rejoice !!!

Post by Steve Reading »

MotoTrojan wrote: Wed Sep 23, 2020 7:46 am
Steve Reading wrote: Wed Sep 23, 2020 7:42 am
muffins14 wrote: Tue Sep 22, 2020 10:48 pm
Im curious, would you also think adding credit risk (corporate bonds) to a portfolio with term and equity would increase risk-adjusted returns?

It seems most tilters stick to equity factors plus term but eschew credit
I personally do think so and once I buy bonds, I will buy both treasuries/TIPs and global corporate bonds.
Interesting. Got any sources that helped shape this viewpoint? What do you get from the corporate bond exposure than equities can't provide?
Corporate bonds are part of the market portfolio and I agree with Fama and Sharpe’s theory that the market portfolio is an efficient portfolio.
"... 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
manlymatt83
Posts: 200
Joined: Tue Jan 30, 2018 8:23 am

Re: Small Cap Value heads Rejoice !!!

Post by manlymatt83 »

YRT70 wrote: Wed Sep 23, 2020 6:46 am
manlymatt83 wrote: Tue Sep 22, 2020 6:52 pm ... so is 50% TSM and 50% SCV until age 50 acceptable?
It can be if you have a high tolerance for risk and tracking error.

One thing to keep in mind: if you plan to start decumulating your SCV allocation at age 50, what would you do if SCV has underperformed the broad market for a long period at that time? If you start selling it then in order to buy TSM, you'd be selling low and buying high, which is generally not a good idea of course.
It’s a really good point. That’s the only thing I’m struggling with. Do I go 50/50 TSM/SCV and move towards 80/20 TSM/SCV slowly as I also add bonds, or do I pick an allocation I can stick with for life (70/30 is probably accurate) and hard code that in perpetuity (just diluting both slices as I add bonds)?
MotoTrojan
Posts: 10661
Joined: Wed Feb 01, 2017 8:39 pm

Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

Steve Reading wrote: Wed Sep 23, 2020 7:55 am
MotoTrojan wrote: Wed Sep 23, 2020 7:46 am
Steve Reading wrote: Wed Sep 23, 2020 7:42 am
muffins14 wrote: Tue Sep 22, 2020 10:48 pm
Im curious, would you also think adding credit risk (corporate bonds) to a portfolio with term and equity would increase risk-adjusted returns?

It seems most tilters stick to equity factors plus term but eschew credit
I personally do think so and once I buy bonds, I will buy both treasuries/TIPs and global corporate bonds.
Interesting. Got any sources that helped shape this viewpoint? What do you get from the corporate bond exposure than equities can't provide?
Corporate bonds are part of the market portfolio and I agree with Fama and Sharpe’s theory that the market portfolio is an efficient portfolio.
Gotcha. Sounded like you were excluding other bonds such as munis or MBS so I thought there was something unique there to a treasury/TIP and corporate bond barbell.
YRT70
Posts: 687
Joined: Sat Apr 27, 2019 8:51 am

Re: Small Cap Value heads Rejoice !!!

Post by YRT70 »

muffins14 wrote: Tue Sep 22, 2020 10:48 pm Im curious, would you also think adding credit risk (corporate bonds) to a portfolio with term and equity would increase risk-adjusted returns?

It seems most tilters stick to equity factors plus term but eschew credit
In case you haven't read it, I thought Larry made some pretty good points: "No Need For Corp. Bonds?"
https://www.etf.com/sections/index-inve ... nopaging=1
Random Walker
Posts: 4611
Joined: Fri Feb 23, 2007 8:21 pm

Re: Small Cap Value heads Rejoice !!!

Post by Random Walker »

MotoTrojan wrote: Wed Sep 23, 2020 7:46 am
Steve Reading wrote: Wed Sep 23, 2020 7:42 am
muffins14 wrote: Tue Sep 22, 2020 10:48 pm
Im curious, would you also think adding credit risk (corporate bonds) to a portfolio with term and equity would increase risk-adjusted returns?

It seems most tilters stick to equity factors plus term but eschew credit
I personally do think so and once I buy bonds, I will buy both treasuries/TIPs and global corporate bonds.
Interesting. Got any sources that helped shape this viewpoint? What do you get from the corporate bond exposure than equities can't provide?

That’s my question too. Seems corporate bonds just add more equity type risk to the portfolio.

Dave
Jeff Albertson
Posts: 832
Joined: Sat Apr 06, 2013 7:11 pm
Location: Springfield

Re: Small Cap Value heads Rejoice !!!

Post by Jeff Albertson »

From Bloomberg, John Authers on small cap stocks, "The Size Effect Didn't Disappear. It Never Existed":
Asness and team have now revisited the data, brought it up to date, and broken it down to daily returns. The regressions are all in Asness’s piece, and best not listed here. The bottom line is emphatic. In effect, Asness’s team found that even a few decades ago, the apparent outperformance of small companies over and above their beta was only because their beta had been underestimated, due to their illiquidity. Often, thanks to the difficulty trading, they don’t show their full market reaction straight away, but only with a lag, once traders have been able to make a trade. Accounting for this lag and recalculating the beta means, to quote Asness’s typically pungent language, that “you really don’t find any size effect. Zippo. Nada.”

It’s not that the small-company effect has steadily disappeared. It was never there. If you think the market is going up, it still makes sense to ride high-beta stocks while it is rising, and that will mean picking a lot of small stocks. But there is no point in specifically buying small-caps as an asset class.
https://www.bloomberg.com/opinion/artic ... ver-there?
Random Walker
Posts: 4611
Joined: Fri Feb 23, 2007 8:21 pm

Re: Small Cap Value heads Rejoice !!!

Post by Random Walker »

manlymatt83 wrote: Wed Sep 23, 2020 7:57 am
YRT70 wrote: Wed Sep 23, 2020 6:46 am
manlymatt83 wrote: Tue Sep 22, 2020 6:52 pm ... so is 50% TSM and 50% SCV until age 50 acceptable?
It can be if you have a high tolerance for risk and tracking error.

One thing to keep in mind: if you plan to start decumulating your SCV allocation at age 50, what would you do if SCV has underperformed the broad market for a long period at that time? If you start selling it then in order to buy TSM, you'd be selling low and buying high, which is generally not a good idea of course.
It’s a really good point. That’s the only thing I’m struggling with. Do I go 50/50 TSM/SCV and move towards 80/20 TSM/SCV slowly as I also add bonds, or do I pick an allocation I can stick with for life (70/30 is probably accurate) and hard code that in perpetuity (just diluting both slices as I add bonds)?
I think that one should pick equity allocations (US, Int, EM, SV, etc) he thinks suit him best, then maintain those relative allocations on the equity side throughout the investing horizon. As the investor progresses over time, then just adjust the overall equity/bond split as he sees fit.

Dave
MotoTrojan
Posts: 10661
Joined: Wed Feb 01, 2017 8:39 pm

Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

Jeff Albertson wrote: Wed Sep 23, 2020 9:15 am From Bloomberg, John Authers on small cap stocks, "The Size Effect Didn't Disappear. It Never Existed":
Asness and team have now revisited the data, brought it up to date, and broken it down to daily returns. The regressions are all in Asness’s piece, and best not listed here. The bottom line is emphatic. In effect, Asness’s team found that even a few decades ago, the apparent outperformance of small companies over and above their beta was only because their beta had been underestimated, due to their illiquidity. Often, thanks to the difficulty trading, they don’t show their full market reaction straight away, but only with a lag, once traders have been able to make a trade. Accounting for this lag and recalculating the beta means, to quote Asness’s typically pungent language, that “you really don’t find any size effect. Zippo. Nada.”

It’s not that the small-company effect has steadily disappeared. It was never there. If you think the market is going up, it still makes sense to ride high-beta stocks while it is rising, and that will mean picking a lot of small stocks. But there is no point in specifically buying small-caps as an asset class.
https://www.bloomberg.com/opinion/artic ... ver-there?
Posted the actual blog from Cliff the other day, quite interesting indeed. It is an important distinction though that Cliff is not saying a small-cap index fund will not outperform a large-cap one, he is simply showing that there was no premium for SMB beyond the adjusted beta exposure (the small-cap index fund has higher beta, effectively leveraging a large-cap or total-market index fund). So if you are simply trying to increase expected return (and risk) without leverage, small still can help, although I think value is a far better bang-for-your-buck.
Random Walker
Posts: 4611
Joined: Fri Feb 23, 2007 8:21 pm

Re: Small Cap Value heads Rejoice !!!

Post by Random Walker »

Jeff Albertson wrote: Wed Sep 23, 2020 9:15 am From Bloomberg, John Authers on small cap stocks, "The Size Effect Didn't Disappear. It Never Existed":
Asness and team have now revisited the data, brought it up to date, and broken it down to daily returns. The regressions are all in Asness’s piece, and best not listed here. The bottom line is emphatic. In effect, Asness’s team found that even a few decades ago, the apparent outperformance of small companies over and above their beta was only because their beta had been underestimated, due to their illiquidity. Often, thanks to the difficulty trading, they don’t show their full market reaction straight away, but only with a lag, once traders have been able to make a trade. Accounting for this lag and recalculating the beta means, to quote Asness’s typically pungent language, that “you really don’t find any size effect. Zippo. Nada.”

It’s not that the small-company effect has steadily disappeared. It was never there. If you think the market is going up, it still makes sense to ride high-beta stocks while it is rising, and that will mean picking a lot of small stocks. But there is no point in specifically buying small-caps as an asset class.
https://www.bloomberg.com/opinion/artic ... ver-there?
I believe though that the effects of the other factors (value, momentum, trend, profitability/quality) tend to be more pronounced in the smaller stocks though.

Dave
MotoTrojan
Posts: 10661
Joined: Wed Feb 01, 2017 8:39 pm

Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

Random Walker wrote: Wed Sep 23, 2020 9:20 am
Jeff Albertson wrote: Wed Sep 23, 2020 9:15 am From Bloomberg, John Authers on small cap stocks, "The Size Effect Didn't Disappear. It Never Existed":
Asness and team have now revisited the data, brought it up to date, and broken it down to daily returns. The regressions are all in Asness’s piece, and best not listed here. The bottom line is emphatic. In effect, Asness’s team found that even a few decades ago, the apparent outperformance of small companies over and above their beta was only because their beta had been underestimated, due to their illiquidity. Often, thanks to the difficulty trading, they don’t show their full market reaction straight away, but only with a lag, once traders have been able to make a trade. Accounting for this lag and recalculating the beta means, to quote Asness’s typically pungent language, that “you really don’t find any size effect. Zippo. Nada.”

It’s not that the small-company effect has steadily disappeared. It was never there. If you think the market is going up, it still makes sense to ride high-beta stocks while it is rising, and that will mean picking a lot of small stocks. But there is no point in specifically buying small-caps as an asset class.
https://www.bloomberg.com/opinion/artic ... ver-there?
I believe though that the effects of the other factors (value, momentum, trend, profitability/quality) tend to be more pronounced in the smaller stocks though.

Dave
It is also harder to get high exposure to those factors in larger-caps (particularly value). VFVA does a great job of this for someone that wants a deep HML loading but doesn't want to put all their chips into small/mid-caps.
caklim00
Posts: 2271
Joined: Mon May 26, 2008 10:09 am

Re: Small Cap Value heads Rejoice !!!

Post by caklim00 »

MotoTrojan wrote: Fri Sep 18, 2020 10:40 pm
caklim00 wrote: Fri Sep 18, 2020 7:57 pm
MotoTrojan wrote: Fri Sep 18, 2020 6:52 pm Thought you all may enjoy this comparison of VOO, VBR, and SLYV showing percentile scales (top 1000 US stocks) on Size & Book/Price.

And here is SLYV vs. AVUV (pretty subtle):

Here is all 3 again but instead of size, gross profitability (not seeing any huge differences):

One more before I run... VFVA, VBR, AVUV with E/P and B/P. Can really see how well VFVA loads up even with it's larger cap ranges.
Nice work! Looks like AVUV has some slightly larger cap holdings (hopefully these are positive momentum) and a few more smaller cap holdings.
10 points for caklim00!

Image
Haha, didn't even see I got 10 points :) Glad to see something quantifiable other than just taking Avantis' word for how they manage momentum.
caklim00
Posts: 2271
Joined: Mon May 26, 2008 10:09 am

Re: Small Cap Value heads Rejoice !!!

Post by caklim00 »

YRT70 wrote: Sun Sep 20, 2020 7:19 am
kolder wrote: Sun Sep 20, 2020 6:03 am Is foreign tax drag a concern for anyone? Considering small value typically pays out higher dividends, you end up taking a bigger hit especially in a tax advantaged account. I've seen numbers thrown around of about 20-50 bps loss due to this which could be even higher in SCV funds. I do want to hold international but that is quite the price to pay for diversification IMO.

I was considering using DGS or DEM for EM but the dividends are so high that it doesn't even seem worth it, despite the strong value exposure.
Perhaps AVEM is interesting for you. Larger value with dividend yield around 3.75%, much lower than those Wisdom Tree Dividend ETFs.
Wasn't much but just bought some AVEM today using some broker bonus proceeds. I'm officially light on EM per my IPS since all of my EM targeting comes from DFEVX which is using an old 401k I can't contribute to anymore.

I was torn between EMGF and AVEM for new EM contributions but the lower ER and likely significantly lower turnover pointed me toward AVEM. EMGF will likely be tax loss harvest partner unless DFA releases their ETF with a low ER.
Day9
Posts: 995
Joined: Mon Jun 11, 2012 6:22 pm

Re: Small Cap Value heads Rejoice !!!

Post by Day9 »

caklim00 wrote: Wed Sep 23, 2020 10:07 am
YRT70 wrote: Sun Sep 20, 2020 7:19 am
kolder wrote: Sun Sep 20, 2020 6:03 am Is foreign tax drag a concern for anyone? Considering small value typically pays out higher dividends, you end up taking a bigger hit especially in a tax advantaged account. I've seen numbers thrown around of about 20-50 bps loss due to this which could be even higher in SCV funds. I do want to hold international but that is quite the price to pay for diversification IMO.

I was considering using DGS or DEM for EM but the dividends are so high that it doesn't even seem worth it, despite the strong value exposure.
Perhaps AVEM is interesting for you. Larger value with dividend yield around 3.75%, much lower than those Wisdom Tree Dividend ETFs.
Wasn't much but just bought some AVEM today using some broker bonus proceeds. I'm officially light on EM per my IPS since all of my EM targeting comes from DFEVX which is using an old 401k I can't contribute to anymore.

I was torn between EMGF and AVEM for new EM contributions but the lower ER and likely significantly lower turnover pointed me toward AVEM. EMGF will likely be tax loss harvest partner unless DFA releases their ETF with a low ER.
I am in the same boat as you. Well, I may be soon. My entire EM allocation is in DFEVX in an old 401k. It has returned far less than the rest of my portfolio, so to rebalance I have had to continuously add to it. Unlike you I am (barely) able to keep my allocations with just this one old 401k. But if things stay the same I will need to buy more EM in another account. Just wanted to commiserate and let you know your posts on this topic are helpful to me.
I'm just a fan of the person I got my user name from
User avatar
Robert T
Posts: 2740
Joined: Tue Feb 27, 2007 9:40 pm
Location: 1, 0.2, 0.4, 0.5
Contact:

Re: Small Cap Value heads Rejoice !!!

Post by Robert T »

Steve Reading wrote: Tue Sep 22, 2020 8:26 pm The latter story is, of course, much harder to swallow.
The part you cut off is also important IMO. Correlations of small cap and value stocks with the market tend to 1 in market crashes. This leads to the sometimes observed higher Sharpe ratio but increased negative skewness (downside risk) in portfolios tilted to small cap value.

In a multifactor world as earlier described by Cochrane, it’s not just returns and return volatility that matter, but also other risks such as recession sensitivity (drawdowns occurring at the worst possible time – when employment/human capital risk also tends to rise).

So in the multifactor world of mean, standard deviation, and recession sensitivity: some investors are willing to give up some return or accept more variance (both reducing the Sharpe ratio) to reduce recession-sensitivity. In this multifactor world – as Cochrane indicates – the market portfolio is no longer on the mean-variance frontier. The mean-variance efficient portfolio “takes stronger positions than the market portfolio in factors such as value or recession sensitive stocks that the average investor fears”. (re: the sometimes observed higher Sharpe ratio but increased downside risk in portfolios tilted to small cap value). No free lunch. Investors don't like "recession sensitivity - as we have seen by the recent vitriolic bashing of small value – with more than twice the drawdown of SV during COVID. Some people, including myself, try to ‘neutralize’ this "recession sensitivity" of a small cap value tilted portfolio with longer-term treasuries – somewhat but not always successful [no escape].

Fama says that the market portfolio is always (informationally) efficient in that market clearing prices reflect all available information. This is not inconsistent with expected premiums on “recession sensitive” stocks (re: small cap value – as Fama says, sometimes they get clobbered. And this often happens at worst possible time).

Fama acknowledges that the ‘market’ in principle can include not just all traded financial assets, but also consumer durables, real estate, and human capital. I agree that the global market of financial assets (about 55% world stocks: 45% world bonds) is a good starting point (a la Sharpe) with tilts away from the market portfolio based on how individual characteristics (e.g. age, human capital risk/job, mortgage, domicile, other assets etc.) as well as tastes and preferences, differ from the average market participant.

Personally, I currently plan to stick with my ‘tilts’ away from the market over the long-term. My characteristics, tastes, preference don’t become more ‘market-like’ enough to shift towards a ‘market portfolio’ over time. And interestingly, from Cochranes article on what seems to be related to retirees – “an investor who has no other source of income beyond his investment portfolio does not particularly care about recessions. Therefore, he should buy extra amounts of recession sensitive stocks (value stocks)…’ This obviously doesn’t reflect tastes and preferences, just characteristics, and not everyone can or will tilt to small value as the average investor holds the market portfolio.

Another interesting observation is that Bogle also implies the “market” is not mean-variance efficient, and that only holding US stocks and bonds is more mean-variance efficient. And a lot of supporters say he’s right. Then they use the ‘efficient market’ argument to justify a US TSM and bash anything else, which is somewhat inconsistent.

Need to each navigate our own way …

Obviously no guarantees.
.
000
Posts: 2842
Joined: Thu Jul 23, 2020 12:04 am

Re: Small Cap Value heads Rejoice !!!

Post by 000 »

MotoTrojan wrote: Wed Sep 23, 2020 7:39 am
000 wrote: Wed Sep 23, 2020 2:33 am
manlymatt83 wrote: Tue Sep 22, 2020 6:52 pm ... so is 50% TSM and 50% SCV until age 50 acceptable?
Before jumping on the SCV train, I strongly suggest doing an industry analysis of what's in your chosen SCV fund.
Could you not say the same about someone who is 100% TSM? I would wager the average sector-exposure goes down at 50/50 market-cap/SCV (better balances among sectors).

Looking at the Exposure tab here on PV for my current portfolio (#1), what I plan to move to long-term (#2, replacing LCV w/ S&P500), and 100% S&P500 I don't see any egregious deltas. I actually end up with less financials (often lumped in with value traps these days), marginal energy increase (exposure in general is tiny), and a good bit more of materials & industrials (those are really the only ones that stand out), but overall the sectors look plenty diversified.

https://www.portfoliovisualizer.com/bac ... tion6_2=25
QVAL, IVAL, and FNDC cost too much (49bp, 59bp, 39bp respectively). Those ERs are likely to eat up much of whatever SCV premium there may be.
User avatar
Forester
Posts: 1565
Joined: Sat Jan 19, 2019 2:50 pm
Location: UK

Re: Small Cap Value heads Rejoice !!!

Post by Forester »

Another POV. Active investing skews to value & small, passive skews to large; flows from active funds to passive funds (and the elderly selling active funds to fund lifestyle vs the young accumulating in passive) results in suppressed SCV stock prices and ever present bid for megacap > https://twitter.com/profplum99/status/ ... 51137?s=21
MotoTrojan
Posts: 10661
Joined: Wed Feb 01, 2017 8:39 pm

Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

000 wrote: Wed Sep 23, 2020 5:03 pm
MotoTrojan wrote: Wed Sep 23, 2020 7:39 am
000 wrote: Wed Sep 23, 2020 2:33 am
manlymatt83 wrote: Tue Sep 22, 2020 6:52 pm ... so is 50% TSM and 50% SCV until age 50 acceptable?
Before jumping on the SCV train, I strongly suggest doing an industry analysis of what's in your chosen SCV fund.
Could you not say the same about someone who is 100% TSM? I would wager the average sector-exposure goes down at 50/50 market-cap/SCV (better balances among sectors).

Looking at the Exposure tab here on PV for my current portfolio (#1), what I plan to move to long-term (#2, replacing LCV w/ S&P500), and 100% S&P500 I don't see any egregious deltas. I actually end up with less financials (often lumped in with value traps these days), marginal energy increase (exposure in general is tiny), and a good bit more of materials & industrials (those are really the only ones that stand out), but overall the sectors look plenty diversified.

https://www.portfoliovisualizer.com/bac ... tion6_2=25
QVAL, IVAL, and FNDC cost too much (49bp, 59bp, 39bp respectively). Those ERs are likely to eat up much of whatever SCV premium there may be.
Maybe, maybe not. Only option out there for ex-US small that is cheaper is AVDV at 36bp, I do hope Vanguard comes out with an ex-US value fund like VFVA at an even better value because this is the fund that's expense bothers me the most.

For QVAL/IVAL, the ER is high but I justify it by looking at the decile returns (What Works On Wallstreet has some great tables on these) and noting how much spread there has been between the cheapest decile (like QVAL/IVAL target) and the average of the cheapest 3-5 deciles (like a typical long-only value fund will hold) and it more than pays for the extra ER for a larger number of valuation metrics (not just EV/EBIT) even with substantial margin (knockdown on factor return). I'd probably be better off replacing QVAL with VFVA , but I sleep fine at night with it as-is.

Portfolio weighted ER of 0.25% is pretty good for how much factor exposure I am getting.
MotoTrojan
Posts: 10661
Joined: Wed Feb 01, 2017 8:39 pm

Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

Forester wrote: Wed Sep 23, 2020 5:45 pm Another POV. Active investing skews to value & small, passive skews to large; flows from active funds to passive funds (and the elderly selling active funds to fund lifestyle vs the young accumulating in passive) results in suppressed SCV stock prices and ever present bid for megacap > https://twitter.com/profplum99/status/ ... 51137?s=21
I highly recommend people listen to his podcasts talking about this, it is pretty frightening. He is modeling something like a 50x increase in market-cap prices as passive takes over :|:

https://podcasts.apple.com/us/podcast/t ... 0483139066

Corey has a similar one that is getting a lot of buzz and is inspired by Mike:

https://investresolve.com/podcasts/core ... -cascades/
000
Posts: 2842
Joined: Thu Jul 23, 2020 12:04 am

Re: Small Cap Value heads Rejoice !!!

Post by 000 »

MotoTrojan wrote: Wed Sep 23, 2020 5:46 pm
000 wrote: Wed Sep 23, 2020 5:03 pm QVAL, IVAL, and FNDC cost too much (49bp, 59bp, 39bp respectively). Those ERs are likely to eat up much of whatever SCV premium there may be.
Maybe, maybe not. Only option out there for ex-US small that is cheaper is AVDV at 36bp, I do hope Vanguard comes out with an ex-US value fund like VFVA at an even better value because this is the fund that's expense bothers me the most.

For QVAL/IVAL, the ER is high but I justify it by looking at the decile returns (What Works On Wallstreet has some great tables on these) and noting how much spread there has been between the cheapest decile (like QVAL/IVAL target) and the average of the cheapest 3-5 deciles (like a typical long-only value fund will hold) and it more than pays for the extra ER for a larger number of valuation metrics (not just EV/EBIT) even with substantial margin (knockdown on factor return). I'd probably be better off replacing QVAL with VFVA , but I sleep fine at night with it as-is.

Portfolio weighted ER of 0.25% is pretty good for how much factor exposure I am getting.
0.59% is quite a headwind for factor premia (that may not even exist) to overcome.

Total ER doesn't matter, marginal ER is what matters because the decision to include IVAL or not is made at the margin.
000
Posts: 2842
Joined: Thu Jul 23, 2020 12:04 am

Re: Small Cap Value heads Rejoice !!!

Post by 000 »

Forester wrote: Wed Sep 23, 2020 5:45 pm Another POV. Active investing skews to value & small, passive skews to large; flows from active funds to passive funds (and the elderly selling active funds to fund lifestyle vs the young accumulating in passive) results in suppressed SCV stock prices and ever present bid for megacap > https://twitter.com/profplum99/status/ ... 51137?s=21
Active doesn't skew to value and small. Active investors in aggregate own the same stocks as the index, expect for the picocaps it doesn't include.

Moreover funds such as VBR and VIOV are passive and cap-weighted.

If you really believe passive index funds are distorting the market, you should stock pick instead of using funds. Not a joke.
absolute zero
Posts: 507
Joined: Thu Dec 29, 2016 4:59 pm

Re: Small Cap Value heads Rejoice !!!

Post by absolute zero »

MotoTrojan wrote: Wed Sep 23, 2020 5:48 pm
Forester wrote: Wed Sep 23, 2020 5:45 pm Another POV. Active investing skews to value & small, passive skews to large; flows from active funds to passive funds (and the elderly selling active funds to fund lifestyle vs the young accumulating in passive) results in suppressed SCV stock prices and ever present bid for megacap > https://twitter.com/profplum99/status/ ... 51137?s=21
I highly recommend people listen to his podcasts talking about this, it is pretty frightening. He is modeling something like a 50x increase in market-cap prices as passive takes over :|:

https://podcasts.apple.com/us/podcast/t ... 0483139066

Corey has a similar one that is getting a lot of buzz and is inspired by Mike:

https://investresolve.com/podcasts/core ... -cascades/
I listened to about half of the first podcast you linked, but couldn’t understand what the guy was talking about most of the time. Something about how passive investors hold less cash than active investors (0.1% vs 5%), and so the switch to passive will make the stock market go up 5,000%. What??
absolute zero
Posts: 507
Joined: Thu Dec 29, 2016 4:59 pm

Re: Small Cap Value heads Rejoice !!!

Post by absolute zero »

000 wrote: Wed Sep 23, 2020 6:31 pm
Forester wrote: Wed Sep 23, 2020 5:45 pm Another POV. Active investing skews to value & small, passive skews to large; flows from active funds to passive funds (and the elderly selling active funds to fund lifestyle vs the young accumulating in passive) results in suppressed SCV stock prices and ever present bid for megacap > https://twitter.com/profplum99/status/ ... 51137?s=21
Active doesn't skew to value and small. Active investors in aggregate own the same stocks as the index, expect for the picocaps it doesn't include.

Moreover funds such as VBR and VIOV are passive and cap-weighted.

If you really believe passive index funds are distorting the market, you should stock pick instead of using funds. Not a joke.
I don’t know if active skews to value, but I could definitely believe that it skews small. In order for active to skew small, passive must skew large. If all passive was in total market funds then there would be no skew. But I don’t think that’s the case. While I don’t have any data, I’d imagine more passive investments are titled towards large cap than small cap. This is just a guess based on every employer plan that I’ve participated in - they all seem to include S&P500 funds, and rarely total market funds.
MotoTrojan
Posts: 10661
Joined: Wed Feb 01, 2017 8:39 pm

Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

absolute zero wrote: Wed Sep 23, 2020 7:50 pm
MotoTrojan wrote: Wed Sep 23, 2020 5:48 pm
Forester wrote: Wed Sep 23, 2020 5:45 pm Another POV. Active investing skews to value & small, passive skews to large; flows from active funds to passive funds (and the elderly selling active funds to fund lifestyle vs the young accumulating in passive) results in suppressed SCV stock prices and ever present bid for megacap > https://twitter.com/profplum99/status/ ... 51137?s=21
I highly recommend people listen to his podcasts talking about this, it is pretty frightening. He is modeling something like a 50x increase in market-cap prices as passive takes over :|:

https://podcasts.apple.com/us/podcast/t ... 0483139066

Corey has a similar one that is getting a lot of buzz and is inspired by Mike:

https://investresolve.com/podcasts/core ... -cascades/
I listened to about half of the first podcast you linked, but couldn’t understand what the guy was talking about most of the time. Something about how passive investors hold less cash than active investors (0.1% vs 5%), and so the switch to passive will make the stock market go up 5,000%. What??
The 2nd podcast (and associated paper) is much more clear and skeptical, I suggest starting there.
000
Posts: 2842
Joined: Thu Jul 23, 2020 12:04 am

Re: Small Cap Value heads Rejoice !!!

Post by 000 »

absolute zero wrote: Wed Sep 23, 2020 7:55 pm I don’t know if active skews to value, but I could definitely believe that it skews small. In order for active to skew small, passive must skew large. If all passive was in total market funds then there would be no skew. But I don’t think that’s the case. While I don’t have any data, I’d imagine more passive investments are titled towards large cap than small cap. This is just a guess based on every employer plan that I’ve participated in - they all seem to include S&P500 funds, and rarely total market funds.
Good point. I was just thinking of total market, but you are correct that a lot of money is in the semi-passive S&P 500.
User avatar
Forester
Posts: 1565
Joined: Sat Jan 19, 2019 2:50 pm
Location: UK

Re: Small Cap Value heads Rejoice !!!

Post by Forester »

000 wrote: Wed Sep 23, 2020 6:31 pm
Forester wrote: Wed Sep 23, 2020 5:45 pm Another POV. Active investing skews to value & small, passive skews to large; flows from active funds to passive funds (and the elderly selling active funds to fund lifestyle vs the young accumulating in passive) results in suppressed SCV stock prices and ever present bid for megacap > https://twitter.com/profplum99/status/ ... 51137?s=21
Active doesn't skew to value and small. Active investors in aggregate own the same stocks as the index, expect for the picocaps it doesn't include.

Moreover funds such as VBR and VIOV are passive and cap-weighted.

If you really believe passive index funds are distorting the market, you should stock pick instead of using funds. Not a joke.
If active + passive = the market but active managers own more value-y stocks, then value would suffer a relative penalty until the shift to passive levels off.
000
Posts: 2842
Joined: Thu Jul 23, 2020 12:04 am

Re: Small Cap Value heads Rejoice !!!

Post by 000 »

Forester wrote: Thu Sep 24, 2020 8:46 am If active + passive = the market but active managers own more value-y stocks, then value would suffer a relative penalty until the shift to passive levels off.
How can this happen?
absolute zero
Posts: 507
Joined: Thu Dec 29, 2016 4:59 pm

Re: Small Cap Value heads Rejoice !!!

Post by absolute zero »

Forester wrote: Thu Sep 24, 2020 8:46 am
000 wrote: Wed Sep 23, 2020 6:31 pm
Forester wrote: Wed Sep 23, 2020 5:45 pm Another POV. Active investing skews to value & small, passive skews to large; flows from active funds to passive funds (and the elderly selling active funds to fund lifestyle vs the young accumulating in passive) results in suppressed SCV stock prices and ever present bid for megacap > https://twitter.com/profplum99/status/ ... 51137?s=21
Active doesn't skew to value and small. Active investors in aggregate own the same stocks as the index, expect for the picocaps it doesn't include.

Moreover funds such as VBR and VIOV are passive and cap-weighted.

If you really believe passive index funds are distorting the market, you should stock pick instead of using funds. Not a joke.
If active + passive = the market but active managers own more value-y stocks, then value would suffer a relative penalty until the shift to passive levels off.
Not if the active managers that *aren’t* losing funds to passive are simultaneously becoming *more* value-y. Which we would expect them to do, if the value stocks become more and more of a bargain.
User avatar
Forester
Posts: 1565
Joined: Sat Jan 19, 2019 2:50 pm
Location: UK

Re: Small Cap Value heads Rejoice !!!

Post by Forester »

000 wrote: Thu Sep 24, 2020 8:50 am
Forester wrote: Thu Sep 24, 2020 8:46 am If active + passive = the market but active managers own more value-y stocks, then value would suffer a relative penalty until the shift to passive levels off.
How can this happen?
When the manager attempting to pick midcap bargains gets ditched for VOO (FAANG + everything else).

Also a massive difference between (1) believing passive or low cost systematic funds are what retail investors are surely best sticking with (2) being open to the idea of distortion while the passive migration takes place, or some kind of permanent change whereby the markets trend less but have periodic violent liquidity crunches.
Massdriver
Posts: 106
Joined: Tue Jan 02, 2018 12:05 pm

Re: Small Cap Value heads Rejoice !!!

Post by Massdriver »

000 wrote: Wed Sep 23, 2020 5:03 pm
MotoTrojan wrote: Wed Sep 23, 2020 7:39 am
000 wrote: Wed Sep 23, 2020 2:33 am
manlymatt83 wrote: Tue Sep 22, 2020 6:52 pm ... so is 50% TSM and 50% SCV until age 50 acceptable?
Before jumping on the SCV train, I strongly suggest doing an industry analysis of what's in your chosen SCV fund.
Could you not say the same about someone who is 100% TSM? I would wager the average sector-exposure goes down at 50/50 market-cap/SCV (better balances among sectors).

Looking at the Exposure tab here on PV for my current portfolio (#1), what I plan to move to long-term (#2, replacing LCV w/ S&P500), and 100% S&P500 I don't see any egregious deltas. I actually end up with less financials (often lumped in with value traps these days), marginal energy increase (exposure in general is tiny), and a good bit more of materials & industrials (those are really the only ones that stand out), but overall the sectors look plenty diversified.

https://www.portfoliovisualizer.com/bac ... tion6_2=25
QVAL, IVAL, and FNDC cost too much (49bp, 59bp, 39bp respectively). Those ERs are likely to eat up much of whatever SCV premium there may be.
Is this a popular view here in this thread that a fund like AVDV with a .36% ER will likely eat up the SCV premium? The DFA int scv fund seems to have a decent history of returns and Avantis has better ERs than DFA.

Edit: I should qualify this further and ask a popular view in this thread among SCV tilters.
YRT70
Posts: 687
Joined: Sat Apr 27, 2019 8:51 am

Re: Small Cap Value heads Rejoice !!!

Post by YRT70 »

The latest Ben Felix podcast has a lot of factor related topics. One of the papers they discuss claims diversification benefits of adding factors.
Ben shares some findings from a model he built inspired by a program written by one of this show’s listeners that tests historical safe withdrawal rates for factor loaded portfolios. Ben gets into a series of papers that speak to the diversification benefit of adding factors in this section too. He wraps up the discussion with a spanner in the works though, which looks at this question through the lens of time-series momentum rather than cross-sectional momentum. Here, he considers trend following as another type of diversification that has shown favourable impacts on portfolio returns in the data that exists.
  • Ben’s remodelling of a listener’s code that tests historical safe withdrawal rates for factor loaded portfolios. [0:34:40.0]
    Safe withdrawal rates for different stock indexes according to Ben’s model. [0:37:15.0]
    A paper looking at the interaction between factors historically and the results this produced. [0:47:52.0]
    Findings of a paper looking at the five factors through business cycles. [0:56:57.0]
    Papers exploring whether a factor can be cheap and therefore have a higher extended premium. [1:00:41.0]
    The shadow time-series momentum casts on this; the impact of trend following on safe withdrawal rates. [1:02:46.0]
https://rationalreminder.ca/podcast

While listening I was wondering why they got relatively low SWRs but then later he mentions they used 50 year timeframes.
000
Posts: 2842
Joined: Thu Jul 23, 2020 12:04 am

Re: Small Cap Value heads Rejoice !!!

Post by 000 »

Forester wrote: Thu Sep 24, 2020 8:59 am When the manager attempting to pick midcap bargains gets ditched for VOO (FAANG + everything else).

Also a massive difference between (1) believing passive or low cost systematic funds are what retail investors are surely best sticking with (2) being open to the idea of distortion while the passive migration takes place, or some kind of permanent change whereby the markets trend less but have periodic violent liquidity crunches.
Ok, I acknowledge that trading of passive instruments can affect prices.

But S&P 500 isn't the market and it isn't a representative index of the market. Buying S&P 500 as sole US holding is an active tilt.

So VOO investors are active as far as I'm concerned.

Just like the many Vanguard active funds that are really semi-passive and mostly follow some index under the hood.
asif408
Posts: 2195
Joined: Sun Mar 02, 2014 8:34 am
Location: Florida

Re: Small Cap Value heads Rejoice !!!

Post by asif408 »

Massdriver wrote: Thu Sep 24, 2020 9:05 am Is this a popular view here in this thread that a fund like AVDV with a .36% ER will likely eat up the SCV premium? The DFA int scv fund seems to have a decent history of returns and Avantis has better ERs than DFA.

Edit: I should qualify this further and ask a popular view in this thread among SCV tilters.
Depends on how big you believe the premium is and what it is taking the place of. FWIW, I do current tilt to SCV, not because I believe it has inherently superior returns, but because valuations have fallen dramatically in recent years compared to large cap and growth stocks.

If I had to make a high confidence bet, I'd say US SCV will probably handily beat any other style/size segment of the US market, just based on its much lower valuations. In foreign developed markets, SCV should beat all growth and blend funds, but I'm less confident it will beat LCV in developed markets because valuations aren't much different, and you can find LCV developed markets funds for cheaper. So I'd hedge my bets and own some LCV and SCV in developed markets.
User avatar
Steve Reading
Posts: 2460
Joined: Fri Nov 16, 2018 10:20 pm

Re: Small Cap Value heads Rejoice !!!

Post by Steve Reading »

Massdriver wrote: Thu Sep 24, 2020 9:05 am
000 wrote: Wed Sep 23, 2020 5:03 pm
MotoTrojan wrote: Wed Sep 23, 2020 7:39 am
000 wrote: Wed Sep 23, 2020 2:33 am
manlymatt83 wrote: Tue Sep 22, 2020 6:52 pm ... so is 50% TSM and 50% SCV until age 50 acceptable?
Before jumping on the SCV train, I strongly suggest doing an industry analysis of what's in your chosen SCV fund.
Could you not say the same about someone who is 100% TSM? I would wager the average sector-exposure goes down at 50/50 market-cap/SCV (better balances among sectors).

Looking at the Exposure tab here on PV for my current portfolio (#1), what I plan to move to long-term (#2, replacing LCV w/ S&P500), and 100% S&P500 I don't see any egregious deltas. I actually end up with less financials (often lumped in with value traps these days), marginal energy increase (exposure in general is tiny), and a good bit more of materials & industrials (those are really the only ones that stand out), but overall the sectors look plenty diversified.

https://www.portfoliovisualizer.com/bac ... tion6_2=25
QVAL, IVAL, and FNDC cost too much (49bp, 59bp, 39bp respectively). Those ERs are likely to eat up much of whatever SCV premium there may be.
Is this a popular view here in this thread that a fund like AVDV with a .36% ER will likely eat up the SCV premium? The DFA int scv fund seems to have a decent history of returns and Avantis has better ERs than DFA.

Edit: I should qualify this further and ask a popular view in this thread among SCV tilters.
A value premium of ~1% would be enough to make up for the AVDV fee. That's about 4 times smaller than the historical value premium. Depending on your expectations, this might be a good or a bad deal to you.
"... 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
User avatar
Uncorrelated
Posts: 1060
Joined: Sun Oct 13, 2019 3:16 pm

Re: Small Cap Value heads Rejoice !!!

Post by Uncorrelated »

Massdriver wrote: Thu Sep 24, 2020 9:05 am
000 wrote: Wed Sep 23, 2020 5:03 pm
MotoTrojan wrote: Wed Sep 23, 2020 7:39 am
000 wrote: Wed Sep 23, 2020 2:33 am
manlymatt83 wrote: Tue Sep 22, 2020 6:52 pm ... so is 50% TSM and 50% SCV until age 50 acceptable?
Before jumping on the SCV train, I strongly suggest doing an industry analysis of what's in your chosen SCV fund.
Could you not say the same about someone who is 100% TSM? I would wager the average sector-exposure goes down at 50/50 market-cap/SCV (better balances among sectors).

Looking at the Exposure tab here on PV for my current portfolio (#1), what I plan to move to long-term (#2, replacing LCV w/ S&P500), and 100% S&P500 I don't see any egregious deltas. I actually end up with less financials (often lumped in with value traps these days), marginal energy increase (exposure in general is tiny), and a good bit more of materials & industrials (those are really the only ones that stand out), but overall the sectors look plenty diversified.

https://www.portfoliovisualizer.com/bac ... tion6_2=25
QVAL, IVAL, and FNDC cost too much (49bp, 59bp, 39bp respectively). Those ERs are likely to eat up much of whatever SCV premium there may be.
Is this a popular view here in this thread that a fund like AVDV with a .36% ER will likely eat up the SCV premium? The DFA int scv fund seems to have a decent history of returns and Avantis has better ERs than DFA.

Edit: I should qualify this further and ask a popular view in this thread among SCV tilters.
Based on the historical factor premia, the excess return of something like AVDV is around 4% per year. You should (of course) aim for as low ER as possible, but I don't see how the higher ER is expected to eat up most of SCV premium.

You can verify it for yourself by running something like a mean-variance analysis.
Post Reply