Small Cap Value Investors: Time to Back Up the Truck?

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William Million
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Small Cap Value Investors: Time to Back Up the Truck?

Post by William Million » Sun Nov 17, 2019 6:48 pm

I see that large growth has been on a tear.

Last 5 years, as per Morningstar, large cap growth 13.5% annual; small cap value 4.6%.

If you buy the theory that small cap value will, over the long haul, out perform, is it now time to back up the truck? Is this one of those historic opportunities?

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Re: Small Cap Value Investors: Time to Back Up the Truck?

Post by livesoft » Sun Nov 17, 2019 6:51 pm

I have noticed that recently small cap value does well when positive news or rumors about tariffs and the trade wars are published. Thus, I don't think it is time to back up the truck.
Last edited by livesoft on Sun Nov 17, 2019 6:57 pm, edited 1 time in total.
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Re: Small Cap Value Investors: Time to Back Up the Truck?

Post by Smith1776 » Sun Nov 17, 2019 6:53 pm

SCV allocation is to diversify IMHO. Keep a proportion of your portfolio in that cross section along with other things like TSM, but don't expect miracles.

It doesn't and shouldn't be an all or nothing bet.

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Re: Small Cap Value Investors: Time to Back Up the Truck?

Post by whodidntante » Sun Nov 17, 2019 6:55 pm

I would back up the truck on EM value first. And then developed value. If you still have room in your truck, back it up for US SCV. Maybe your load will be worth something someday.

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Re: Small Cap Value Investors: Time to Back Up the Truck?

Post by Kenkat » Sun Nov 17, 2019 7:14 pm

I like to back up the virtual truck of expectations in these situations but leave my portfolio alone.

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Re: Small Cap Value Investors: Time to Back Up the Truck?

Post by averagedude » Sun Nov 17, 2019 8:40 pm

If you believe in the small cap value premuim, I don't think you should back up the truck. Instead you should have been buying it when you rebalance according to your investment policy statement.

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Re: Small Cap Value Investors: Time to Back Up the Truck?

Post by nedsaid » Sun Nov 17, 2019 8:45 pm

William Million wrote:
Sun Nov 17, 2019 6:48 pm
I see that large growth has been on a tear.

Last 5 years, as per Morningstar, large cap growth 13.5% annual; small cap value 4.6%.

If you buy the theory that small cap value will, over the long haul, out perform, is it now time to back up the truck? Is this one of those historic opportunities?
The least I would do in this situation is not to chase Large Growth after it has performed so well for a decade. We all know how performance chasing works for the small investor, not very well. Never been a fan of buy high, sell low but that is what a lot of individual investors have done. Timing these things is impossible but this would be a good time, in my view, to start a "Swedroe Shuffle" a rebalancing from Growth to Value over time. I have started this process, moving assets from Total Stock Market Index to Value indexes. Doesn't mean abandoning Large Growth but simply doing small waves of selling as the market hits new highs and reallocating to Value.
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Re: Small Cap Value Investors: Time to Back Up the Truck?

Post by rkhusky » Sun Nov 17, 2019 9:55 pm

If you believe in factor investing, you will know that SV is fully loaded on the market factor, such that you don’t need any TSM. If you are a true believer, you will be 100% SV.

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Re: Small Cap Value Investors: Time to Back Up the Truck?

Post by fennewaldaj » Sun Nov 17, 2019 10:04 pm

whodidntante wrote:
Sun Nov 17, 2019 6:55 pm
I would back up the truck on EM value first. And then developed value. If you still have room in your truck, back it up for US SCV. Maybe your load will be worth something someday.
Yes this. Small cap value is cheap relative to large growth but its not all that cheap in absolute terms. EM value is actually cheap in absolute terms. If I was going to market time based on valuations it would be by over weighting EM and DM value.

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Re: Small Cap Value Investors: Time to Back Up the Truck?

Post by Taylor Larimore » Sun Nov 17, 2019 10:12 pm

William Million wrote:
Sun Nov 17, 2019 6:48 pm
I see that large growth has been on a tear.

Last 5 years, as per Morningstar, large cap growth 13.5% annual; small cap value 4.6%.

If you buy the theory that small cap value will, over the long haul, out perform, is it now time to back up the truck? Is this one of those historic opportunities?
William Mellon

No one knows the future. It is dangerous to bet on one corner of the market as the current dismal performance of small-cap value demonstrates. We also know that market-timing is nearly always a mistake. Read what experts say:

https://www.bogleheads.org/wiki/Taylor_ ... ing_quotes

Consider total market index funds and your investments will never again fall below average.

The Three-Fund Portfolio

Best wishes
Taylor
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Re: Small Cap Value Investors: Time to Back Up the Truck?

Post by Scooter57 » Sun Nov 17, 2019 10:38 pm

Small Cap value ain't what it used to be. Many small companies over the past decade or so have stayed private until the venture capitalists who own big chunks of them could make huge amounts taking them public. This often means investors only get to invest in them after the excitement has been worked for all its worth and started to fade.

There have been a lot of takeovers, too.So the more profitable small caps have been swallowed up by bigger companies and taken off the market. By the same token, companies that take over small cap companies often keep the rich parts and spin off small companies made up of the unprofitable divisions of these companies.

In short, the quality of the small stocks you find on publicly traded stock exchsnges is not as high as what you could have bought in 1920, or 1950, or the computer revolution that started around 1983 and extended through 2000.
You could get on on the ground floor of exciting small companies then. But now by the time an intruiging company goes IPO it is often much larger cap, even if it hadn't made a cent in profit.

When I went through my couple years of investing in well valued small companies I saw all these factors in play. Too many small cap stocks were failing companies that had once been bigger, companies venture capitalists had taken private, drained of csdh, and put back on the market, and spun off fragments of bigger companies. What I did not see was small companies with excellent future prospects of growth. Those were hyped up to ridiculous market caps or taken private so the billionaires could get those lush profits

Academics love to backtest, but often strike me as painfully unaware of what is going on in the present that differs from how things were in the past.

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Re: Small Cap Value Investors: Time to Back Up the Truck?

Post by fennewaldaj » Sun Nov 17, 2019 11:00 pm

Scooter57 wrote:
Sun Nov 17, 2019 10:38 pm
Small Cap value ain't what it used to be. Many small companies over the past decade or so have stayed private until the venture capitalists who own big chunks of them could make huge amounts taking them public. This often means investors only get to invest in them after the excitement has been worked for all its worth and started to fade.

There have been a lot of takeovers, too.So the more profitable small caps have been swallowed up by bigger companies and taken off the market. By the same token, companies that take over small cap companies often keep the rich parts and spin off small companies made up of the unprofitable divisions of these companies.

In short, the quality of the small stocks you find on publicly traded stock exchsnges is not as high as what you could have bought in 1920, or 1950, or the computer revolution that started around 1983 and extended through 2000.
You could get on on the ground floor of exciting small companies then. But now by the time an intruiging company goes IPO it is often much larger cap, even if it hadn't made a cent in profit.

When I went through my couple years of investing in well valued small companies I saw all these factors in play. Too many small cap stocks were failing companies that had once been bigger, companies venture capitalists had taken private, drained of csdh, and put back on the market, and spun off fragments of bigger companies. What I did not see was small companies with excellent future prospects of growth. Those were hyped up to ridiculous market caps or taken private so the billionaires could get those lush profits

Academics love to backtest, but often strike me as painfully unaware of what is going on in the present that differs from how things were in the past.
Aren't small value companies typically older companies anyway? That is they should not be hurt by the long time to IPO as those companies typically debut as small (or mid) growth companies. Also IPOs have historically had bad returns. its entirely possible it is the VC investors who are going to lose out by waiting to take these companies private not us (the late stage investors in Uber and Lyft are underwater). The increased money in buy out style PE could also help small (and mid) value as those are the companies they typically buy.

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Re: Small Cap Value Investors: Time to Back Up the Truck?

Post by Fat-Tailed Contagion » Sun Nov 17, 2019 11:01 pm

What SCV is best for Taxable accounts? Non-taxable accounts?

And what about EM?
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Re: Small Cap Value Investors: Time to Back Up the Truck?

Post by whodidntante » Sun Nov 17, 2019 11:11 pm

Scooter57 wrote:
Sun Nov 17, 2019 10:38 pm
Small Cap value ain't what it used to be. Many small companies over the past decade or so have stayed private until the venture capitalists who own big chunks of them could make huge amounts taking them public. This often means investors only get to invest in them after the excitement has been worked for all its worth and started to fade.

There have been a lot of takeovers, too.So the more profitable small caps have been swallowed up by bigger companies and taken off the market. By the same token, companies that take over small cap companies often keep the rich parts and spin off small companies made up of the unprofitable divisions of these companies.

In short, the quality of the small stocks you find on publicly traded stock exchsnges is not as high as what you could have bought in 1920, or 1950, or the computer revolution that started around 1983 and extended through 2000.
You could get on on the ground floor of exciting small companies then. But now by the time an intruiging company goes IPO it is often much larger cap, even if it hadn't made a cent in profit.

When I went through my couple years of investing in well valued small companies I saw all these factors in play. Too many small cap stocks were failing companies that had once been bigger, companies venture capitalists had taken private, drained of csdh, and put back on the market, and spun off fragments of bigger companies. What I did not see was small companies with excellent future prospects of growth. Those were hyped up to ridiculous market caps or taken private so the billionaires could get those lush profits

Academics love to backtest, but often strike me as painfully unaware of what is going on in the present that differs from how things were in the past.
As you're writing your research paper, don't forget to invalidate the three-factor model. That's how you get your Nobel prize.

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Re: Small Cap Value Investors: Time to Back Up the Truck?

Post by MotoTrojan » Sun Nov 17, 2019 11:18 pm

Fat-Tailed Contagion wrote:
Sun Nov 17, 2019 11:01 pm
What SCV is best for Taxable accounts? Non-taxable accounts?

And what about EM?
VIOV taxable or non-taxable.

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Re: Small Cap Value Investors: Time to Back Up the Truck?

Post by MotoTrojan » Sun Nov 17, 2019 11:18 pm

Was pretty close until recently actually. Your numbers seem off. I am buying domestic and international SCV right now though.

https://www.portfoliovisualizer.com/bac ... ion2_2=100

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Re: Small Cap Value Investors: Time to Back Up the Truck?

Post by sf_tech_saver » Sun Nov 17, 2019 11:29 pm

A fine reason to own VTI not VOO-- but that's about it for me thanks.
VTI is a modern marvel

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Re: Small Cap Value Investors: Time to Back Up the Truck?

Post by willthrill81 » Sun Nov 17, 2019 11:43 pm

The problem is that valuation-based asset allocation has not even held up well in backtests. I wouldn't do it.

My specific strategy calls for rotating into the top performing equity asset class I have access to in each account. For a long while now, that's almost exclusively been large and mid-cap growth. So far, it's paid off well.

That being said, I'm not now nor have I ever recommended my strategy to anyone. I believe that most investors would be well served with a long-term tilt toward small and value, but if they cannot handle the inevitable underperformance that will at some point crop up from any tilt, then something like the 3-fund portfolio is a reasonable strategy.
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Re: Small Cap Value Investors: Time to Back Up the Truck?

Post by lazyday » Mon Nov 18, 2019 7:14 am

Seems to me it’s a lousy time to overweight US equity or growth stocks. In bonds it might be a lousy time to increase duration or leverage.

But that doesn’t necessarily mean we should do the opposite.

It’s difficult to evaluate which assets are cheap and which are expensive. So changing allocations to chase assets that seem to have become slightly cheaper is likely to increase risk but not return. However, we might argue that ex-US and value are now very cheap.

Even if an asset is very cheap, it’s possible for it to continue to get cheaper for many years. Most people are likely to give up at some point. Buy low, sell lower. However, a few people are diehard value investors with strong stomachs, and are able to stick with what they believe for a long time.

A true value diehard today might consider underweighting US equity and maybe global growth. Over 98% of my equity is in ex-US value, with EM overweighted.

OP William Million, in case you haven’t seen the AQR “Value-Timing Sin” article: viewtopic.php?t=294425

willthrill81, if you’re a diehard momentum investor, you might be an exception to my “lousy time” belief. I try to incorporate momentum into my decisions, but know that I cannot be a diehard momentum investor. It doesn’t fit with my frugal personality:
bluquark wrote:
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One thing I notice is that investing strategies tend to have a foundation in the investor's sense of identity. US-only investors are proud patriots, and international-market-cap investors are proud cosmopolitans. Factor investors are proudly math/finance-theory-literate, and vanilla-index investors are proudly common-sensical.

In the event that an investor is temporarily convinced to go with a strategy that cuts against their sense of who they are and what matters, it is difficult to stay the course.

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Re: Small Cap Value Investors: Time to Back Up the Truck?

Post by rkhusky » Mon Nov 18, 2019 8:03 am

whodidntante wrote:
Sun Nov 17, 2019 11:11 pm
As you're writing your research paper, don't forget to invalidate the three-factor model. That's how you get your Nobel prize.
The three-factor model will just be as valid if growth out-performs value for the next 50 years. It's ambivalent to the performance of its factors. (Not to say that the three-factor model will always describe portfolio returns, since its just a data mining model, not a theoretical model.)

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Re: Small Cap Value Investors: Time to Back Up the Truck?

Post by nisiprius » Mon Nov 18, 2019 8:09 am

William Million wrote:
Sun Nov 17, 2019 6:48 pm
...If you buy the theory that small cap value will, over the long haul, out perform, is it now time to back up the truck? Is this one of those historic opportunities?...
As nearly as I can understand it, the theory behind a small-cap value tilt has nothing to do with timing or "opportunities."

In general, for all such theories, there are two separate questions.

a) Is there a reason to expect this asset class... or portfolios formed with judicious amounts of this asset class... to outperform in the future, measured by risk-adjusted return or raw return or whatever.

b) Should I try to market time the purchase of the asset classes called for by this strategy?

Now, that said, it is hard to summarize Cliff Asness' subtle and carefully hedged statements, but there's a thread, Cliff Asness: It's Time for a Venial Value-Timing Sin. OK. I'll summarize it. Caricature it. Be smart-alecky about it. After saying for years that Rob Arnott is an idiot for trying to market-time factors, pretending that this is on a general principle that trying to market-time factors is stupid, Asness is revising that to say "it's stupid to market time factors when Arnott says so, but smart to market time them when I say so." But I can't tell whether Asness is telling you or I, as individual investors, to do it. More likely he just means everyone should buy AQR mutual funds and let him do it for us, rather than RAFI-indexed funds and let Arnott do it for us.
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Re: Small Cap Value Investors: Time to Back Up the Truck?

Post by jeffyscott » Mon Nov 18, 2019 8:22 am

MotoTrojan wrote:
Sun Nov 17, 2019 11:18 pm
Was pretty close until recently actually. Your numbers seem off. I am buying domestic and international SCV right now though.
I think OP was giving the M* category average?

Vg small cap value index (VSIAX) 5 year return is 7.31% and M* indicates that is +2.47 vs. category average. VIOV is even a bit better at 7.94%.

You can get another small cap value number from M* by clicking on the small cap value section of the style box on their home page, taking you to: MSVL, with a 5 year return of 1.94%.

Without looking any further, that's a range of about 2-8% for small cap value 5 year returns, depending on your choice of index to use. :shock:
Time is your friend; impulse is your enemy. - John C. Bogle

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Re: Small Cap Value Investors: Time to Back Up the Truck?

Post by lazyday » Mon Nov 18, 2019 8:38 am

nisiprius wrote:
Mon Nov 18, 2019 8:09 am
Asness is revising that to say "it's stupid to market time factors when Arnott says so, but smart to market time them when I say so."
To be fair, Arnott himself would probably agree that value has higher expected returns today than it did back when Asness made fun of Arnott.

https://interactive.researchaffiliates. ... =modelhist

Should show "Model History" for "US Market" "RAFI Value Factor". Look at the "Expected 5-yr. Excess Return" line.

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Re: Small Cap Value Investors: Time to Back Up the Truck?

Post by BergeronsBuddies » Mon Nov 18, 2019 8:48 am

whodidntante wrote:
Sun Nov 17, 2019 6:55 pm
I would back up the truck on EM value first. And then developed value. If you still have room in your truck, back it up for US SCV. Maybe your load will be worth something someday.
I agree, I would like exposure to small value EM. What is your favorite fund for this exposure? DGS? Any thoughts on the new AVEM? Too early?

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Re: Small Cap Value Investors: Time to Back Up the Truck?

Post by livesoft » Mon Nov 18, 2019 8:51 am

FWIW, I have lot of money in DGS in a tax-advantaged account. I've never made any money in it, so maybe now is the time for others to buy it? :twisted:
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Re: Small Cap Value Investors: Time to Back Up the Truck?

Post by Forester » Mon Nov 18, 2019 9:42 am

I feel that we're in something of a no man's land at the moment. There are probably obvious opportunities right now staring us in the face but they'll only be known 5 years or so from now. And the people today with those calls, could be broken clocks, or correct for the wrong reasons. Some people are bullish on gold, EM, ex-US, so in other words the early 2000s will roll around again. Others think China is the next Japan and that the USA will be a growth-y economy for the foreseeable future.

As always there are very convincing well-meaning smart individuals behind every perspective.

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Re: Small Cap Value Investors: Time to Back Up the Truck?

Post by MotoTrojan » Mon Nov 18, 2019 10:08 am

BergeronsBuddies wrote:
Mon Nov 18, 2019 8:48 am
whodidntante wrote:
Sun Nov 17, 2019 6:55 pm
I would back up the truck on EM value first. And then developed value. If you still have room in your truck, back it up for US SCV. Maybe your load will be worth something someday.
I agree, I would like exposure to small value EM. What is your favorite fund for this exposure? DGS? Any thoughts on the new AVEM? Too early?
I’ve been buying AVDV, the developed small value fund. No distinct EM allocation and not sure I’ll ever have one but I wouldn’t hesitate to buy AVEM.

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Re: Small Cap Value Investors: Time to Back Up the Truck?

Post by markcoop » Mon Nov 18, 2019 10:16 am

So if the whole market drops, but SV does not drop as much, would that be considered a win? Or perhaps the whole market drops and SV drops even further, but then on the eventual recovery SV takes off. Would that be considered a win? So hard to predict how and when the gap will close. Having said that, I have recently over-rebalanced out of TSM, in effect leaving a greater percentage of my domestic stock in SV.
Mark

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Re: Small Cap Value Investors: Time to Back Up the Truck?

Post by harvestbook » Mon Nov 18, 2019 10:37 am

I'll just stay at 15 percent since my truck is full of turnips.
I'm not smart enough to know, and I can't afford to guess.

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Re: Small Cap Value Investors: Time to Back Up the Truck?

Post by 305pelusa » Mon Nov 18, 2019 10:40 am

BergeronsBuddies wrote:
Mon Nov 18, 2019 8:48 am
whodidntante wrote:
Sun Nov 17, 2019 6:55 pm
I would back up the truck on EM value first. And then developed value. If you still have room in your truck, back it up for US SCV. Maybe your load will be worth something someday.
I agree, I would like exposure to small value EM. What is your favorite fund for this exposure? DGS? Any thoughts on the new AVEM? Too early?
It depends on how you implement factor portfolio qualitatively or quantitatively. Many here simply add factor tilts by "feel", adding whichever funds look good in terms of the P/E ratios they hit, market caps, MOM screens, etc. Such people might reasonably add AVEM because it looks better than, say, FNDE or EMGF. The might add SLYV instead of VBR because it's "smaller", etc. I would say this is more qualitative

Others (myself included), care more about the overall factor exposure of the portfolio. We might, for instance, target a 0.2/0.2/0 SmB/HmL/WmL exposure. The advantage here is a much more precise measurement of risk and return. In these cases, a fund like AVEM is completely unsuitable. We have no way of knowing how much it will tends to load on factors and what kind of positive/negative alpha it tends to achieve in that process.

It depends on how you go about it.

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Re: Small Cap Value Investors: Time to Back Up the Truck?

Post by BergeronsBuddies » Mon Nov 18, 2019 11:05 am

305pelusa wrote:
Mon Nov 18, 2019 10:40 am
BergeronsBuddies wrote:
Mon Nov 18, 2019 8:48 am
whodidntante wrote:
Sun Nov 17, 2019 6:55 pm
I would back up the truck on EM value first. And then developed value. If you still have room in your truck, back it up for US SCV. Maybe your load will be worth something someday.
I agree, I would like exposure to small value EM. What is your favorite fund for this exposure? DGS? Any thoughts on the new AVEM? Too early?
It depends on how you implement factor portfolio qualitatively or quantitatively. Many here simply add factor tilts by "feel", adding whichever funds look good in terms of the P/E ratios they hit, market caps, MOM screens, etc. Such people might reasonably add AVEM because it looks better than, say, FNDE or EMGF. The might add SLYV instead of VBR because it's "smaller", etc. I would say this is more qualitative

Others (myself included), care more about the overall factor exposure of the portfolio. We might, for instance, target a 0.2/0.2/0 SmB/HmL/WmL exposure. The advantage here is a much more precise measurement of risk and return. In these cases, a fund like AVEM is completely unsuitable. We have no way of knowing how much it will tends to load on factors and what kind of positive/negative alpha it tends to achieve in that process.

It depends on how you go about it.
Thanks for the insights, I am most likely in your qualitative segment of investors (I really like SLYV), but would be interested in hearing what fund you would choose in the emerging markets space based on the historical data. Thanks!

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Re: Small Cap Value Investors: Time to Back Up the Truck?

Post by 305pelusa » Mon Nov 18, 2019 11:43 am

BergeronsBuddies wrote:
Mon Nov 18, 2019 11:05 am
305pelusa wrote:
Mon Nov 18, 2019 10:40 am
BergeronsBuddies wrote:
Mon Nov 18, 2019 8:48 am
whodidntante wrote:
Sun Nov 17, 2019 6:55 pm
I would back up the truck on EM value first. And then developed value. If you still have room in your truck, back it up for US SCV. Maybe your load will be worth something someday.
I agree, I would like exposure to small value EM. What is your favorite fund for this exposure? DGS? Any thoughts on the new AVEM? Too early?
It depends on how you implement factor portfolio qualitatively or quantitatively. Many here simply add factor tilts by "feel", adding whichever funds look good in terms of the P/E ratios they hit, market caps, MOM screens, etc. Such people might reasonably add AVEM because it looks better than, say, FNDE or EMGF. The might add SLYV instead of VBR because it's "smaller", etc. I would say this is more qualitative

Others (myself included), care more about the overall factor exposure of the portfolio. We might, for instance, target a 0.2/0.2/0 SmB/HmL/WmL exposure. The advantage here is a much more precise measurement of risk and return. In these cases, a fund like AVEM is completely unsuitable. We have no way of knowing how much it will tends to load on factors and what kind of positive/negative alpha it tends to achieve in that process.

It depends on how you go about it.
Thanks for the insights, I am most likely in your qualitative segment of investors (I really like SLYV), but would be interested in hearing what fund you would choose in the emerging markets space based on the historical data. Thanks!
I've only found a reasonably long segment of data (more than 2 decades) for SFENX/FNDE and EMGF. As well as the index funds of course (VEIEX/VWO, IEMG, etc).

What you choose depends on your factor exposure desires.

On the one hand,the factor funds above are fairly pricy and don't load that much on factors. On the other hand, the index funds themselves already carry negative size exposure and statistically significant negative alpha in a 3 Factor regression (due to their neg. MOM load), which makes their ER effectively higher.

Personally, I like SFENX/FNDE very much. And as others have said, it truly is dirt cheap right now.

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Re: Small Cap Value Investors: Time to Back Up the Truck?

Post by nedsaid » Mon Nov 18, 2019 11:44 am

rkhusky wrote:
Sun Nov 17, 2019 9:55 pm
If you believe in factor investing, you will know that SV is fully loaded on the market factor, such that you don’t need any TSM. If you are a true believer, you will be 100% SV.
I wish people would quit telling me how to think, that is if I really believe in factors that I have to make all or nothing bets. No I don't.
A fool and his money are good for business.

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Re: Small Cap Value Investors: Time to Back Up the Truck?

Post by willthrill81 » Mon Nov 18, 2019 11:45 am

nedsaid wrote:
Mon Nov 18, 2019 11:44 am
rkhusky wrote:
Sun Nov 17, 2019 9:55 pm
If you believe in factor investing, you will know that SV is fully loaded on the market factor, such that you don’t need any TSM. If you are a true believer, you will be 100% SV.
I wish people would quit telling me how to think, that is if I really believe in factors that I have to make all or nothing bets. No I don't.
Right. It's like saying that either you 'believe in' U.S. equities and should be 100% in them or you don't and you should be 100% ex-U.S. It's a completely faulty notion.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Small Cap Value Investors: Time to Back Up the Truck?

Post by willthrill81 » Mon Nov 18, 2019 12:07 pm

lazyday wrote:
Mon Nov 18, 2019 7:14 am
willthrill81, if you’re a diehard momentum investor, you might be an exception to my “lousy time” belief. I try to incorporate momentum into my decisions, but know that I cannot be a diehard momentum investor. It doesn’t fit with my frugal personality:
bluquark wrote:
Mon Sep 23, 2019 3:49 pm
One thing I notice is that investing strategies tend to have a foundation in the investor's sense of identity. US-only investors are proud patriots, and international-market-cap investors are proud cosmopolitans. Factor investors are proudly math/finance-theory-literate, and vanilla-index investors are proudly common-sensical.

In the event that an investor is temporarily convinced to go with a strategy that cuts against their sense of who they are and what matters, it is difficult to stay the course.
When it comes to investing (but not most other aspects of personal finance), I try to be as pragmatic as I can. I believe that I know myself well and that my strategy fits my personality, risk tolerance, goals, etc. I did a lot of research, both quantitative and qualitative, before arriving at it. My belief is that we should all be brutally honest and critical of our investment approach, including an openness to ideas different from our own, both when we're arriving at one and on a subsequent basis, although a healthy dose of inertia (i.e. 'staying the course' with one's current strategy) is probably best.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Taylor Larimore
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Re: Small Cap Value Investors: Time to Back Up the Truck?

Post by Taylor Larimore » Mon Nov 18, 2019 2:28 pm

Bogleheads:

The investment industry will rejoice when they read this thread.

Best wishes
Taylor
Jack Bogle's Words of Wisdom:"In the stock market, the more elaborate and abstruse the mathematics, the more uncertain and speculative are the conclusions we draw therefrom."
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Small Cap Value Investors: Time to Back Up the Truck?

Post by 3funder » Mon Nov 18, 2019 3:35 pm

fennewaldaj wrote:
Sun Nov 17, 2019 10:04 pm
whodidntante wrote:
Sun Nov 17, 2019 6:55 pm
I would back up the truck on EM value first. And then developed value. If you still have room in your truck, back it up for US SCV. Maybe your load will be worth something someday.
Yes this. Small cap value is cheap relative to large growth but its not all that cheap in absolute terms. EM value is actually cheap in absolute terms. If I was going to market time based on valuations it would be by over weighting EM and DM value.
+1

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Re: Small Cap Value Investors: Time to Back Up the Truck?

Post by rkhusky » Mon Nov 18, 2019 4:55 pm

nedsaid wrote:
Mon Nov 18, 2019 11:44 am
rkhusky wrote:
Sun Nov 17, 2019 9:55 pm
If you believe in factor investing, you will know that SV is fully loaded on the market factor, such that you don’t need any TSM. If you are a true believer, you will be 100% SV.
I wish people would quit telling me how to think, that is if I really believe in factors that I have to make all or nothing bets. No I don't.
Not sure where you got the idea anyone is trying to tell you what to think. Just making an observation.

For example, Vanguard's Small Value fund (VSIAX) has loadings of 1.02, 0.53, and 0.31, respectively for the market, size and value factors (according to Portfolio Visualizer). So, an investor does not need to add Total Stock Market (TSM) to obtain the market return. In order to obtain the risk level that you might want, just add the appropriate level of bonds to the small value (SV) fund.

Reasons for adding TSM to SV include:
An investor believes in factor investing, but does not want such a high loading to the small and value factors, because they might not out-perform in the future. Therefore, the investor dilutes those factors by adding TSM to SV.
An investor is not fully convinced of factor investing and wants to hedge his bets in case it turns out not to work in the future, and so adds some TSM to his factor portfolio.
An investor does not believe in factor investing, but thinks that SV might out-perform in the future and so adds some SV to their TSM portfolio.
Last edited by rkhusky on Mon Nov 18, 2019 5:01 pm, edited 1 time in total.

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Re: Small Cap Value Investors: Time to Back Up the Truck?

Post by rkhusky » Mon Nov 18, 2019 4:59 pm

willthrill81 wrote:
Mon Nov 18, 2019 11:45 am
Right. It's like saying that either you 'believe in' U.S. equities and should be 100% in them or you don't and you should be 100% ex-U.S. It's a completely faulty notion.
If you fully believe that the US will out-perform Int'l in the future, it makes no sense to invest in Int'l stocks.

If you aren't sure, then you hedge your bets by investing in both.

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Re: Small Cap Value Investors: Time to Back Up the Truck?

Post by willthrill81 » Mon Nov 18, 2019 5:07 pm

rkhusky wrote:
Mon Nov 18, 2019 4:59 pm
willthrill81 wrote:
Mon Nov 18, 2019 11:45 am
Right. It's like saying that either you 'believe in' U.S. equities and should be 100% in them or you don't and you should be 100% ex-U.S. It's a completely faulty notion.
If you fully believe that the US will out-perform Int'l in the future, it makes no sense to invest in Int'l stocks.

If you aren't sure, then you hedge your bets by investing in both.
The situation is no different for factor investors. They may believe that size, value, etc. will outperform over the long-term, but they may also acknowledge that 'the market can be irrational longer than you can remain solvent'. There's nothing inherently illogical with a tilt toward factors that does not go 'all in' for them. Saying otherwise is arguing for a false dichotomy.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Small Cap Value Investors: Time to Back Up the Truck?

Post by rossington » Mon Nov 18, 2019 5:20 pm

Taylor Larimore wrote:
Mon Nov 18, 2019 2:28 pm
Bogleheads:

The investment industry will rejoice when they read this thread.

Best wishes
Taylor
Jack Bogle's Words of Wisdom:"In the stock market, the more elaborate and abstruse the mathematics, the more uncertain and speculative are the conclusions we draw therefrom."
I agree. Even thought everyone is free to invest their money anyway they want, it seems that complexity is the chronic condition chosen more often than not. Choosing a more simplifed approach for so many conversely becomes the more difficult thing to do.
"Success is going from failure to failure without loss of enthusiasm." Winston Churchill.

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Re: Small Cap Value Investors: Time to Back Up the Truck?

Post by rkhusky » Mon Nov 18, 2019 8:52 pm

willthrill81 wrote:
Mon Nov 18, 2019 5:07 pm
They may believe that size, value, etc. will outperform over the long-term, but they may also acknowledge that 'the market can be irrational longer than you can remain solvent'.
Right. They don't fully believe in it. They have a certain level of doubt and don't go full in.

Although I don't think the market is irrational if value doesn't beat growth or large doesn't beat small. Just the opposite in fact.

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Re: Small Cap Value Investors: Time to Back Up the Truck?

Post by Scooter57 » Mon Nov 18, 2019 9:38 pm

Factors are not an entity, with scientific properties. They are an academic construct derived from bavktesting

Just defining "value" as a metric can lead to endless debates. Funds often use very simplistic easily monitored criteria like price to book or return on equity. Others who call themselves value investors, like a younger Buffett did, go deep into annual reports and carefully analyze the nonquantitative aspects of the business to determine right pricing and look for undervalued companies.

I often wonder how msny people posting here, "Swedroe says,..." When arguing for value funds even know how value stocks are defined. I see such sweeping stayements made. But when I remember that the market is made up of individual stocks, and then look at the specific stocks held by various value funds, I see a hodgepodge of companies many of which achieve similar quantitative measurements with very different business models and prospects.

A couple years ago I used some software to evaluate just how valuey the holdings of Vanguard's value funds were, and after reading up on many of the companies they chose I found there was usually a good qualitative reason why most of these stocks appeared cheap-- usually a very real threat to their business. (Think Borders in 2009 when Kindle ebooks first emerged.)

I have huge respect for people who get Nobel prizes in hard sciences. But economics, despite its pretensions and Mr. Nobel's Victorian hopes for it, is no more of a science than sociology, and it depends as do so many of the social sciences on obsessively rigorous statistics applied to ridiculously poorly defined soft data.

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Re: Small Cap Value Investors: Time to Back Up the Truck?

Post by nedsaid » Mon Nov 18, 2019 10:16 pm

rkhusky wrote:
Mon Nov 18, 2019 4:55 pm
nedsaid wrote:
Mon Nov 18, 2019 11:44 am
rkhusky wrote:
Sun Nov 17, 2019 9:55 pm
If you believe in factor investing, you will know that SV is fully loaded on the market factor, such that you don’t need any TSM. If you are a true believer, you will be 100% SV.
I wish people would quit telling me how to think, that is if I really believe in factors that I have to make all or nothing bets. No I don't.
Not sure where you got the idea anyone is trying to tell you what to think. Just making an observation.

For example, Vanguard's Small Value fund (VSIAX) has loadings of 1.02, 0.53, and 0.31, respectively for the market, size and value factors (according to Portfolio Visualizer). So, an investor does not need to add Total Stock Market (TSM) to obtain the market return. In order to obtain the risk level that you might want, just add the appropriate level of bonds to the small value (SV) fund.

Reasons for adding TSM to SV include:
An investor believes in factor investing, but does not want such a high loading to the small and value factors, because they might not out-perform in the future. Therefore, the investor dilutes those factors by adding TSM to SV.
An investor is not fully convinced of factor investing and wants to hedge his bets in case it turns out not to work in the future, and so adds some TSM to his factor portfolio.
An investor does not believe in factor investing, but thinks that SV might out-perform in the future and so adds some SV to their TSM portfolio.
I elect milder tilts. Part of what has happened is that the decade long Growth trend has over time reduced my Small/Value tilts. At one time 8% of my stocks were in Small/Value, last I looked it is 5%. I elected to let things ride and have only recently started to retilt. Also have elected not to abandon the Large Caps.
A fool and his money are good for business.

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Re: Small Cap Value Investors: Time to Back Up the Truck?

Post by 305pelusa » Mon Nov 18, 2019 10:55 pm

rkhusky wrote:
Mon Nov 18, 2019 4:55 pm

Reasons for adding TSM to SV include:
An investor believes in factor investing, but does not want such a high loading to the small and value factors, because they might not out-perform in the future. Therefore, the investor dilutes those factors by adding TSM to SV.
An investor is not fully convinced of factor investing and wants to hedge his bets in case it turns out not to work in the future, and so adds some TSM to his factor portfolio.
An investor does not believe in factor investing, but thinks that SV might out-perform in the future and so adds some SV to their TSM portfolio.
You forgot the biggest one in my opinion:
- An investor expects SV to outperform in the long run but is unwilling to tolerate the excessive tracking error and additional volatility produced by a full tilt.

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Re: Small Cap Value Investors: Time to Back Up the Truck?

Post by willthrill81 » Mon Nov 18, 2019 11:12 pm

rkhusky wrote:
Mon Nov 18, 2019 8:52 pm
willthrill81 wrote:
Mon Nov 18, 2019 5:07 pm
They may believe that size, value, etc. will outperform over the long-term, but they may also acknowledge that 'the market can be irrational longer than you can remain solvent'.
Right. They don't fully believe in it. They have a certain level of doubt and don't go full in.
That might be part of it, but an informed investor should be aware that it may take a long time, a decade or longer, for factor premia to manifest themselves and so hedge accordingly. For instance, someone might be 100% confident that stocks will outperform bonds over the next 20 years but not 100% confident that they won't need to access their funds before then and so don't have a 100% stock allocation.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Small Cap Value Investors: Time to Back Up the Truck?

Post by Nicolas » Mon Nov 18, 2019 11:28 pm

Scooter57 wrote:
Mon Nov 18, 2019 9:38 pm
I have huge respect for people who get Nobel prizes in hard sciences. But economics, despite its pretensions and Mr. Nobel's Victorian hopes for it, is no more of a science than sociology, and it depends as do so many of the social sciences on obsessively rigorous statistics applied to ridiculously poorly defined soft data.
The Nobel Prize in Economics was established in 1968 and first awarded in 1969, Mr. Nobel died in 1896. It was not a part of the original prizes but was added later.
https://en.wikipedia.org/wiki/Nobel_Mem ... c_Sciences

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Re: Small Cap Value Investors: Time to Back Up the Truck?

Post by illumination » Mon Nov 18, 2019 11:58 pm

I think small cap value will outperform over the next year or so. I have a small tilt towards it.

That being said, I don't have the same convictions about it over long periods for the future. I've read some analysis and articles that I think made some decent points about it and value investing in general that make me rethink some of the reasons I originally went with it. So I'll probably let it ride, but plan to let it be a shrinking part of my portfolio moving forward.

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Re: Small Cap Value Investors: Time to Back Up the Truck?

Post by rkhusky » Tue Nov 19, 2019 8:15 am

305pelusa wrote:
Mon Nov 18, 2019 10:55 pm
You forgot the biggest one in my opinion:
- An investor expects SV to outperform in the long run but is unwilling to tolerate the excessive tracking error and additional volatility produced by a full tilt.
willthrill81 wrote:
Mon Nov 18, 2019 11:12 pm
For instance, someone might be 100% confident that stocks will outperform bonds over the next 20 years but not 100% confident that they won't need to access their funds before then and so don't have a 100% stock allocation.
Good points, but wouldn't going 100% SV in stocks, while simultaneously reducing the stock allocation and increasing the bond allocation alleviate some of those concerns?

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Re: Small Cap Value Investors: Time to Back Up the Truck?

Post by 305pelusa » Tue Nov 19, 2019 9:06 am

rkhusky wrote:
Tue Nov 19, 2019 8:15 am
305pelusa wrote:
Mon Nov 18, 2019 10:55 pm
You forgot the biggest one in my opinion:
- An investor expects SV to outperform in the long run but is unwilling to tolerate the excessive tracking error and additional volatility produced by a full tilt.
willthrill81 wrote:
Mon Nov 18, 2019 11:12 pm
For instance, someone might be 100% confident that stocks will outperform bonds over the next 20 years but not 100% confident that they won't need to access their funds before then and so don't have a 100% stock allocation.
Good points, but wouldn't going 100% SV in stocks, while simultaneously reducing the stock allocation and increasing the bond allocation alleviate some of those concerns?
I thought your whole premise was that since SCV has beta of 1, if you truly believe in factors, you should tilt as much as possible. Even if factors don't outperform (0% return premium), you're still where you would be had you not tilted.

If you decrease the stock allocation, now your factors must outperform to make up the ground of decreased portfolio beta. Which is fine (and I do that), but that certainly steps up the level of faith and belief you must have in those factors past what your first comment implied.

Also, due to ERs, transaction costs, negative MOM and fund availability (especially Ex-US and EM), it's rather hard to get a significant enough tilt to really cut back much on stocks with long-only portfolios. So the asset allocation decision continues to be the driving decision of returns for most factor portfolios that are long only.

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