Small Cap Value heads Rejoice !!!

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Day9
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Re: Small Cap Value heads Rejoice !!!

Post by Day9 »

000 wrote: Fri Sep 25, 2020 8:26 pm
vineviz wrote: Fri Sep 25, 2020 8:01 pm If you're simply going to reject any evidence that undermines your hypothesis ("I don't care about debt ratings"), what kind of reply do you expect to get to a followup of "but what about all the OTHER risks"?
No, I am not rejecting any evidence that undermines my hypothesis. I simply don't believe the debt ratings are a good risk measure. The bond issuers pay for the ratings,...
Let's come up with some kind of test for that. Like we could look historically to see if companies rated AA would go on to default or go bankrupt less often than companies rated BB, who would turn out to be less risky than companies rated CC, etc. Or maybe we could look at if lower rated companies have to pay higher interest rates on corporate debt than higher rated companies. Or we can look at the stock price of companies by credit rating and see if we can find any trends that confirm or refute vineviz' claim. What kinds of tests do you think would do that?
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Taylor Larimore
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Re: Small Cap Value heads Rejoice !!!

Post by Taylor Larimore »

XacTactX wrote: Fri Sep 25, 2020 7:25 pm Hey folks, I know I've asked stuff like this before but I'd like your advice again. I've tried my best to diversify with different factors like size, value, and profitability, and I'm always trying to analyze my funds to see if I made the right choice.

Here is a list of funds using Morningstar X-Ray:

Image

As you can see, the ETF that I use is SMLF, and the P/E and P/B of this fund is not as low as IJS or AVUV. But instead, this fund has very high ROA and ROE. P/B and P/E are different ways of measuring value, and ROA and ROE are different ways of measuring profitability/quality. So my question is, how do you folks see this tradeoff, and do ROA / ROE play any role in your investment choice?

EDIT: just wanted to add you don't have to be nice, tear down my investment choice and tell me I'm wrong so I can learn :sharebeer
XacTactX:

After many years of trying, I believe it is fruitless to try and pick winning funds based on various criteria. You can be sure that most fund managers try but the record is clear that few outperform a simple total market index fund.

Jack Bogle knows more about investing than you or I or anyone on this forum. I recently came across "Remarks by John C. Bogle before the Financial Analysts of Philadelphia." His speech is full of data with this conclusion:
"If you can't foretell the future, diversify. -- If you can't consistently switch back and forth from growth to value (or large-cap to small-cap) at or near the half-dozen or so inflection points that will occur during an investment lifetime, just own the entire U.S.stock market."
http://johncbogle.com/speeches/JCB_Phila_Ana_2-01.pdf

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "Selecting funds that will significantly exceed market returns, a search in which hope springs eternal and in which past performance has proven of virtually no predictive value, is a loser’s game.”
"Simplicity is the master key to financial success." -- Jack Bogle
000
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Re: Small Cap Value heads Rejoice !!!

Post by 000 »

Day9 wrote: Fri Sep 25, 2020 8:38 pm Let's come up with some kind of test for that. Like we could look historically to see if companies rated AA would go on to default or go bankrupt less often than companies rated BB, who would turn out to be less risky than companies rated CC, etc. Or maybe we could look at if lower rated companies have to pay higher interest rates on corporate debt than higher rated companies. Or we can look at the stock price of companies by credit rating and see if we can find any trends that confirm or refute vineviz' claim. What kinds of tests do you think would do that?
I agree there is probably a higher percentage of lower rated companies going bankrupt. But the stock upside of those who survive could be enough that the overall category is not actually riskier from a stock investor's perspective.
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Re: Small Cap Value heads Rejoice !!!

Post by rkhusky »

XacTactX wrote: Fri Sep 25, 2020 7:25 pm Hey folks, I know I've asked stuff like this before but I'd like your advice again. I've tried my best to diversify with different factors like size, value, and profitability, and I'm always trying to analyze my funds to see if I made the right choice.

...

As you can see, the ETF that I use is SMLF, and the P/E and P/B of this fund is not as low as IJS or AVUV. But instead, this fund has very high ROA and ROE. P/B and P/E are different ways of measuring value, and ROA and ROE are different ways of measuring profitability/quality. So my question is, how do you folks see this tradeoff, and do ROA / ROE play any role in your investment choice?

EDIT: just wanted to add you don't have to be nice, tear down my investment choice and tell me I'm wrong so I can learn :sharebeer
Jumping between strategies is a sure way to under-perform.
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vineviz
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Re: Small Cap Value heads Rejoice !!!

Post by vineviz »

000 wrote: Fri Sep 25, 2020 8:26 pm
vineviz wrote: Fri Sep 25, 2020 8:01 pm If you're simply going to reject any evidence that undermines your hypothesis ("I don't care about debt ratings"), what kind of reply do you expect to get to a followup of "but what about all the OTHER risks"?
No, I am not rejecting any evidence that undermines my hypothesis. I simply don't believe the debt ratings are a good risk measure. The bond issuers pay for the ratings, and large corporations have more bargaining power.
What risk measure do you propose, then? If you’re going to reject all the ones used by the rest of the world, what do you propose instead?
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Small Cap Value heads Rejoice !!!

Post by XacTactX »

HippoSir wrote: Fri Sep 25, 2020 8:12 pm This is where things get quite fuzzy and depend on specifically what you want to target. A fund like AVUV will target value and profitability, with some momentum screens, but won't specifically weight momentum in its weighting. This will result in a deeper value exposure for AVUV than something like SMLF, which weights value, quality, size, and momentum equally (also known as multifactor). I find combining value and momentum an attractive proposition due to their negative correlation, but there are convincing arguments either way whether this approach actually works due to the increase in trading costs.

This post was snipped to save space.
Hippo, it seems like the conclusion you reached is similar to me, and you added some AVUV and VFMF to increase your value exposure. I agree with you that there are convincing arguments to support pure value and a blend of other factors.

I agree with your concern about backtesting. The longest backtest that MSCI provides is for LRGF and INTF, they start in December of 1998. I wish they had longer backtests with 40+ years, it would give more credibility to their findings. I've read their methodology and I like the philosophy behind their decisions, but the backtests were much better than the real life performance. Some of the backtested funds outperformed by 3% per year, but none of the funds have done this well since they were launched in 2015. I know that some of this is because of the bloodbath in the value factor, but still it is disheartening.
Taylor Larimore wrote: Fri Sep 25, 2020 8:44 pm
After many years of trying, I believe it is fruitless to try and pick winning funds based on various criteria. You can be sure that most fund managers try but the record is clear that few outperform a simple total market index fund.

This post was snipped to save space.
Taylor, I think your advice and Jack Bogle's advice is reasonable for at least 90% of retail investors, the other 10% have to be like me (a little bit smart and a little bit crazy). It certainly worked better than my strategy for the past 5-10 years. I am going to tough it out and see where things go. Thank you for the work you've done to educate retail investors and Bogleheads :beer
SMLF | ISCF | EMGF | LendingClub | Cash
HippoSir
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Re: Small Cap Value heads Rejoice !!!

Post by HippoSir »

XacTactX wrote: Fri Sep 25, 2020 9:06 pm I agree with your concern about backtesting. The longest backtest that MSCI provides is for LRGF and INTF, they start in December of 1998. I wish they had longer backtests with 40+ years, it would give more credibility to their findings. I've read their methodology and I like the philosophy behind their decisions, but the backtests were much better than the real life performance. Some of the backtested funds outperformed by 3% per year, but none of the funds have done this well since they were launched in 2015. I know that some of this is because of the bloodbath in the value factor, but still it is disheartening.
Personally I hate backtests in general, any fund manager can design something that looks amazing in backtests. For what its worth, there are longer term backtests of the MSCI DMF indexes floating around, and they look amazing (of course).

When I choose a factor fund I want to see historical factor exposures and understand how they plan to control trading costs as well as idiosyncratic risk. The MSCI DMF indexes (and iShares multifactor funds) actually do really well here, but they sell and market them based on these silly backtests. My impression is the quant guys designing the MSCI indexes really know their stuff, and that backtests are essentially meaningless, but the marketing guys get in the way. :D

Regarding performance since 2015, I'm actually impressed the funds have essentially matched their total market equivalents. They've suffered a significant negative value premium, but the other factors and the risk guardrails are really doing their job.

Lastly, Vanguard, if you're out there, give me a cheap as dirt international version of VFMF so I can stop thinking about iShares multifactor! :beer
Last edited by HippoSir on Fri Sep 25, 2020 9:32 pm, edited 1 time in total.
000
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Re: Small Cap Value heads Rejoice !!!

Post by 000 »

vineviz wrote: Fri Sep 25, 2020 9:04 pm What risk measure do you propose, then? If you’re going to reject all the ones used by the rest of the world, what do you propose instead?
Finding errors in the theory does not require me to prove the negative. I'm not making a positive claim about SCV risk premium. I suggested it might have lower risk, but didn't assert so.

It may be the case that there is no sufficiently good risk measure to justify a claim of SCV risk premium. Indeed, a common problem in economics is assuming certain things are good measures, which actually aren't. This problem has spread to the hard sciences too (lookup redefinition of SI units).

Moreover, my rejection of the bond ratings is with regard to stock investing, not necessarily WRT bond investing. Junk bonds have to have a premium because individual bonds are negatively skewed: bond investors don't get any upside from the junky companies that survive and do extraordinarily well, but stock investors do. So IMO the average bond rating of small caps does not determine the stock risk of the small factor. If it's widely believed that enough junky small caps will survive to produce outsized returns and make up for the bankruptcies, then presumably the market wouldn't be pricing in a risk premium for small value.
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Re: Small Cap Value heads Rejoice !!!

Post by muffins14 »

Right so the expected return of SCV is higher, but because you don’t know what will happen with those distressed companies, the variance is high. Hence risk

Also surely there is a connection with bond yield and expected stock returns right? This is conjecture and others actually know better than me, but If a company needs to raise capital it either needs to sell shares or bonds right? If bond yields are high, I imagine no one would buy the stock unless they expected returns to be higher than the bond yield. So cost of capital must be somewhat similar whether it comes from bonds or from equity, perhaps?
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Re: Small Cap Value heads Rejoice !!!

Post by 000 »

muffins14 wrote: Fri Sep 25, 2020 11:00 pm Right so the expected return of SCV is higher, but because you don’t know what will happen with those distressed companies, the variance is high. Hence risk
Volatility is equal to neither risk nor return, e.g. long term bonds, OTC stocks, commodities, precious metals, derivatives of various kinds.

It doesn't matter that we don't know which stocks will survive; as long the market believes enough will, it is possible the whole factor actually isn't being priced for a risk premium.
muffins14 wrote: Fri Sep 25, 2020 11:00 pm Also surely there is a connection with bond yield and expected stock returns right? This is conjecture and others actually know better than me, but If a company needs to raise capital it either needs to sell shares or bonds right? If bond yields are high, I imagine no one would buy the stock unless they expected returns to be higher than the bond yield. So cost of capital must be somewhat similar whether it comes from bonds or from equity, perhaps?
Maybe, but remember that the corporate bond market is illiquid and high transaction cost.

Also passive investors are more likely to buy junk stocks in their index funds than junk bonds (not in "Total" Bond Market).

And most shares floating around are old issues not new ones.
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Robert T
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Re: Small Cap Value heads Rejoice !!!

Post by Robert T »

.
Earnings-per-share levels are lower, earnings volatility is higher, and debt levels are higher and more expensive on average for smaller companies – and even more so for small cap value companies. If you combine 10 of these companies and take the average – average earnings are still lower, aggregate earnings volatility is still higher, and debt levels are still higher and more expensive, even if you combine 2000 companies (as per the Russell 2000) this is still the case. To me these characteristics reflect higher risk (it is not hard for me to appreciate this whether at household or company level). Last time I checked about 35% of Russell 2000 companies had no net income compared to about 1.5% in the S&P500.

With these combined characteristics, sometimes it can go south very quickly. No, delayed, or disrupted (more volatile) income with higher debt levels can lead to elevated concerns about debt payments that can drive share prices lower thereby increasing debt ratios. This can subsequently lead to downgrading debt quality and increasing debt costs to keep going. With increasing difficulty and costs of raising cash through debt instruments, equity shareholders often then become concerned about share dilution which drives share prices even lower reinforcing a downward spiral, and eventually the company starts missing coupon payments on its debt. This is exactly what happened in the Horsehead bankruptcy which some notable ‘value investors’ held (Monish Pabrai and Guy Spiers). Risks were real, they showed up, and they bit hard. The share price declined from about $20 to 10 cents in about 6 months. The likelihood of moving in this direction for companies with the combined characteristics of lower earnings, more volatile earnings, higher and more expense debt (as in small cap, small cap value companies on average) is higher than companies with higher, more stable earnings, lower and less expensive debt (as is more typically the case in large companies, on average).
.
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Re: Small Cap Value heads Rejoice !!!

Post by Elysium »

Robert T wrote: Sat Sep 26, 2020 1:57 am .
Earnings-per-share levels are lower, earnings volatility is higher, and debt levels are higher and more expensive on average for smaller companies – and even more so for small cap value companies. If you combine 10 of these companies and take the average – average earnings are still lower, aggregate earnings volatility is still higher, and debt levels are still higher and more expensive, even if you combine 2000 companies (as per the Russell 2000) this is still the case. To me these characteristics reflect higher risk (it is not hard for me to appreciate this whether at household or company level). Last time I checked about 35% of Russell 2000 companies had no net income compared to about 1.5% in the S&P500.

With these combined characteristics, sometimes it can go south very quickly. No, delayed, or disrupted (more volatile) income with higher debt levels can lead to elevated concerns about debt payments that can drive share prices lower thereby increasing debt ratios. This can subsequently lead to downgrading debt quality and increasing debt costs to keep going. With increasing difficulty and costs of raising cash through debt instruments, equity shareholders often then become concerned about share dilution which drives share prices even lower reinforcing a downward spiral, and eventually the company starts missing coupon payments on its debt. This is exactly what happened in the Horsehead bankruptcy which some notable ‘value investors’ held (Monish Pabrai and Guy Spiers). Risks were real, they showed up, and they bit hard. The share price declined from about $20 to 10 cents in about 6 months. The likelihood of moving in this direction for companies with the combined characteristics of lower earnings, more volatile earnings, higher and more expense debt (as in small cap, small cap value companies on average) is higher than companies with higher, more stable earnings, lower and less expensive debt (as is more typically the case in large companies, on average).
.
This is very critical for everyone who invests in SCV companies to understand. Put it another way, market expect these companies to be losers, demands a premium for providing capital to continue operating business, a premium in the form deeply discounted share prices that reflects the real possibility of failure, with the expectation that if and when some of these companies surprise with earnings per share, improved debt rating, improved cash flow, etc, then the reward will be very high for those winners. Those few winners are expected to then cover up for all of the losers in that universe.

There is a high amount of uncertainty about this strategy. The risk is real, uncertainty higher. Pay off could be higher too, no guarantees. One could always take lower risk, more certainty of market returns, or even below market returns from lower risk stocks than market (I don't think growth stocks are low risk, they have high uncertainty too of different kind, but min vol/low vol/dividend growth can be). Especially given high quality bonds are at zero/negative real returns, it will become increasingly difficult to maintain the risk/reward profile of a portfolio.
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Re: Small Cap Value heads Rejoice !!!

Post by manlymatt83 »

Trying to educate myself more using Portfolio Visualizer.

I notice today that VTI has a lower SMB and a much lower HMB than VT. Of course, that means VXUS has a much higher SMB/HML than both, at .39 and .51 respectively.

Does that mean that, when tilting SCV internationally, you might want to hold less AVDV (for example), than one might hold of AVUV to accomplish the same benefit domestically?
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Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

manlymatt83 wrote: Sat Sep 26, 2020 10:56 am Trying to educate myself more using Portfolio Visualizer.

I notice today that VTI has a lower SMB and a much lower HMB than VT. Of course, that means VXUS has a much higher SMB/HML than both, at .39 and .51 respectively.

Does that mean that, when tilting SCV internationally, you might want to hold less AVDV (for example), than one might hold of AVUV to accomplish the same benefit domestically?
Factors are region dependent so you cannot compare VTI & VT using the same regression. There are ex-US developed factors you can regress. None are out there for EM readily.

But yes compared to the US universe (what it sounds like you were using), ex-US stocks sure look like value stocks (positive HML) and small stocks (positive SMB).
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Re: Small Cap Value heads Rejoice !!!

Post by manlymatt83 »

MotoTrojan wrote: Sat Sep 26, 2020 11:00 am But yes compared to the US universe (what it sounds like you were using), ex-US stocks sure look like value stocks (positive HML) and small stocks (positive SMB).
Got it! So when running regression analysis on, say, VTI + AVUV, assuming you're looking for target weights of each that get you to an HML of .2 ... how would one translate that when doing VT + AVUV + AVDV?
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Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

manlymatt83 wrote: Sat Sep 26, 2020 11:04 am
MotoTrojan wrote: Sat Sep 26, 2020 11:00 am But yes compared to the US universe (what it sounds like you were using), ex-US stocks sure look like value stocks (positive HML) and small stocks (positive SMB).
Got it! So when running regression analysis on, say, VTI + AVUV, assuming you're looking for target weights of each that get you to an HML of .2 ... how would one translate that when doing VT + AVUV + AVDV?
I would just run a separate regression for your US and ex-US developed portfolios using the appropriate factors and then weight them based on your US vs. ex-US allocation (US% X US HML + ex-US% X ex-US HML = Total HML).

Targeting a specific value is helpful but I would focus more on using it to compare allocations. Say you are comfortable holding 25% of your US equity in AVUV but want to see how much VBR you'd need to hold to get the same exposure (at a lower cost), you could use DFSVX as a proxy for AVUV and run that.
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Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

Much love to you all but I am gonna take a break from Bogleheads to clear my mind and focus on setting up healthy goals for the increased expected return of my factor-tilted portfolio :twisted:.

Hopefully whenever the tide turns for SCV this thread can get back to the fun times of cheering it on and find a new home for bashing tilts to factors, or heck, even bashing International diversification...

:sharebeer
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Re: Small Cap Value heads Rejoice !!!

Post by manlymatt83 »

MotoTrojan wrote: Sat Sep 26, 2020 11:17 am Much love to you all but I am gonna take a break from Bogleheads to clear my mind and focus on setting up healthy goals for the increased expected return of my factor-tilted portfolio :twisted:.

Hopefully whenever the tide turns for SCV this thread can get back to the fun times of cheering it on and find a new home for bashing tilts to factors, or heck, even bashing International diversification...

:sharebeer
:sharebeer
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Robert T
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Re: Small Cap Value heads Rejoice !!!

Post by Robert T »

MotoTrojan wrote: Sat Sep 26, 2020 11:17 am Much love to you all but I am gonna take a break from Bogleheads to clear my mind and focus on setting up healthy goals for the increased expected return of my factor-tilted portfolio :twisted:.

Hopefully whenever the tide turns for SCV this thread can get back to the fun times of cheering it on and find a new home for bashing tilts to factors, or heck, even bashing International diversification...

:sharebeer
Thanks for all your contributions MotoTrojan - some excellent discussions. Will still be camping out at 0.2/0.4 when you return.
.
000
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Re: Small Cap Value heads Rejoice !!!

Post by 000 »

Robert T wrote: Sat Sep 26, 2020 1:57 am .
Earnings-per-share levels are lower, earnings volatility is higher, and debt levels are higher and more expensive on average for smaller companies – and even more so for small cap value companies. If you combine 10 of these companies and take the average – average earnings are still lower, aggregate earnings volatility is still higher, and debt levels are still higher and more expensive, even if you combine 2000 companies (as per the Russell 2000) this is still the case. To me these characteristics reflect higher risk (it is not hard for me to appreciate this whether at household or company level). Last time I checked about 35% of Russell 2000 companies had no net income compared to about 1.5% in the S&P500.

With these combined characteristics, sometimes it can go south very quickly. No, delayed, or disrupted (more volatile) income with higher debt levels can lead to elevated concerns about debt payments that can drive share prices lower thereby increasing debt ratios. This can subsequently lead to downgrading debt quality and increasing debt costs to keep going. With increasing difficulty and costs of raising cash through debt instruments, equity shareholders often then become concerned about share dilution which drives share prices even lower reinforcing a downward spiral, and eventually the company starts missing coupon payments on its debt. This is exactly what happened in the Horsehead bankruptcy which some notable ‘value investors’ held (Monish Pabrai and Guy Spiers). Risks were real, they showed up, and they bit hard. The share price declined from about $20 to 10 cents in about 6 months. The likelihood of moving in this direction for companies with the combined characteristics of lower earnings, more volatile earnings, higher and more expense debt (as in small cap, small cap value companies on average) is higher than companies with higher, more stable earnings, lower and less expensive debt (as is more typically the case in large companies, on average).
.
Is it fair to say you are actually targeting Low Quality? Which is not the same as Value?
Bill Miller wrote: Value investing means really asking what are the best values, and not assuming that because something looks expensive that it is, or assuming that because a stock is down in price and trades at low multiples that it is a bargain.
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Re: Small Cap Value heads Rejoice !!!

Post by vineviz »

000 wrote: Sat Sep 26, 2020 4:53 pm Is it fair to say you are actually targeting Low Quality? Which is not the same as Value?
Not fair.

In the capital asset pricing model, the "value" factor is defined as the exposure to a spectrum that ranges from "cheap" to "expensive".

Most modern models also consider another dimension called "quality" which is typically defined as some combination of profitability, growth, and stability (earnings volatility, credit risk, etc.).

The most popular SCV funds typically are multifactor models with exposure to market beta, size, value, and quality factors. "Value" stocks can be either high quality or low quality, and generally the former have higher expected returns for the same value factor exposure.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Small Cap Value heads Rejoice !!!

Post by 000 »

vineviz wrote: Sat Sep 26, 2020 7:07 pm
000 wrote: Sat Sep 26, 2020 4:53 pm Is it fair to say you are actually targeting Low Quality? Which is not the same as Value?
Not fair.

In the capital asset pricing model, the "value" factor is defined as the exposure to a spectrum that ranges from "cheap" to "expensive".

Most modern models also consider another dimension called "quality" which is typically defined as some combination of profitability, growth, and stability (earnings volatility, credit risk, etc.).

The most popular SCV funds typically are multifactor models with exposure to market beta, size, value, and quality factors. "Value" stocks can be either high quality or low quality, and generally the former have higher expected returns for the same value factor exposure.
If risk premium is the justification for SCV higher expected return, how can the bolded portion be true? There is more risk in lower quality stocks, no?
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Re: Small Cap Value heads Rejoice !!!

Post by Uncorrelated »

Quality is distinct from value. The correlation between QmJ (quality minus junk) and HmL (high value minus low value) is next to nothing. They are (mostly) orthogonal concepts. AFAIK explaining QmJ is an open problem.
Our results present an important puzzle for asset pricing: we cannot tie the returns of quality to risk or, in a highly related finding, demonstrate that prices cross-sectionally vary “enough” with quality measures. At this point the returns to quality must be either an anomaly, data mining (incredibly robust data mining, including across countries, size, and periods, and out-of-sample, relative to the first draft of the paper) or the results of a still-to-be-identified risk factor.
https://link.springer.com/article/10.10 ... 018-9470-2 (Asness, Frazzini, Pedersen, 2019)
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Re: Small Cap Value heads Rejoice !!!

Post by vineviz »

000 wrote: Sat Sep 26, 2020 7:48 pm If risk premium is the justification for SCV higher expected return, how can the bolded portion be true? There is more risk in lower quality stocks, no?
Uncorrelated wrote: Sun Sep 27, 2020 3:26 am Quality is distinct from value. The correlation between QmJ (quality minus junk) and HmL (high value minus low value) is next to nothing. They are (mostly) orthogonal concepts. AFAIK explaining QmJ is an open problem.
I personally don't mind the use of the term "risk premium" to describe the premia associated with the cross-sectional asset pricing factors, but some people do where they can't clearly and definitively articulate exactly what the "risk" is and which investors might be sensitive to it.

To that end, I think there is some merit in "Popularity: A Bridge between Classical and Behavioral Finance" by Roger G. Ibbotson PhD, Thomas M Idzorek CFA, Paul D. Kaplan CFA, and James X. Xiong CFA. They don't address QmJ specifically, and the book attempts to be more "unifying theory" than "empirical research, but it's still a good framework I think.

From the overview:
Popularity is a word that embraces how much anything is liked, recognized, or desired. Popularity drives demand. In this book, we apply this concept to assets and securities to explain the premiums and so-called anomalies in security markets, especially the stock market.

Most assets and securities have a relatively fixed supply over the short or intermediate term. Popularity represents the demand for a security—or perhaps the set of reasons why a security is demanded to the extent that it is—and thus is an important determinant of prices for a given set of expected cash flows.

A common belief in the finance literature is that premiums in the market are payoffs for the risk of securities—that is, they are “risk” premiums. In classical finance, investors are risk averse, and market frictions are usually assumed away. In the broadest context, risk is unpopular. The largest risk premium is the equity risk premium (i.e., the extra expected return for investing in equities rather than bonds or risk-free assets). Other risk premiums include, for example, the interest rate term premium (because of the greater risk of longer-term bonds) and the default risk premium in bond markets.

There are many premiums in the market that may or may not be related to risk, but all are related to investing in something that is unpopular in some way. We consider premiums to be the result of characteristics that are systematically unpopular—that is, popularity makes the price of a security higher and the expected return lower, all other things being equal. Preferences that influence relative popularity can and do change over time. These premiums include the size premium, the value premium, the liquidity premium, the severe downside premium, low volatility and low beta premiums, ESG premiums and discounts, competitive advantage, brand, and reputation. In general, any type of security with characteristics that tend to be overlooked or unwanted can have a premium.

The title of this book refers to a bridge between classical and behavioral finance. Both approaches to finance rest on investor preferences, which we cast as popularity.
Last edited by vineviz on Sun Sep 27, 2020 10:51 am, edited 1 time in total.
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Uncorrelated
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Re: Small Cap Value heads Rejoice !!!

Post by Uncorrelated »

vineviz wrote: Sun Sep 27, 2020 8:39 am
Good points. Perhaps we should be moving away from the term "risk factors" in favor of something more neutral, until it it proven that there is a direct relation between quantifiable risks and excess return measured by hml/qmj/mom and other factors.

Fama's comments that factors are related to preferences rather than risk are starting to make more sense.
000
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Re: Small Cap Value heads Rejoice !!!

Post by 000 »

What CAGR premiums are you all expecting over the long term for SCV over TSM and ISCV over ITSM?
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Re: Small Cap Value heads Rejoice !!!

Post by petulant »

000 wrote: Fri Sep 25, 2020 8:45 pm
Day9 wrote: Fri Sep 25, 2020 8:38 pm Let's come up with some kind of test for that. Like we could look historically to see if companies rated AA would go on to default or go bankrupt less often than companies rated BB, who would turn out to be less risky than companies rated CC, etc. Or maybe we could look at if lower rated companies have to pay higher interest rates on corporate debt than higher rated companies. Or we can look at the stock price of companies by credit rating and see if we can find any trends that confirm or refute vineviz' claim. What kinds of tests do you think would do that?
I agree there is probably a higher percentage of lower rated companies going bankrupt. But the stock upside of those who survive could be enough that the overall category is not actually riskier from a stock investor's perspective.
Here I think you've fallen into exactly what the value tilt people are saying. They're saying the value factor premium comes from being junkier companies with a few moonshots compensating for the risk. That's different from your previous postulation that value stocks are less risky.
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Re: Small Cap Value heads Rejoice !!!

Post by Uncorrelated »

000 wrote: Sun Sep 27, 2020 5:33 pm What CAGR premiums are you all expecting over the long term for SCV over TSM and ISCV over ITSM?
CAGR premium is not an useful concept. Critically, a higher expected CAGR only implies a better portfolio if the investor has a constant relative risk aversion of exactly one. But an investor with a relative risk aversion of one will prefer a 200% (leveraged) TSM portfolio over 100% TSM.

I calculate the expected return of factor funds by multiplying the factor exposure with 50% of the historical factor premia. For most well-diversified SVC funds, this is in the range of 1.5%-2%.
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Re: Small Cap Value heads Rejoice !!!

Post by 000 »

petulant wrote: Sun Sep 27, 2020 5:41 pm
000 wrote: Fri Sep 25, 2020 8:45 pm
Day9 wrote: Fri Sep 25, 2020 8:38 pm Let's come up with some kind of test for that. Like we could look historically to see if companies rated AA would go on to default or go bankrupt less often than companies rated BB, who would turn out to be less risky than companies rated CC, etc. Or maybe we could look at if lower rated companies have to pay higher interest rates on corporate debt than higher rated companies. Or we can look at the stock price of companies by credit rating and see if we can find any trends that confirm or refute vineviz' claim. What kinds of tests do you think would do that?
I agree there is probably a higher percentage of lower rated companies going bankrupt. But the stock upside of those who survive could be enough that the overall category is not actually riskier from a stock investor's perspective.
Here I think you've fallen into exactly what the value tilt people are saying. They're saying the value factor premium comes from being junkier companies with a few moonshots compensating for the risk. That's different from your previous postulation that value stocks are less risky.
I agree an individual SCV stock is probably riskier than an individual large cap, but am not convinced a diversified SCV play is riskier than total market.
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Re: Small Cap Value heads Rejoice !!!

Post by Fryxell »

vineviz wrote: Sun Sep 27, 2020 8:39 am I personally don't mind the use of the term "risk premium" to describe the premia associated with the cross-sectional asset pricing factors, but some people do where they can't clearly and definitively articulate exactly what the "risk" is and which investors might be sensitive to it.
It’s hard to make a case that the excess returns of momentum factor are due to ‘risk.’ The ‘risk’ explanations for momentum are very contorted and don’t make much sense. And it becomes impossible to argue that the excess returns for low volatility stocks are due to ‘risk.’ I mean, what’s the ‘risk’ there? That you’ll miss out on the lottery ticket? Seems to me it’s the lottery tickets that are risky.
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Re: Small Cap Value heads Rejoice !!!

Post by Forester »

Fryxell wrote: Sun Sep 27, 2020 5:51 pm
vineviz wrote: Sun Sep 27, 2020 8:39 am I personally don't mind the use of the term "risk premium" to describe the premia associated with the cross-sectional asset pricing factors, but some people do where they can't clearly and definitively articulate exactly what the "risk" is and which investors might be sensitive to it.
It’s hard to make a case that the excess returns of momentum factor are due to ‘risk.’ The ‘risk’ explanations for momentum are very contorted and don’t make much sense. And it becomes impossible to argue that the excess returns for low volatility stocks are due to ‘risk.’ I mean, what’s the ‘risk’ there? That you’ll miss out on the lottery ticket? Seems to me it’s the lottery tickets that are risky.
Low vol is inconvenient so apparently it's explained by Quality + Value + whether it's a full moon, or something. Momentum can't be explained as a risk factor so it's dismissed as too expensive to practically invest in.
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Re: Small Cap Value heads Rejoice !!!

Post by 000 »

Forester wrote: Sun Sep 27, 2020 7:42 pm Low vol is inconvenient so apparently it's explained by Quality + Value + whether it's a full moon, or something. Momentum can't be explained as a risk factor so it's dismissed as too expensive to practically invest in.
Why do you hold SCV?
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Re: Small Cap Value heads Rejoice !!!

Post by vineviz »

Fryxell wrote: Sun Sep 27, 2020 5:51 pm
vineviz wrote: Sun Sep 27, 2020 8:39 am I personally don't mind the use of the term "risk premium" to describe the premia associated with the cross-sectional asset pricing factors, but some people do where they can't clearly and definitively articulate exactly what the "risk" is and which investors might be sensitive to it.
It’s hard to make a case that the excess returns of momentum factor are due to ‘risk.’ The ‘risk’ explanations for momentum are very contorted and don’t make much sense. And it becomes impossible to argue that the excess returns for low volatility stocks are due to ‘risk.’ I mean, what’s the ‘risk’ there? That you’ll miss out on the lottery ticket? Seems to me it’s the lottery tickets that are risky.
As I probably implied before, I'm not as convinced as some people about the implausibility of risk-based explanations for factor returns.

Investors aren't homogenous, obviously, so it is entirely reasonable that investor A might be incredibly sensitive to a particular risk that investor B doesn't care at all about. It's on this basis, for example, that Hurst and Docherty predict that that myopic loss aversion of some large institutional traders may act as "a limit to arbitrage and a partial explanation for the momentum premium". https://ssrn.com/abstract=2647847

I don't see any real advantage in getting hung up about whether this is a "risk" story or a "behavioral" story, since both words ultimately lead back to the same phenomenon.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Small Cap Value heads Rejoice !!!

Post by dml130 »

MotoTrojan wrote: Mon Sep 14, 2020 12:50 pm Funny note while looking at FNDA... it's 2nd largest holding at 0.47% is TSLA! Funny quirk with these fundamental small-cap funds, the small comes from the economic scale and not the market-cap :).
I'm a little confused about this. I was looking at closely at FNDA but noticed that TSLA is a top holding...seems to me like a pretty major glitch in the methodology that something aiming to be a small cap value would end up with a company that is basically the extreme opposite. Any thoughts on this? How did that happen?
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Re: Small Cap Value heads Rejoice !!!

Post by imak »

dml130 wrote: Sun Sep 27, 2020 9:31 pm
MotoTrojan wrote: Mon Sep 14, 2020 12:50 pm Funny note while looking at FNDA... it's 2nd largest holding at 0.47% is TSLA! Funny quirk with these fundamental small-cap funds, the small comes from the economic scale and not the market-cap :).
I'm a little confused about this. I was looking at closely at FNDA but noticed that TSLA is a top holding...seems to me like a pretty major glitch in the methodology that something aiming to be a small cap value would end up with a company that is basically the extreme opposite. Any thoughts on this? How did that happen?
It is expected as the underlying index for FNDA - Russell RAFI US Small Company index, does not assign weights based on market cap. It assigns weights relatively based on the firm's economic footprint as calculated by averaging 3 fundamental factors: adjusted sales, retained operating cash flow and dividends+buybacks.
In case of TSLA, it belongs to large cap growth by market cap but not by its fundamental economic footprint as measured by these 3 factors.

Refer their index construction methodology in Section 4 of this document:
https://research.ftserussell.com/produc ... gy_new.pdf
AA: 30% FNDX, 30% FNDA, 10% FNDF, 10% FNDC, 10% REET+VWO+DGS, 10% TMF; EF = VTEB; "Discipline matters more than allocation" ~ W Bernstein
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Re: Small Cap Value heads Rejoice !!!

Post by dml130 »

Okay, so it's considered "small" by these metrics, I guess. But, am I mistaken that this is also supposed to be a "value" fund of sorts? By what measure is TSLA considered a value stock?
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Re: Small Cap Value heads Rejoice !!!

Post by manlymatt83 »

Anyone have a chart of something like VTI vs VBR going back to 1900s? Or the asset classes in general?
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Re: Small Cap Value heads Rejoice !!!

Post by imak »

dml130 wrote: Sun Sep 27, 2020 11:36 pm Okay, so it's considered "small" by these metrics, I guess. But, am I mistaken that this is also supposed to be a "value" fund of sorts? By what measure is TSLA considered a value stock?
For RAFI indexes the tilt to value is dynamic, i.e. it buys recently beaten down stocks and sells recently appreciated stocks, anchoring to their economic scale.

For example, lets assume the 5 year moving average of fundamental economic footprint of Apple is 4% of RAFI US Index. Lets say in a recent crash, the Index price dropped 30%, resulting in Apple's current weight in index dropping below 4%, say 3.5%. Now in the next quarterly rebalancing, index buys Apple stocks to restore its weight to 4%, as per its 5 year economic scale (anchor weight). This is contrarian rebalancing relative to market cap weight index, which results in dynamic value tilt. As a stock/sector gets beaten down, relatively more dollar allocation is needed to restore to its scale/anchor weight. For this reason, FNDA can oscillate between Small-Blend and Small-Value style boxes depending on growth vs value spreads, acquiring deeper value tilt as the spread widens.

This article from 2009 by Rob Arnott explains this dynamic value tilt:
https://www.etf.com/sections/features/5 ... trade.html

Edit: Fundamental index methodology doesn't actually differentiate between value and growth stocks, so TSLA is included in small company index as per its economic scale.
AA: 30% FNDX, 30% FNDA, 10% FNDF, 10% FNDC, 10% REET+VWO+DGS, 10% TMF; EF = VTEB; "Discipline matters more than allocation" ~ W Bernstein
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Re: Small Cap Value heads Rejoice !!!

Post by Forester »

000 wrote: Sun Sep 27, 2020 7:48 pm
Forester wrote: Sun Sep 27, 2020 7:42 pm Low vol is inconvenient so apparently it's explained by Quality + Value + whether it's a full moon, or something. Momentum can't be explained as a risk factor so it's dismissed as too expensive to practically invest in.
Why do you hold SCV?
More a source of differentiated returns than a quest to beat the market. Splitting my equities threeways SCV-Momentum-MinVol is the best plan I can arrive at, having examined all the evidence.
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Re: Small Cap Value heads Rejoice !!!

Post by dml130 »

imak wrote: Mon Sep 28, 2020 12:19 am
dml130 wrote: Sun Sep 27, 2020 11:36 pm Okay, so it's considered "small" by these metrics, I guess. But, am I mistaken that this is also supposed to be a "value" fund of sorts? By what measure is TSLA considered a value stock?
For RAFI indexes the tilt to value is dynamic, i.e. it buys recently beaten down stocks and sells recently appreciated stocks, anchoring to their economic scale.

For example, lets assume the 5 year moving average of fundamental economic footprint of Apple is 4% of RAFI US Index. Lets say in a recent crash, the Index price dropped 30%, resulting in Apple's current weight in index dropping below 4%, say 3.5%. Now in the next quarterly rebalancing, index buys Apple stocks to restore its weight to 4%, as per its 5 year economic scale (anchor weight). This is contrarian rebalancing relative to market cap weight index, which results in dynamic value tilt. As a stock/sector gets beaten down, relatively more dollar allocation is needed to restore to its scale/anchor weight. For this reason, FNDA can oscillate between Small-Blend and Small-Value style boxes depending on growth vs value spreads, acquiring deeper value tilt as the spread widens.

This article from 2009 by Rob Arnott explains this dynamic value tilt:
https://www.etf.com/sections/features/5 ... trade.html

Edit: Fundamental index methodology doesn't actually differentiate between value and growth stocks, so TSLA is included in small company index as per its economic scale.
Ah, that makes sense to me now. Thank you for that thorough explanation, much appreciated.
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Re: Small Cap Value heads Rejoice !!!

Post by dcabler »

manlymatt83 wrote: Mon Sep 28, 2020 12:00 am Anyone have a chart of something like VTI vs VBR going back to 1900s? Or the asset classes in general?
Simba's spreadsheet available on this forum.
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Re: Small Cap Value heads Rejoice !!!

Post by YRT70 »

I was looking at a period where SCV did well, 2001-2005 on PortfolioVisualiser. Something that surprised me:

CAGR 2001-2005
67% IJS, 33% VTSMX: 8.6%
38% DFSVX, 62% VTSMX: 8.6%
https://www.portfoliovisualizer.com/bac ... tion3_3=33

So to match the performance of DFSVX in this period a large amount of IJS is necessary. But when I run match portfolio performance on PV it gives VTSMX=57.53%, IJS=42.47%, instead of 67% IJS. The performance of the 42% IJS portfolio doesn't come close to the 38% DFSVX portfolio in this period.
https://www.portfoliovisualizer.com/mat ... tion2_1=38

Anyone know what's going on?
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Re: Small Cap Value heads Rejoice !!!

Post by acegolfer »

vineviz wrote: Sun Sep 27, 2020 7:56 pm I don't see any real advantage in getting hung up about whether this is a "risk" story or a "behavioral" story, since both words ultimately lead back to the same phenomenon.
Some ppl want to know "why" before making investment decisions. Nothing wrong, or probably it's better to do so rather than making decisions based on phenomenon.
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Re: Small Cap Value heads Rejoice !!!

Post by vineviz »

YRT70 wrote: Mon Sep 28, 2020 6:49 am Anyone know what's going on?
The "Returns Based Clone Regression" in Portfolio Visualizer is basically trying to minimize the tracking error (i.e. the sum of squared monthly differences) in the return. The tracking error is closely related to the r2 measurement.

Because IJS had a very high correlation with DFSVX during this period of time (0.97) but much lower annualized returns (11.8% vs 19.1%), the combination of VTSMX + IJS that has the lowest tracking error (or highest r2) with your target portfolio won't actually match the return of the target portfolio.

It's just a limitation of tracking error as a standalone metric, I'm afraid.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Small Cap Value heads Rejoice !!!

Post by vineviz »

acegolfer wrote: Mon Sep 28, 2020 7:34 am
vineviz wrote: Sun Sep 27, 2020 7:56 pm I don't see any real advantage in getting hung up about whether this is a "risk" story or a "behavioral" story, since both words ultimately lead back to the same phenomenon.
Some ppl want to know "why" before making investment decisions. Nothing wrong, or probably it's better to do so rather than making decisions based on phenomenon.
Yeah, I actually don't disagree with you.

I was thinking more about getting hung up on the labels ("risk" vs "behavioral"), since those terms are subjective and non mutually exclusive. But I do agree that having an reasonable explanation for WHY something works is actually important, if for no other reason than to defend against the lure of data mining.

The question I like to use is a basic 3-part question:

1) Is the explanation for X likely to be systematic;
2) How likely is it that the systematic reason for X is likely to persist;
3) What is the likely outcome for me if that reason does NOT persist (or if the explanation turns out to be wrong).
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Small Cap Value heads Rejoice !!!

Post by garlandwhizzer »

For what it's worth, my 2 cents worth. I think a lot of the struggles of SCV over the last 13 years are due to the underlying macroeconomy which has been weak. The recovery after the GR was the weakest recovery on record, inflation and economic growth as measured by GDP growth have been persistently low by historical standards. Both the economy and the markets are totally dependent on hyper-aggressive FED policy (zero rates, QE) in order to maintain what little pre-tax corporate profit growth we have generated since 2006-7. We have had persistent low inflation and low GDP growth unresponsive to maximal monetary policy and even to tax cuts and massive deficit spending attempting to fire up the economy is not an environment in which small struggling companies do well. If we go into a long period of robust economic growth, rising rates, and rising inflation, I expect SCV which is now selling at fire sale prices to do well. Outperformance of SCV is based on the few SCV stocks that become growth stocks with rapidly rising profits and rapidly expanding PE ratios. Those companies have been rare in these difficult macroeconomic times. The only reliable source of robust revenue and profit growth during the last 13 years of economic stagnation has been mega-cap tech which is why its valuations have gotten so stretched. Most of the good backtesting results from SCV came from periods of significant inflation and robust growth which tend to support small heavily indebted companies with weak balance sheets. When the overall economy struggles, SCV struggles more IMO.

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Re: Small Cap Value heads Rejoice !!!

Post by Forester »

garlandwhizzer wrote: Mon Sep 28, 2020 7:44 am For what it's worth, my 2 cents worth. I think a lot of the struggles of SCV over the last 13 years are due to the underlying macroeconomy which has been weak. The recovery after the GR was the weakest recovery on record, inflation and economic growth as measured by GDP growth have been persistently low by historical standards. Both the economy and the markets are totally dependent on hyper-aggressive FED policy (zero rates, QE) in order to maintain what little pre-tax corporate profit growth we have generated since 2006-7. We have had persistent low inflation and low GDP growth unresponsive to maximal monetary policy and even to tax cuts and massive deficit spending attempting to fire up the economy is not an environment in which small struggling companies do well. If we go into a long period of robust economic growth, rising rates, and rising inflation, I expect SCV which is now selling at fire sale prices to do well. Outperformance of SCV is based on the few SCV stocks that become growth stocks with rapidly rising profits and rapidly expanding PE ratios. Those companies have been rare in these difficult macroeconomic times. The only reliable source of robust revenue and profit growth during the last 13 years of economic stagnation has been mega-cap tech which is why its valuations have gotten so stretched. Most of the good backtesting results from SCV came from periods of significant inflation and robust growth which tend to support small heavily indebted companies with weak balance sheets. When the overall economy struggles, SCV struggles more IMO.

Garland Whizzer
Feels like a depression and one can sense it in the popular media, fashions and so on. Even the tech 'bubble' of late has been driven by a sort of grim logic rather than exuberance.
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Re: Small Cap Value heads Rejoice !!!

Post by Robert T »

Elysium wrote: Sat Sep 26, 2020 10:28 amOne could always take lower risk, more certainty of market returns, or even below market returns from lower risk stocks than market (I don't think growth stocks are low risk, they have high uncertainty too of different kind, but min vol/low vol/dividend growth can be). Especially given high quality bonds are at zero/negative real returns, it will become increasingly difficult to maintain the risk/reward profile of a portfolio.
On the distribution of returns:

Here’s an example: When I set up my portfolio the (informed) expectations used were:

Expected return = 7.5%
Expected standard deviation = 14

This implied a 16 percent chance of returns being 4.5% or less over a 25-year period. i.e. if no additional investments were made over the 25 year period, there was a 16 percent chance my end balance could be half (49%) of that expected (implications of a 4.5% vs. 7.5% return over a 25 year period). Yes – that’s a big difference. The end balance difference declines with additional savings and investments (also impacted by sequence of returns). But what this indicated to me was that I needed to ensure: (i) realism in initial expected return; (ii) flexibility in planning e.g. save more, ability to live on less, or work longer if things did not work out. Initial long-term estimates were based on conservative fixed annual savings (which were fairly easy to adjust upward with income), early retirement (so could work longer if needed), and ‘inflation-adjusted and cushioned’ expected retirement spending (which could be significantly reduced if needed).This type of implication applies to all investors, not just those with small value tilts.

As it turns out actual returns have been higher than the point estimate expected return so far but well within the expected likely one standard deviation.

Wouldn’t it be better to use minimum volatility or high yield (low beta) stocks to reduce the deviation of returns, even if it means lower expected returns? Irrespective of approach, we need to initially decide how much risk we want to take. I could have simply increased the bond portion to lower expected return, and lower standard deviation. This is a choice we have to make. The key question is would the Sharpe ratio (mean-variance) be significantly improved with these other approaches. The historical evidence (simulated back-tests) says no - as reflected by lower Sharpe ratios for MSCI ACWI Minimum Volatility and MSCI ACWI High Dividend yield (since 1995 when data is available) relative to simulated returns back to 1995 for my global small cap value tilted portfolio (plus bonds). The Sharpe ratios for the MSCI ACWI Momentum series, and the MSCI ACWI Quality series were slightly higher over this period. Interestingly all had significantly higher Sharpe ratios than MSCI ACWI – on a stand-alone basis and when adjusted by adding bonds to equate standard deviations across all portfolios. MSCI ACWI Quality required just as much bonds (34%) to match the volatility of MSCI ACWI Min. Vol. as did my global smaller cap value tilted portfolio. Momentum required more (39%,) High Dividend Yield less (30%), but returns of Min Vol and High Dividend Yield were also 0.7-0.8% lower. Bond returns (term risk) will be lower in the future, but Min. Vol. does not escape as it has exposure to term risk.

The question is which tilts do we each believe in? For most it seems the answer is none, beyond tilting more or less to stocks, and that is perfectly fine. Within equities, personally I believe more in smaller cap value, than quality or momentum as there is a clearer risk-based story, and as a result I think there is a reasonable likelihood there will be a long-term ‘risk’ premium (as with beta). Will this yield a higher Sharpe ratio (be more mean-variance efficient) than the market portfolio? If you believe that small cap value reflects sensitivity to recession risk, then in the multifactor framework described by Cochrane yes, but with greater downside risk in recessions. As a side, I do have a growing appreciation for momentum, but still processing that.

I don’t consider myself an extreme tilter. My largest tilt by far is beta (more than the 55% stock share of the global market, but not 100% stocks), with smaller size and value tilts relative to beta - current weights = 1.0, 0.2, 0.4 for market, size, and value – broadly reflective to relative beliefs. All premiums (including beta) will likely be lower going forward. But the question of whether this is a permanent change in the mean or simply a variation within the likely distribution of returns cannot be known until we have a lot more data (future years).

There are no guarantees to any of this.

Robert
.
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Re: Small Cap Value heads Rejoice !!!

Post by YRT70 »

vineviz wrote: Mon Sep 28, 2020 7:35 am
YRT70 wrote: Mon Sep 28, 2020 6:49 am Anyone know what's going on?
The "Returns Based Clone Regression" in Portfolio Visualizer is basically trying to minimize the tracking error (i.e. the sum of squared monthly differences) in the return. The tracking error is closely related to the r2 measurement.

Because IJS had a very high correlation with DFSVX during this period of time (0.97) but much lower annualized returns (11.8% vs 19.1%), the combination of VTSMX + IJS that has the lowest tracking error (or highest r2) with your target portfolio won't actually match the return of the target portfolio.

It's just a limitation of tracking error as a standalone metric, I'm afraid.
Makes sense. Thanks for explaining.
manlymatt83 wrote: Mon Sep 28, 2020 12:00 am Anyone have a chart of something like VTI vs VBR going back to 1900s? Or the asset classes in general?
This one starts at 1928: https://www.ifa.com/portfolios/100/#4
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Re: Small Cap Value heads Rejoice !!!

Post by manlymatt83 »

In trying to further simplify, if I hold 50% AVUV, 40% AVDV, and 10% DGS, can I just dump the DGS allocation? I realize AVDV doesn't have emerging markets, but is the 10% really going to make that much of a difference? Or perhaps add a little AVEM at a much lower ER (even though it isn't small cap).
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