Small Cap Value heads Rejoice !!!

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caklim00
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Re: Small Cap Value heads Rejoice !!!

Post by caklim00 »

manlymatt83 wrote: Thu Sep 24, 2020 9:15 pm
MotoTrojan wrote: Thu Sep 24, 2020 6:45 pm
nzahir wrote: Thu Sep 24, 2020 6:42 pm Any other funds similar to DEMSX (small cap emerging) that are more easily accessible?

Not FNDC
FNDC is developed not emerging. DGS is one of your only options if you are set on small-value. There are many more value funds (AVEM for example).
Is AVEM actually value or just emerging markets in general? And if someone is holding AVUV and AVDV isn’t the trifecta ETF DGS over AVEM?
AVEM is core-like. I mostly use DFVEX which is all cap value. DGS may be the closest but I worry a bit about ER + turnover costs + wouldn't want to hold it in taxable.

I've sort of wondered why Avantis didn't offer an EM SCV fund like they did with US and Developed International. Some one smarter can probably speak to the costs of EM Small Cap.
nzahir
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Re: Small Cap Value heads Rejoice !!!

Post by nzahir »

MotoTrojan wrote: Thu Sep 24, 2020 6:45 pm
nzahir wrote: Thu Sep 24, 2020 6:42 pm Any other funds similar to DEMSX (small cap emerging) that are more easily accessible?

Not FNDC
FNDC is developed not emerging. DGS is one of your only options if you are set on small-value. There are many more value funds (AVEM for example).
Ya I know, I just had a feeling it would get recommended by you as an alternative

I see there is EWX/DGS/EEMS, fees are a bit high

I may just stick with AVEM instead since EM already has room for growth. Might not need small cap in EM (unless Avantis or DFA offered it sometime soon and with a fair ER). Also, AVEM is not value from what I have seen, unless I am getting wrong info.

There is also then an argument in my brain about EM vs small cap international. This stuff is getting a bit complex for me, but it is interesting to hear everyone's thoughts

Do you guys like EM in your taxable accounts so you can tax loss harvest with the higher volatility if need be?
YRT70
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Re: Small Cap Value heads Rejoice !!!

Post by YRT70 »

If I heard it correctly Ben Felix said in his last podcast that value is more likely to outperform during a recession. Is this accurate?
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Uncorrelated
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Re: Small Cap Value heads Rejoice !!!

Post by Uncorrelated »

YRT70 wrote: Fri Sep 25, 2020 5:54 am If I heard it correctly Ben Felix said in his last podcast that value is more likely to outperform during a recession. Is this accurate?
I'm not sure about "more likely", but it has certainly been the case in the past. Both in the USA and globally, HmL, RmW and CmA are highly negatively correlated with MKT (depending on time period, between -0.15 and -0.4).

See
https://papers.ssrn.com/sol3/papers.cfm ... id=2287202
https://papers.ssrn.com/sol3/papers.cfm ... id=2601662

This is also true for QmJ, which (according to PV) boasts a whopping -0.7 correlation with MKT in developed markets.

I'm not sure if this is actually helpful or if this is just a side-effect of how the factors are constructed.
rkhusky
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Re: Small Cap Value heads Rejoice !!!

Post by rkhusky »

YRT70 wrote: Fri Sep 25, 2020 5:54 am If I heard it correctly Ben Felix said in his last podcast that value is more likely to outperform during a recession. Is this accurate?
Outperform what? Probably won't outperform bonds.

But, a 60/40 mix of SV/TBM might outperform a 70/30 mix of TSM/TBM in a recession.
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Re: Small Cap Value heads Rejoice !!!

Post by YRT70 »

Uncorrelated wrote: Fri Sep 25, 2020 6:58 am
YRT70 wrote: Fri Sep 25, 2020 5:54 am If I heard it correctly Ben Felix said in his last podcast that value is more likely to outperform during a recession. Is this accurate?
I'm not sure about "more likely", but it has certainly been the case in the past. Both in the USA and globally, HmL, RmW and CmA are highly negatively correlated with MKT (depending on time period, between -0.15 and -0.4).

See
https://papers.ssrn.com/sol3/papers.cfm ... id=2287202
https://papers.ssrn.com/sol3/papers.cfm ... id=2601662

This is also true for QmJ, which (according to PV) boasts a whopping -0.7 correlation with MKT in developed markets.

I'm not sure if this is actually helpful or if this is just a side-effect of how the factors are constructed.
Thanks for clearing that up.
rkhusky wrote: Fri Sep 25, 2020 6:58 am Outperform what?
TSM.
YRT70
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Re: Small Cap Value heads Rejoice !!!

Post by YRT70 »

caklim00 wrote: Thu Sep 24, 2020 10:22 pm
manlymatt83 wrote: Thu Sep 24, 2020 9:15 pm
MotoTrojan wrote: Thu Sep 24, 2020 6:45 pm
nzahir wrote: Thu Sep 24, 2020 6:42 pm Any other funds similar to DEMSX (small cap emerging) that are more easily accessible?

Not FNDC
FNDC is developed not emerging. DGS is one of your only options if you are set on small-value. There are many more value funds (AVEM for example).
Is AVEM actually value or just emerging markets in general? And if someone is holding AVUV and AVDV isn’t the trifecta ETF DGS over AVEM?
AVEM is core-like.
Are you sure about that? The metrics look quite valuey no? https://www.morningstar.com/etfs/arcx/avem/portfolio
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Robert T
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Re: Small Cap Value heads Rejoice !!!

Post by Robert T »

MotoTrojan wrote: Thu Sep 24, 2020 6:25 pm Surprised these are so high, in particular the US large cap.
Expected portfolio returns are lower now that they were 18 years ago.
And realized returns over the past 18 years were also higher than expected.
AQR, Buckingham, Research Affiliate, and Blackrock seem to have similar expected US market returns. Outlier seems to be GMO who project much lower return.

No guarantees.
.
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Re: Small Cap Value heads Rejoice !!!

Post by Robert T »

YRT70 wrote: Fri Sep 25, 2020 5:54 am If I heard it correctly Ben Felix said in his last podcast that value is more likely to outperform during a recession. Is this accurate?
From my earlier analysis using the "NBER recession" definition (which is the standard).

Since start of 1928:
  • SV underperformed Market in 60% of cases (9 of 15)
However, SV tends to decline before the 'official' onset of recessions. If we include the 5 month period before recessions officially start
  • SV underperformed Market in 73% of cases (11 of 15)
And in recessions which resulted in a cumulated negative return of SV or Market (inclusive of the 5 month period prior to recessions).
  • SV underperformed Market in 78% of cases (7 of 9)
.
caklim00
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Re: Small Cap Value heads Rejoice !!!

Post by caklim00 »

YRT70 wrote: Fri Sep 25, 2020 7:13 am
caklim00 wrote: Thu Sep 24, 2020 10:22 pm
manlymatt83 wrote: Thu Sep 24, 2020 9:15 pm
MotoTrojan wrote: Thu Sep 24, 2020 6:45 pm
nzahir wrote: Thu Sep 24, 2020 6:42 pm Any other funds similar to DEMSX (small cap emerging) that are more easily accessible?

Not FNDC
FNDC is developed not emerging. DGS is one of your only options if you are set on small-value. There are many more value funds (AVEM for example).
Is AVEM actually value or just emerging markets in general? And if someone is holding AVUV and AVDV isn’t the trifecta ETF DGS over AVEM?
AVEM is core-like.
Are you sure about that? The metrics look quite valuey no? https://www.morningstar.com/etfs/arcx/avem/portfolio
AVEM looks like DFA EM Core 1: https://www.morningstar.com/funds/xnas/dfcex/portfolio
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Re: Small Cap Value heads Rejoice !!!

Post by YRT70 »

Robert T wrote: Fri Sep 25, 2020 7:43 am
YRT70 wrote: Fri Sep 25, 2020 5:54 am If I heard it correctly Ben Felix said in his last podcast that value is more likely to outperform during a recession. Is this accurate?
From my earlier analysis using the "NBER recession" definition (which is the standard).

Since start of 1928:
  • SV underperformed Market in 60% of cases (9 of 15)
However, SV tends to decline before the 'official' onset of recessions. If we include the 5 month period before recessions officially start
  • SV underperformed Market in 73% of cases (11 of 15)
And in recessions which resulted in a cumulated negative return of SV or Market (inclusive of the 5 month period prior to recessions).
  • SV underperformed Market in 78% of cases (7 of 9)
.
That's interesting. Thanks. Do you have similar statistics for large value?
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Re: Small Cap Value heads Rejoice !!!

Post by Elysium »

Robert T wrote: Fri Sep 25, 2020 7:35 am Expected portfolio returns are lower now that they were 18 years ago.
And realized returns over the past 18 years were also higher than expected.
Robert T:

Are correlations between expected and realized returns equal for all assets? or is there evidence that lower risk assets have better probability of realizing the expected results than higher risk assets. If so, wouldn't it be better to accept lower but reliable returns than higher and unreliable returns.
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Re: Small Cap Value heads Rejoice !!!

Post by vineviz »

Elysium wrote: Fri Sep 25, 2020 7:59 am
Robert T wrote: Fri Sep 25, 2020 7:35 am Expected portfolio returns are lower now that they were 18 years ago.
And realized returns over the past 18 years were also higher than expected.
Robert T:

Are correlations between expected and realized returns equal for all assets? or is there evidence that lower risk assets have better probability of realizing the expected results than higher risk assets. If so, wouldn't it be better to accept lower but reliable returns than higher and unreliable returns.
The variance of an asset effectively reflects "correlations between expected and realized returns".

If it was always "better to accept lower but reliable returns than higher and unreliable returns" then we'd all own nothing but Treasury bills, right?
"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 acegolfer »

YRT70 wrote: Fri Sep 25, 2020 5:54 am If I heard it correctly Ben Felix said in his last podcast that value is more likely to outperform during a recession. Is this accurate?
This paper is one of few economic model behind value premium. https://papers.ssrn.com/sol3/papers.cfm ... _id=463680
The answer to your question based on this model is no.
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Re: Small Cap Value heads Rejoice !!!

Post by Elysium »

vineviz wrote: Fri Sep 25, 2020 8:42 am
Elysium wrote: Fri Sep 25, 2020 7:59 am
Robert T wrote: Fri Sep 25, 2020 7:35 am Expected portfolio returns are lower now that they were 18 years ago.
And realized returns over the past 18 years were also higher than expected.
Robert T:

Are correlations between expected and realized returns equal for all assets? or is there evidence that lower risk assets have better probability of realizing the expected results than higher risk assets. If so, wouldn't it be better to accept lower but reliable returns than higher and unreliable returns.
The variance of an asset effectively reflects "correlations between expected and realized returns".

If it was always "better to accept lower but reliable returns than higher and unreliable returns" then we'd all own nothing but Treasury bills, right?
Yes, exactly what I was getting at - variance. Will come to that in a second. As for second, yes, of course T-Bills would be preferable IF they could also provide real returns that would meet our needs, but is an extreme example (or a strawman). Not the same when we are discussing equities, for instance High Quality vs Low Quality, or Developed vs EM. Therefore expected returns alone cannot be a driver, variance also matters when looking at expected returns is the point.

Here is a graphic from Bakcrock that illustrates this better:

Image

If expected returns alone were the factor then we would all invest 100% in China A shares.
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Re: Small Cap Value heads Rejoice !!!

Post by Day9 »

Elysium wrote: Fri Sep 25, 2020 7:59 am
Robert T wrote: Fri Sep 25, 2020 7:35 am Expected portfolio returns are lower now that they were 18 years ago.
And realized returns over the past 18 years were also higher than expected.
Robert T:

Are correlations between expected and realized returns equal for all assets? or is there evidence that lower risk assets have better probability of realizing the expected results than higher risk assets. If so, wouldn't it be better to accept lower but reliable returns than higher and unreliable returns.
Yes "expected return" is the mean and as you point out there is a wide distribution of returns for riskier assets. On our wiki page for expected returns, Rick Ferri's estimate includes the standard deviation of annual returns. For example he put nominal expected return of US Large stocks at 7% with a standard deviation of 19. And US Treasury bills 2.1% with standard deviation of 2.

https://www.bogleheads.org/w/index.php? ... Rick_Ferri

The answer to your second question depends on your need, ability, and willingness to take risk.

Need to take risk: Return needed to meet your goals
Ability to take risk: What kind of drawdown is unacceptable when considering "needs" and not "wants"
Willingness to take risk: Emotion & gut tolerance

As an aside I noticed many bogleheads parrot "need, ability, and willingness to take risk", yet also do not believe there is any way to estimate expected return of stock investments. How can they determine their need to take risk then?
I'm just a fan of the person I got my user name from
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vineviz
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Re: Small Cap Value heads Rejoice !!!

Post by vineviz »

Elysium wrote: Fri Sep 25, 2020 9:27 am Therefore expected returns alone cannot be a driver, variance also matters when looking at expected returns is the point.
In other words, you're suggesting that investors should consider both risk and return in constructing their portfolios?

I'm curious to know who you think might disagree with this.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
Elysium
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Re: Small Cap Value heads Rejoice !!!

Post by Elysium »

vineviz wrote: Fri Sep 25, 2020 10:17 am
Elysium wrote: Fri Sep 25, 2020 9:27 am Therefore expected returns alone cannot be a driver, variance also matters when looking at expected returns is the point.
In other words, you're suggesting that investors should consider both risk and return in constructing their portfolios?

I'm curious to know who you think might disagree with this.
Not so much if anyone is disagreeing. It's a question that is often overlooked in all these conversations. I am trying to draw a picture of variance risk as probability of meeting realized returns. Let's say EM stocks have the highest expected returns currently, but they also have the highest variance, which needs to be taken into consideration when deciding to overweight EM stocks or even own them in the first place. Because there is a higher probability of meeting the mean expected returns from US Large Cap stocks than the same for EM stocks. So you could tilt to risker assets by saying they have higher expected returns, but the probability will tell us that there is more chance of us getting less instead because of the higher variance. This is not the same way risk is discussed in these threads.

This is also what is exactly happening with SCV stocks, while they do have higher expected returns, because of the higher variance in those expectations to begin with, they have ended up having less at the moment. It could have been the other way, if they did realize those higher returns, but for any number of factors unknown to us, they didn't. I am not sure if everyone tilting is thinking of this same way, which could be a cause of disappointment later when those expectations aren't met.
Last edited by Elysium on Fri Sep 25, 2020 11:16 am, edited 4 times in total.
Elysium
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Re: Small Cap Value heads Rejoice !!!

Post by Elysium »

Day9 wrote: Fri Sep 25, 2020 9:37 am As an aside I noticed many bogleheads parrot "need, ability, and willingness to take risk", yet also do not believe there is any way to estimate expected return of stock investments. How can they determine their need to take risk then?
I don't know about other people, but expectations are part of deciding an AA. I think most people do consider it, using some measure of historical returns as baseline and then applying a conservative lower number to it based on where we have been. Jack Bogle did this quite frequently. I don't have a problem with that at all.
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Re: Small Cap Value heads Rejoice !!!

Post by Day9 »

Elysium wrote: Fri Sep 25, 2020 11:07 am
Day9 wrote: Fri Sep 25, 2020 9:37 am As an aside I noticed many bogleheads parrot "need, ability, and willingness to take risk", yet also do not believe there is any way to estimate expected return of stock investments. How can they determine their need to take risk then?
I don't know about other people, but expectations are part of deciding an AA. I think most people do consider it, using some measure of historical returns as baseline and then applying a conservative lower number to it based on where we have been. Jack Bogle did this quite frequently. I don't have a problem with that at all.
Yes I remembered Bogle doing that in interviews and I found this article that corroborates what you say.

"Bogle’s formula is this:
Future Market Returns = Dividend Yield + Earnings Growth +/- Change in P/E Ratio.
He says this formula currently gives him an estimate of stock market returns in the 4-6% range, well below the long-term average that falls in the 8-10% range."

https://awealthofcommonsense.com/2016/0 ... e%20model.
I'm just a fan of the person I got my user name from
manlymatt83
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Re: Small Cap Value heads Rejoice !!!

Post by manlymatt83 »

For those who set a "SCV tilt", do you do it as part of your overall portfolio, or just your equity allocation?

IE:

in a 90/10 portfolio, and a 20% tilt, do you hold:

- 18% SCV
- 72% TSM
- 10% bonds

or:

- 20% SCV
- 70% TSM
- 10% bonds
muffins14
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Re: Small Cap Value heads Rejoice !!!

Post by muffins14 »

What's your goal? To hold 20% of 90% or to hold 20%?

Many would start from a particular factor loading they intend to hold, and then find what % of what fund they need to hold to achieve that.

e.g. if you want a value (HML) loading of 0.2, an 80/20 portfolio of VTI/IJS won't get you there, so you need to hold a 60/40 VTI/IJS portfolio instead
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Re: Small Cap Value heads Rejoice !!!

Post by YRT70 »

manlymatt83 wrote: Fri Sep 25, 2020 11:52 am For those who set a "SCV tilt", do you do it as part of your overall portfolio, or just your equity allocation?

IE:

in a 90/10 portfolio, and a 20% tilt, do you hold:

- 18% SCV
- 72% TSM
- 10% bonds

or:

- 20% SCV
- 70% TSM
- 10% bonds
Personally I keep my fixed income out of the equation. 25% SCV would be 25% of the equity.
acegolfer wrote: Fri Sep 25, 2020 9:14 am
YRT70 wrote: Fri Sep 25, 2020 5:54 am If I heard it correctly Ben Felix said in his last podcast that value is more likely to outperform during a recession. Is this accurate?
This paper is one of few economic model behind value premium. https://papers.ssrn.com/sol3/papers.cfm ... _id=463680
The answer to your question based on this model is no.
Thanks.
Last edited by YRT70 on Fri Sep 25, 2020 12:20 pm, edited 1 time in total.
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Re: Small Cap Value heads Rejoice !!!

Post by manlymatt83 »

muffins14 wrote: Fri Sep 25, 2020 12:04 pm What's your goal? To hold 20% of 90% or to hold 20%?

Many would start from a particular factor loading they intend to hold, and then find what % of what fund they need to hold to achieve that.

e.g. if you want a value (HML) loading of 0.2, an 80/20 portfolio of VTI/IJS won't get you there, so you need to hold a 60/40 VTI/IJS portfolio instead
Which tool on portfoliovisualizer allows you to play with weightings to get overall HML?
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Re: Small Cap Value heads Rejoice !!!

Post by rkhusky »

Day9 wrote: Fri Sep 25, 2020 9:37 am
Yes "expected return" is the mean and as you point out there is a wide distribution of returns for riskier assets.
Expected return is the integral of return over the distribution of returns. Unfortunately, the stock market has no known distribution. Therefore, you have to approximate and make assumptions about the future distribution, which adds additional incalculable uncertainty in estimates of expected return.
Last edited by rkhusky on Fri Sep 25, 2020 12:22 pm, edited 1 time in total.
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Re: Small Cap Value heads Rejoice !!!

Post by vineviz »

Elysium wrote: Fri Sep 25, 2020 11:04 am It's a question that is often overlooked in all these conversations.
Is it, though?

By my count, the word "risk" has appeared over 500 times in this thread alone.

If there are conversations that "overlook" the risks involved with SCV stocks, I don't think this is one of them.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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rkhusky--10,000+ posts!!!

Post by Taylor Larimore »

rkhusky:

I noticed that you have made over 10,000 posts on this forum. This is a real accomplishment--especially when they are well written and researched!!

Thank you and best wishes.
Taylor
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Re: Small Cap Value heads Rejoice !!!

Post by Robert T »

Elysium wrote: Fri Sep 25, 2020 7:59 am Robert T:

Are correlations between expected and realized returns equal for all assets? or is there evidence that lower risk assets have better probability of realizing the expected results than higher risk assets. If so, wouldn't it be better to accept lower but reliable returns than higher and unreliable returns.
It matters at the portfolio level, not the individual asset class level. For example, why would anyone own long-term bonds with a return volatility that has (recently) been 1.5 times as high as US Stocks, for a lower expected return? Because of low correlation between these two assets that yields significant portfolio value of long-term bonds beyond its individual characteristics.

At the portfolio level there is always a trade-off between expected returns, and the likely distribution of returns. And that’s why people often spend so much time trying to reduce this trade-off i.e. develop portfolios that do not compromise on expected returns but reduce the likely distribution of returns (re: including non-correlated assets a la Roger Gibson; multifactor portfolios etc, Larry Swedroe’s increased attention to this over the years – which ironically people seem to despise him for). These efforts are explicitly paying attention to the likely distribution of returns (standard deviation) and not just "point estimate" expected return.

Understanding the likely distribution of returns (re: Fama-French’s Volatility Lessons paper) can help better align expectations, improve the likelihood of staying the course (and prevent capitulation). This is not just a small value tilted portfolio issue, it applies to all portfolios including US TSM which some investors seem to sell out of (capitulate) at market bottoms.
.
Last edited by Robert T on Fri Sep 25, 2020 1:12 pm, edited 1 time in total.
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Re: rkhusky--10,000+ posts!!!

Post by rkhusky »

Taylor Larimore wrote: Fri Sep 25, 2020 12:48 pm rkhusky:

I noticed that you have made over 10,000 posts on this forum. This is a real accomplishment--especially when they are well written and researched!!

Thank you and best wishes.
Taylor
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Thanks. I have learned a lot. Including an appreciation for how much I don’t know.
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Re: Small Cap Value heads Rejoice !!!

Post by texasfight »

To everyone obsessed with tilting.

https://www.portfoliovisualizer.com/bac ... tion4_3=75

Go simple, and create an efficient portfolio with the 2 most important assets in the world
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Re: Small Cap Value heads Rejoice !!!

Post by HippoSir »

texasfight wrote: Fri Sep 25, 2020 1:26 pm To everyone obsessed with tilting.

https://www.portfoliovisualizer.com/bac ... tion4_3=75

Go simple, and create an efficient portfolio with the 2 most important assets in the world
It's sort of funny that you choose an active management tiltled fund for this (SP500). :D
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Re: Small Cap Value heads Rejoice !!!

Post by texasfight »

HippoSir wrote: Fri Sep 25, 2020 1:48 pm
texasfight wrote: Fri Sep 25, 2020 1:26 pm To everyone obsessed with tilting.

https://www.portfoliovisualizer.com/bac ... tion4_3=75

Go simple, and create an efficient portfolio with the 2 most important assets in the world
It's sort of funny that you choose an active management tiltled fund for this (SP500). :D
Pick any fund that closely tracks market beta without size or value tilts. I would prefer to hold something like MGK or VUG until there is a major change in fiscal policy and political power of mega/large caps vs. small.

https://twitter.com/ViscosityRedux/stat ... 77088?s=20

Read this thread and answer the question at the end of it.

But the biggest reason of all to avoid trying to our clever the market, is small cap value investors (chart porn vs. nasdaq lured them in) and no duration risk taker (chart porn of long term treasury yields and the zero bound lured them in) have fallen behind their peers, and the US housing market and costs of everything have inflated faster than their assets now.
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Re: Small Cap Value heads Rejoice !!!

Post by Elysium »

Robert T wrote: Fri Sep 25, 2020 1:09 pm
Elysium wrote: Fri Sep 25, 2020 7:59 am Robert T:

Are correlations between expected and realized returns equal for all assets? or is there evidence that lower risk assets have better probability of realizing the expected results than higher risk assets. If so, wouldn't it be better to accept lower but reliable returns than higher and unreliable returns.
It matters at the portfolio level, not the individual asset class level. For example, why would anyone own long-term bonds with a return volatility that has (recently) been 1.5 times as high as US Stocks, for a lower expected return? Because of low correlation between these two assets that yields significant portfolio value of long-term bonds beyond its individual characteristics.

At the portfolio level there is always a trade-off between expected returns, and the likely distribution of returns. And that’s why people often spend so much time trying to reduce this trade-off i.e. develop portfolios that do not compromise on expected returns but reduce the likely distribution of returns (re: including non-correlated assets a la Roger Gibson; multifactor portfolios etc, Larry Swedroe’s increased attention to this over the years – which ironically people seem to despise him for). These efforts are explicitly paying attention to the likely distribution of returns (standard deviation) and not just "point estimate" expected return.

Understanding the likely distribution of returns (re: Fama-French’s Volatility Lessons paper) can help better align expectations, improve the likelihood of staying the course (and prevent capitulation). This is not just a small value tilted portfolio issue, it applies to all portfolios including US TSM which some investors seem to sell out of (capitulate) at market bottoms.
.
Yes, makes sense at the portfolio level. For someone who has done the work to get all of the components of the portfolio aligned to their stated goals, and then have a method to measure everything, there is nothing to be said.

In general, I do question though when people say things like they are adding "AVDV" and "QVAL" etc, because they appear interesting, they are paying close attention to how it needs to fit within an overall framework.
HippoSir
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Re: Small Cap Value heads Rejoice !!!

Post by HippoSir »

Elysium wrote: Thu Sep 24, 2020 5:10 pm
HippoSir wrote: Thu Sep 24, 2020 1:32 pm
Elysium wrote: Thu Sep 24, 2020 1:26 pm Disagree. There is risk that the process applied itself is wrong.
I've seen a lot of posts from you in factor threads but I've always struggled to figure out what your specific argument is.
I got some time now, let me see if I can explain. First, I was responding in between breaks, so I am not sure if Vineviz meant something different, I have to go back and check.

Second, about your specific questions:
HippoSir wrote: Thu Sep 24, 2020 1:32 pm Do you believe that factors do not explain returns?
I think they do. They are helpful for explaining returns post-fact.
HippoSir wrote: Thu Sep 24, 2020 1:32 pm Do you believe that factors may explain returns, but won't have any premium going forwards?
The word premium itself is misleading. It can be negative or positive. Calling something that can be negative as a "premium" is a twist on the whole thing. Even if the idea was originated by FF, I think it was popularized by industry hungry for selling products. I do not think it is possible to systemically capture an excess return premium in any reliable manner over any reliable period of time. It may not even happen in your lifetime. I reject the argument that all these factors are to be viewed same as equity risk premium. I think there is a huge difference, much of it has to do with behavioral aspects of it. I believe market ranks ERP higher than any other factor premium. I cannot prove it, but nether can other side disprove it.

I do not know for sure whether there will be premium from investing in SCV or not, no one does, and to repeat myself, I don't think it's the same as thinking there will be an equity premium going forward. I see no reason why the market should reward you for investing in a company that is about to go bankrupt, for all you know this company will go bankrupt and you'll lose everything. Now, the theory goes that if you select a portfolio of thousands of such stocks then a few winners will come out of it, because as the academics like to call they "surprised" the market (instead of the word mispricing). The idea is that such few winners win so big to earn an excess premium. So, goes the theory behind SCV. Do you see why I find it hard to believe that this phenomenon will happen reliably in my lifetime? Possible, but should I do it. Bogle says, even if you tilt limit yourself to 15%, I think that's reasonable.
HippoSir wrote: Thu Sep 24, 2020 1:32 pm Do you believe that factor funds are improperly constructed? Do you believe that factor funds are being improperly sold to investors who expect a guaranteed short term premium out of them?
Yes, and no - to both. Some, not all are improperly constructed. Those that are constructed properly sticks to the fundamentals, others have added on several things, including the AQR long/short strategies are found to have flaws, which even they cannot figure out. Professionally, I am a technology leader, I build complex systems with many moving parts, my approach to building systems is to build them with only the needed moving parts, just enough to get to the desired goals, anymore and I am adding more complexity and more errors that needs to be chased down. Same goes for factor products, more algorithms, more room for errors.

Some companies take advantage of it, for instance I saw the other day a fund advertised as "high yield factor" fund or "floating rate factor" fund. What is stopping someone to claim they discovered another factor that was proven in backtests, then market it, if they are slick at marketing they could make big bucks. Investor beware in this regard is my motto.
Thank you for the detailed and well thought through response, I very much appreciate your thoughts!

I agree with much of what you say, I think where I differ is that the long term data on a positive value factor premium is compelling enough for me to tilt towards it with part of my portfolio (as cheaply and simply as possible). It provides a potential (although not guaranteed) source of diversification beyond just the equity risk premium with (IMO) a reasonable risk and behavioral based justification for why it exists. That said, I completely understand people who look at the same data and reach a different conclusion.

I think part of the attraction for me is that my job/income is highly tied to the large amounts of money floating around the big tech FAANG world that currently represent a large portion of the major indexes. Tilting small+value (really multifactor in my case), provides a way to offset this risk somewhat.
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Re: Small Cap Value heads Rejoice !!!

Post by Forester »

Another sign of value capitulation: ValueStockGeek switches to a Quality Buffett strategy away from deep value https://valuestockgeek.com/2020/09/24/strategy-shift/
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Re: Small Cap Value heads Rejoice !!!

Post by Steve Reading »

Elysium wrote: Fri Sep 25, 2020 11:04 am This is also what is exactly happening with SCV stocks, while they do have higher expected returns, because of the higher variance in those expectations to begin with, they have ended up having less at the moment. It could have been the other way, if they did realize those higher returns, but for any number of factors unknown to us, they didn't.
I admit I’ve completely misunderstood you from the start. I 100% agree with you that SCV has higher expected returns, and it comes with higher risk (more uncertainty about that higher expected return).

Cheers mate.
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Re: Small Cap Value heads Rejoice !!!

Post by Elysium »

Steve Reading wrote: Fri Sep 25, 2020 3:22 pm I 100% agree with you that SCV has higher expected returns, and it comes with higher risk (more uncertainty about that higher expected return).
Exactly! (bold mine)
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Re: Small Cap Value heads Rejoice !!!

Post by 000 »

Is it possible SCV is less risky and thus offers a negative risk premium relative to total market?

Consider:
1. Small stocks have less management concentration risk, i.e. 10 CEOs versus 1 CEO of the same 10 Corporations merged together.
2. Small stocks have less risk of being trust-busted.
3. Value stocks have less risk of speculative business ventures failing, i.e. most are in established industries.
4. Value stocks have less risk of being caught up in investor mania, i.e. "margin of safety" concept.

Maybe the SCV premium found in past data was not because of higher risk, but because of all the failures of speculative business ventures bid up by investors. Now with mature tech/internet, the failure rate of such highly bid ventures is less.
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Re: Small Cap Value heads Rejoice !!!

Post by Elysium »

HippoSir wrote: Fri Sep 25, 2020 3:10 pm I think where I differ is that the long term data on a positive value factor premium is compelling enough for me to tilt towards it with part of my portfolio (as cheaply and simply as possible). It provides a potential (although not guaranteed) source of diversification beyond just the equity risk premium with (IMO) a reasonable risk and behavioral based justification for why it exists. That said, I completely understand people who look at the same data and reach a different conclusion.
It isn't even a different conclusion. It is very hard to argue against the idea that a premium should be present for providing capital to riskier business.

It comes down to what I just said in couple of previous posts, it is the higher uncertainty which makes it unsuitable for almost everyone except those who are well versed in the nuances. I consider almost everyone contributing on this thread as nuanced, but not the average person asking whether they should tilt or not. Think about how much they need to learn about the concepts in order to be successful at this. I also think while younger investor could pursue this, older investors are better off in lower volatility stocks in general (not just behavioral, more certainty about returns, lower returns with lower risk acceptable) as they value consistency. In fact, I think they can go even lower risk than market, say high quality dividend companies with lower overall risk than market. There are people like Swedroe who says instead invest in deep value stocks with increased exposure to bonds for lower overall portfolio risk. I guess this probably looks good to a computer optimized portfolio, but not something average investor can handle. This is why I like so much of what Jack Bogle has said, he was aware of all of the above, but he was always thinking of the average investor and what is practical.
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Re: Small Cap Value heads Rejoice !!!

Post by Elysium »

000 wrote: Fri Sep 25, 2020 4:51 pm Is it possible SCV is less risky and thus offers a negative risk premium relative to total market?

Consider:
1. Small stocks have less management concentration risk, i.e. 10 CEOs versus 1 CEO of the same 10 Corporations merged together.
2. Small stocks have less risk of being trust-busted.
3. Value stocks have less risk of speculative business ventures failing, i.e. most are in established industries.
4. Value stocks have less risk of being caught up in investor mania, i.e. "margin of safety" concept.

Maybe the SCV premium found in past data was not because of higher risk, but because of all the failures of speculative business ventures bid up by investors. Now with mature tech/internet, the failure rate of such highly bid ventures is less.
I don't think any of that holds true. Value companies are risky, if in doubt just look at the debt rating.
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Re: Small Cap Value heads Rejoice !!!

Post by Forester »

Elysium wrote: Fri Sep 25, 2020 4:59 pm
000 wrote: Fri Sep 25, 2020 4:51 pm Is it possible SCV is less risky and thus offers a negative risk premium relative to total market?

Consider:
1. Small stocks have less management concentration risk, i.e. 10 CEOs versus 1 CEO of the same 10 Corporations merged together.
2. Small stocks have less risk of being trust-busted.
3. Value stocks have less risk of speculative business ventures failing, i.e. most are in established industries.
4. Value stocks have less risk of being caught up in investor mania, i.e. "margin of safety" concept.

Maybe the SCV premium found in past data was not because of higher risk, but because of all the failures of speculative business ventures bid up by investors. Now with mature tech/internet, the failure rate of such highly bid ventures is less.
I don't think any of that holds true. Value companies are risky, if in doubt just look at the debt rating.
Debt-laden distressed companies have lower returns than the market and are more likely to file for bankruptcy. The "risk premium" does not exist.
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Re: Small Cap Value heads Rejoice !!!

Post by 000 »

Elysium wrote: Fri Sep 25, 2020 4:59 pm
000 wrote: Fri Sep 25, 2020 4:51 pm Is it possible SCV is less risky and thus offers a negative risk premium relative to total market?

Consider:
1. Small stocks have less management concentration risk, i.e. 10 CEOs versus 1 CEO of the same 10 Corporations merged together.
2. Small stocks have less risk of being trust-busted.
3. Value stocks have less risk of speculative business ventures failing, i.e. most are in established industries.
4. Value stocks have less risk of being caught up in investor mania, i.e. "margin of safety" concept.

Maybe the SCV premium found in past data was not because of higher risk, but because of all the failures of speculative business ventures bid up by investors. Now with mature tech/internet, the failure rate of such highly bid ventures is less.
I don't think any of that holds true. Value companies are risky, if in doubt just look at the debt rating.
Really?

Which of these two large cap lists has more risk of business failure?
1. Berkshire Hathaway, Johnson & Johnson, Procter & Gamble, UnitedHealth, JPMorgan Chase, Verizon, Disney, Intel, Merck, AT&T.
2. Apple, Microsoft, Amazon, Alphabet, Facebook, Tesla, Visa, Mastercard, NVIDIA, Home Depot.

Which of these two small cap lists has more risk of business failure?
1. Coupa Software, EPAM Systems, Horizon Therapeutics, Teladoc Health, Zebra Technologies, Catalent, Zillow, Insulet, Etsy, Teradyne.
2. Peloton Interactive, IDEX, PerkinElmer, Atmos Energy Corp, Booz Allen Hamilton, Generac, Brown & Brown, RPM International, Molina Healthcare, Avalara.
Last edited by 000 on Fri Sep 25, 2020 6:56 pm, edited 1 time in total.
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Re: Small Cap Value heads Rejoice !!!

Post by Elysium »

000 wrote: Fri Sep 25, 2020 5:20 pm
Elysium wrote: Fri Sep 25, 2020 4:59 pm
000 wrote: Fri Sep 25, 2020 4:51 pm Is it possible SCV is less risky and thus offers a negative risk premium relative to total market?

Consider:
1. Small stocks have less management concentration risk, i.e. 10 CEOs versus 1 CEO of the same 10 Corporations merged together.
2. Small stocks have less risk of being trust-busted.
3. Value stocks have less risk of speculative business ventures failing, i.e. most are in established industries.
4. Value stocks have less risk of being caught up in investor mania, i.e. "margin of safety" concept.

Maybe the SCV premium found in past data was not because of higher risk, but because of all the failures of speculative business ventures bid up by investors. Now with mature tech/internet, the failure rate of such highly bid ventures is less.
I don't think any of that holds true. Value companies are risky, if in doubt just look at the debt rating.
Really?

Which of these two lists has more risk of business failure?
Berkshire Hathaway, Johnson & Johnson, Procter & Gamble, UnitedHealth, JPMorgan Chase, Verizon, Disney, Intel, Merck, AT&T.
Apple, Microsoft, Amazon, Alphabet, Facebook, Tesla, Visa, Mastercard, NVIDIA, Home Depot.

Which of these two lists has more risk of business failure?
Coupa Software, EPAM Systems, Horizon Therapeutics, Teladoc Health, Zebra Technologies, Catalent, Zillow, Insulet, Etsy, Teradyne.
Peloton Interactive, IDEX, PerkinElmer, Atmos Energy Corp, Booz Allen Hamilton, Generac, Brown & Brown, RPM International, Molina Healthcare, Avalara.
Which one of these individuals would you like to lend money for lower rate?

Person A: Credit score 820
Person B: Credit score 620

Most of those companies in your top list aren't deep value companies, their credit rating is higher, many AA rated, you have MSFT which has AAA rated debt, TSLA is an exception. You need to do the research yourself and come to this conclusion. SCV is different.
Last edited by Elysium on Fri Sep 25, 2020 5:57 pm, edited 1 time in total.
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Re: Small Cap Value heads Rejoice !!!

Post by vineviz »

000 wrote: Fri Sep 25, 2020 5:20 pm
Elysium wrote: Fri Sep 25, 2020 4:59 pm I don't think any of that holds true. Value companies are risky, if in doubt just look at the debt rating.
Really?
Yes, really.
If you doubt that value and junk are two sides of the same coin, consider that companies whose bonds are in the junk bin are also likely to find their shares on the discount rack. Of the roughly 1,200 companies in the Russell 3000 Index for which a long-term credit rating from S&P Global Ratings is available, the median price-to-book ratio of firms rated junk (BB or lower) is 17% lower than that of those rated investment grade. Other valuation measures tell a similar story. The median price-to-sales ratio of companies rated junk is 63% lower, price-to-earnings is 15% lower and price-to-cash flow is 35% lower.
source
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Re: Small Cap Value heads Rejoice !!!

Post by petulant »

vineviz wrote: Fri Sep 25, 2020 5:52 pm
000 wrote: Fri Sep 25, 2020 5:20 pm
Elysium wrote: Fri Sep 25, 2020 4:59 pm I don't think any of that holds true. Value companies are risky, if in doubt just look at the debt rating.
Really?
Yes, really.
If you doubt that value and junk are two sides of the same coin, consider that companies whose bonds are in the junk bin are also likely to find their shares on the discount rack. Of the roughly 1,200 companies in the Russell 3000 Index for which a long-term credit rating from S&P Global Ratings is available, the median price-to-book ratio of firms rated junk (BB or lower) is 17% lower than that of those rated investment grade. Other valuation measures tell a similar story. The median price-to-sales ratio of companies rated junk is 63% lower, price-to-earnings is 15% lower and price-to-cash flow is 35% lower.
source
"Two sides of the same coin" really overstates it though. I'm not going to touch P/S since that metric is really dependent on industry, and value/growth and junk can be deeply industry-correlated due to the differences in turnover, margin, etc. across industries. But let's look at P/B.

It says junk companies have a 17% lower P/B. The S&P 600 Value fund IJS has a P/B of 1.01, which is 30% lower than the S&P 600 fund IJR at 1.44. Now, the link was measured at January 30, 2020, and IJS has dropped more than IJR (25% vs. 18%). To correct assuming book has been constant, IJS may have been at 1.35 and IJR at 1.75, a 23% difference. The difference in book value for these funds most likely isn't the same as the difference between bond ratings categories.

Or try the Vanguard value and large cap indexes. Value is at 2.2 and large cap is at 3.8. That is a 42% difference. Large cap is up 3.45 and value is down 13% YTD. Keeping book constant again, we get a value p/b of 2.53 and large cap p/b of 3.35, a difference of 24.5%.

Investment grade has a correlation but it doesn't describe the entire difference. Note, I accept the article appears to be equal-weighted and this quick check is cap-weighted and imprecise. But I think the burden is on a claimant here.

The problem here is that you're right, but it's not the whole story. We would expect companies with financial difficulties to both have downgrades in bond ratings and start to look like value stocks. But we would also expect otherwise healthy but slow-growing companies to also be value stocks yet potentially have a good bond rating. A value index based on P/B or P/E is going to capture both. And to make it more complicated, a slow-growing company in a stable industry may be more likely to issue debt to juice returns, causing the slide into financial distress.
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Re: Small Cap Value heads Rejoice !!!

Post by 000 »

Elysium wrote: Fri Sep 25, 2020 5:44 pm Which one of these individuals would you like to lend money for lower rate?

Person A: Credit score 820
Person B: Credit score 620

Most of those companies in your top list aren't deep value companies, their credit rating is higher, many AA rated, you have MSFT which has AAA rated debt, TSLA is an exception. You need to do the research yourself and come to this conclusion. SCV is different.
I don't lend out my money at all so credit ratings mean nothing to me.
vineviz wrote: Fri Sep 25, 2020 5:52 pm Yes, really.
My "Really?" was a reference to "I don't think any of that holds true.", not "look at the debt rating". I don't care about debt ratings.

What about all the other risks I mentioned where small/value may have less risk?

If I take ten small caps and merge them into a mid or large cap, how does the risk profile change?
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Re: Small Cap Value heads Rejoice !!!

Post by XacTactX »

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
SMLF | ISCF | EMGF | LendingClub | Cash
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Re: Small Cap Value heads Rejoice !!!

Post by vineviz »

000 wrote: Fri Sep 25, 2020 6:49 pm My "Really?" was a reference to "I don't think any of that holds true.", not "look at the debt rating". I don't care about debt ratings.

What about all the other risks I mentioned where small/value may have less risk?

If I take ten small caps and merge them into a mid or large cap, how does the risk profile change?
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"?

Imagine your hypothesis is right, and that somehow the entire academic field of economics and the entire financial services industry have got it backwards about the size and value factors: SCV stocks actually are less risky than large cap growth stocks. What test would you use to support or reject that hypothesis? What would you measure and what result would convince you that you're wrong?
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Re: Small Cap Value heads Rejoice !!!

Post by HippoSir »

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.
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.

If you're looking for strong value exposure, AVUV or IJS would be a better choice, if you want a mix of different factors SMLF would be a better choice.

Personally I target multifactor, as in times like now when value is underperforming, the other factors help offset a bit (although you will still suffer vs a total market fund). That said, multifactor, and especially the iShares multifactor funds, have the disadvantage of a significantly complex optimization process involved in the construction. This means it's tough to tell whether or not trading costs/idiosyncratic risk/etc will wipe out any factor premiums the funds provide.

In my portfolio use VFMF for my US multifactor exposure, with a small slug of AVUV for additional pure small value exposure, along with INTF/ISCF/EMGF (international iShares multifactor) for international factor exposure (I would move to an international VFMF if one was available). I also keep a core slug of VT (total world) as the market weighted backbone of my portfolio. My goal is to get the deepest low cost multifactor exposure I can, as a diversifier to my VT.

BTW, in case you haven't seen it, a reference for the methodology of the MSCI index the iShares multifactor funds use:

https://www.msci.com/msci-diversified-m ... or-indexes

EDIT: I'll also note my other objection to the iShares multifactor funds beyond complexity. They make heavy use of relatively short term backtesting to make decisions, which brings the significant risk of data mining (for example the move to the newer GEM LT model in 2018). I have not found a low cost alternative with similar factor exposure however, so I continue to use them.
Last edited by HippoSir on Fri Sep 25, 2020 8:45 pm, edited 1 time in total.
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Re: Small Cap Value heads Rejoice !!!

Post by 000 »

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.
vineviz wrote: Fri Sep 25, 2020 8:01 pm Imagine your hypothesis is right, and that somehow the entire academic field of economics and the entire financial services industry have got it backwards about the size and value factors: SCV stocks actually are less risky than large cap growth stocks. What test would you use to support or reject that hypothesis? What would you measure and what result would convince you that you're wrong?
I don't think "the entire academic field of economics and the entire financial services industry" believe what you believe about the size and value factors.

I didn't say SCV is less risky than LCG. I said it might be less risky than the broad market index.

As far as being convinced on SCV risk premium, I don't tilt to or away from SCV, so I don't have a dog in the fight; I am here to share and receive knowledge. It's hard to know what risks were missed along the way, so it's hard to tell how risky a decision was, even when looking to the past from the future. Certainly a claim can be made that tilting to narrow segments of the overall market introduces diversifiable risk to a portfolio, but that applies equally to SCV and SCG.

Nevertheless, I would first like to see a coherent explanation for why 10 small-caps merged together has less risk than the same businesses unmerged.

What result would convince you you're wrong?

IRL it appears that, among those who have a growth-value preference, most risk-averse investors (e.g. older people) prefer value stocks and most risk-loving investors (e.g. young people) prefer growth stocks. How does that square with the theory?
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