Small cap value vs. total market?

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Alexa9
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Re: Small cap value vs. total market?

Post by Alexa9 » Fri Jan 05, 2018 4:43 pm

willthrill81 wrote:
Fri Jan 05, 2018 4:35 pm
Alexa9 wrote:
Fri Jan 05, 2018 4:32 pm
If this isn't reason to tilt to small cap (value) I don't know what is:

The Top 100 (largest) Holdings in VTI make up 53% of the fund (Out of 3,600)
The Top 200 Holdings in VTI make up 67% of the fund
The Top 300 Holdings in VTI make up 75% of the fund
The Top 400 Holdings in VTI make up 80% of the fund
The Top 500 Holdings in VTI make up 83% of the fund

Even more surprising!:
The Bottom 1000 (smallest) Holdings in VTI make up just 0.2% of the fund
The Bottom 2000 Holdings in VTI make up 2% of the fund
The Bottom 3000 Holdings in VTI make up 13% of the fund

VTI is not much different than VOO (S&P 500)
How does that lead one to conclude that tilting toward SCV is appropriate?
VTI is a large cap fund. Here is it's makeup:

Image

I see denying the theory of the small value premium like denying the theory of evolution. Read Fama/French and Larry Swedroe if you're not convinced.

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willthrill81
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Re: Small cap value vs. total market?

Post by willthrill81 » Fri Jan 05, 2018 4:52 pm

Alexa9 wrote:
Fri Jan 05, 2018 4:43 pm
willthrill81 wrote:
Fri Jan 05, 2018 4:35 pm
Alexa9 wrote:
Fri Jan 05, 2018 4:32 pm
If this isn't reason to tilt to small cap (value) I don't know what is:

The Top 100 (largest) Holdings in VTI make up 53% of the fund (Out of 3,600)
The Top 200 Holdings in VTI make up 67% of the fund
The Top 300 Holdings in VTI make up 75% of the fund
The Top 400 Holdings in VTI make up 80% of the fund
The Top 500 Holdings in VTI make up 83% of the fund

Even more surprising!:
The Bottom 1000 (smallest) Holdings in VTI make up just 0.2% of the fund
The Bottom 2000 Holdings in VTI make up 2% of the fund
The Bottom 3000 Holdings in VTI make up 13% of the fund

VTI is not much different than VOO (S&P 500)
How does that lead one to conclude that tilting toward SCV is appropriate?
VTI is a large cap fund. Here is it's makeup:

Image

I see denying the theory of the small value premium like denying the theory of evolution. Read Fama/French and Larry Swedroe if you're not convinced.
I am convinced, but the holdings of a large cap fund don't have anything to do with the long-term returns of SCV.
“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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Alexa9
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Re: Small cap value vs. total market?

Post by Alexa9 » Fri Jan 05, 2018 4:55 pm

willthrill81 wrote:
Fri Jan 05, 2018 4:52 pm
Alexa9 wrote:
Fri Jan 05, 2018 4:43 pm
willthrill81 wrote:
Fri Jan 05, 2018 4:35 pm
Alexa9 wrote:
Fri Jan 05, 2018 4:32 pm
If this isn't reason to tilt to small cap (value) I don't know what is:

The Top 100 (largest) Holdings in VTI make up 53% of the fund (Out of 3,600)
The Top 200 Holdings in VTI make up 67% of the fund
The Top 300 Holdings in VTI make up 75% of the fund
The Top 400 Holdings in VTI make up 80% of the fund
The Top 500 Holdings in VTI make up 83% of the fund

Even more surprising!:
The Bottom 1000 (smallest) Holdings in VTI make up just 0.2% of the fund
The Bottom 2000 Holdings in VTI make up 2% of the fund
The Bottom 3000 Holdings in VTI make up 13% of the fund

VTI is not much different than VOO (S&P 500)
How does that lead one to conclude that tilting toward SCV is appropriate?
VTI is a large cap fund. Here is it's makeup:

I see denying the theory of the small value premium like denying the theory of evolution. Read Fama/French and Larry Swedroe if you're not convinced.
I am convinced, but the holdings of a large cap fund don't have anything to do with the long-term returns of SCV.
Sure they do. They only hold 3% small value stocks. You're not capturing the small value premium if you don't tilt significantly. Market weight is far from ideal but that seems to be the common mantra on this website.

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willthrill81
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Re: Small cap value vs. total market?

Post by willthrill81 » Fri Jan 05, 2018 4:59 pm

Alexa9 wrote:
Fri Jan 05, 2018 4:55 pm
willthrill81 wrote:
Fri Jan 05, 2018 4:52 pm
Alexa9 wrote:
Fri Jan 05, 2018 4:43 pm
willthrill81 wrote:
Fri Jan 05, 2018 4:35 pm
Alexa9 wrote:
Fri Jan 05, 2018 4:32 pm
If this isn't reason to tilt to small cap (value) I don't know what is:

The Top 100 (largest) Holdings in VTI make up 53% of the fund (Out of 3,600)
The Top 200 Holdings in VTI make up 67% of the fund
The Top 300 Holdings in VTI make up 75% of the fund
The Top 400 Holdings in VTI make up 80% of the fund
The Top 500 Holdings in VTI make up 83% of the fund

Even more surprising!:
The Bottom 1000 (smallest) Holdings in VTI make up just 0.2% of the fund
The Bottom 2000 Holdings in VTI make up 2% of the fund
The Bottom 3000 Holdings in VTI make up 13% of the fund

VTI is not much different than VOO (S&P 500)
How does that lead one to conclude that tilting toward SCV is appropriate?
VTI is a large cap fund. Here is it's makeup:

I see denying the theory of the small value premium like denying the theory of evolution. Read Fama/French and Larry Swedroe if you're not convinced.
I am convinced, but the holdings of a large cap fund don't have anything to do with the long-term returns of SCV.
Sure they do. They only hold 3% small value stocks. You're not capturing the small value premium if you don't tilt significantly.
Well yes, you cannot capture any tilt (other than country) by owning a market-cap weighted index of the entire market.
“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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Doc
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Re: Small cap value vs. total market?

Post by Doc » Fri Jan 05, 2018 5:27 pm

grog wrote:
Fri Jan 05, 2018 4:41 pm
But you wouldn’t sub SCV and TSM one for one, would you? Shouldn’t the comparison be between TSM and SCV diluted with fixed income/cash? Does SCV give you, if not a free lunch, the claimed free dessert?
Right. Read about it in "Reducing the Risk of Black Swans: Using the Science of Investing to Capture Returns With Less Volatility"
by Larry Swedroe (Author),‎ Kevin Grogan (Author)

The basic concept is to increase returns AND risk by substituting SCV for the larger cap group and then re-establish the original risk profile by an increase in your fixed income allocation.

It isn't a free lunch in just reduces the chewy "fat tails" in the risk curve. (The fat tails are the black swans.)
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

heyyou
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Re: Small cap value vs. total market?

Post by heyyou » Fri Jan 05, 2018 8:29 pm

Trev H settled the performance debate for BHs in 2009.
A portfolio of 25% each of domestic LB, SV, and foreign LV, SB, all from VG, outperforms VG's Total Market fund.
viewtopic.php?f=10&t=38374
My 1/N allocation has done well enough to suit me, which does matter. The Callan Periodic Table shows noticeable annual volatility for every equity sub-asset class.

Pray tell, what is so special about market cap weighting which just shows the results of a popularity contest? My trusting of what others prefer was destroyed in the 2000 Crash, and is reinforced every time I drive in rush hour traffic or read the news. If popularity matters most, why not just buy the FAANG stocks instead of TSM where the FAANGs' performances are somewhat diluted by other stocks?
FAANG: acronym for Facebook, Apple, Amazon, Netflix, Alphabet's Google
Don't know and don't care how others allocate, just here to argue.
Last edited by heyyou on Fri Jan 05, 2018 8:48 pm, edited 1 time in total.

venkman
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Re: Small cap value vs. total market?

Post by venkman » Fri Jan 05, 2018 8:46 pm

grog wrote:
Fri Jan 05, 2018 4:41 pm
But you wouldn’t sub SCV and TSM one for one, would you? Shouldn’t the comparison be between TSM and SCV diluted with fixed income/cash? Does SCV give you, if not a free lunch, the claimed free dessert?
Not really a free anything, I would say. SCV gives you greater expected return in exchange for taking on greater risk. I would expect the risk-adjusted return of SCV and TSM to be roughly equal over the long term. There could be a free lunch from SCV's diversification value, since it isn't perfectly correlated with TSM.

Backtesting with hypothetical portfolios suggests yes until about 15 years ago, coincidentally just a few years after when actual small value index funds became readily available.
I would absolutely expect the size of the historical SCV premium to decrease along with the decreasing investment costs. But even if the investment costs of TSM and SCV were exactly the same, I would still expect SCV to return a risk premium over TSM.

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Ditchwitch
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Re: Small cap value vs. total market?

Post by Ditchwitch » Fri Jan 05, 2018 8:55 pm

livesoft wrote:
Mon Dec 11, 2017 1:08 pm
I tilt to SCV and keep only 45% to 50% of my equities in large-caps. Here's what I think:

SCV is not for the buy-and-hold person. One has to rebalance into SCV when it is doing terrible and out of SCV when it has done great. The swings of SCV are much more than the swings of a total market index fund. If one merely watches SCV go up and down or go down and up, then there is no point for that person to invest in SCV.

And sometimes the rebalancing opportunities in SCV are fleeting, so if you are not paying attention, then you will miss them. Fortunately, brokerages will send an alert via e-mail or a text message when there is a rebalancing opportunity, so it is pretty hard to miss a rebalancing opportunity. For folks who do not want to worry about such alerts, then Total Stock Market is perfect for them,

Furthermore, the swings of SCV that one will get alerts on their smart phone will not show up when backtesting with Portfolio Visualizer or other means. That's because the best opportunities occur intraday. One doesn't have to act on every alert, but one should be able to act on enough of them to make a difference.
I included a SC tilt in my portfolio too (IJR) but wasn't really planning on trading on the back of it's volatility in the mid-term. Fidelity has trading tools that would allow me to set up alerts but am a bit weary of getting sucked into watching ETF prices...isn't "rebalancing on it's volatility" just a fancy way of timing the market and short term trading?
“Anyone who has never made a mistake has never tried anything new.” | ― Albert Einstein

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willthrill81
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Re: Small cap value vs. total market?

Post by willthrill81 » Fri Jan 05, 2018 9:00 pm

venkman wrote:
Fri Jan 05, 2018 8:46 pm
grog wrote:
Fri Jan 05, 2018 4:41 pm
But you wouldn’t sub SCV and TSM one for one, would you? Shouldn’t the comparison be between TSM and SCV diluted with fixed income/cash? Does SCV give you, if not a free lunch, the claimed free dessert?
Not really a free anything, I would say. SCV gives you greater expected return in exchange for taking on greater risk. I would expect the risk-adjusted return of SCV and TSM to be roughly equal over the long term. There could be a free lunch from SCV's diversification value, since it isn't perfectly correlated with TSM.
Over the last 46 years, TSM had a Sharpe ratio of .42, whereas SCV had a Sharpe ratio of .59. So the risk-adjusted returns are much better with SCV. That's part of the reason that Larry Swedroe recommends SCV over TSM in the "Larry Portfolio."
“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

Mark D
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Re: Small cap value vs. total market?

Post by Mark D » Fri Jan 05, 2018 9:18 pm

willthrill81 wrote:
Fri Jan 05, 2018 4:25 pm
Mark D wrote:
Fri Jan 05, 2018 3:48 pm
willthrill81 wrote:
Fri Jan 05, 2018 1:49 pm
Mark D wrote:
Fri Jan 05, 2018 10:25 am
willthrill81 wrote:
Wed Dec 13, 2017 11:54 pm


Yes, it does, even though it may take a while to occur. Excellent observation.
Hello, I have enjoyed reading these forums from time to time and this is my first post. About RTM: if what Bogle means in that 2002 talk, and what RTM means here, is the phenomenon of reversion to the mean described in probability theory and statistics, then, if I understand correctly, "past performance does not forecast future performance" and RTM are not inconsistent with one another. Yes, RTM says that future performance, in relation to past performance, is going to be worse, but it is not saying that the future performance will be poorer than it would have been if the past outperformance had not occurred. Right?

I think this was explained by TheEternalVortex in 2010. viewtopic.php?p=651182#p651182

Mark
The problem with the "past performance does not predict future performance" statement is that it assumes that returns are 'memory-less'. That is demonstrably false; over the short- and mid-term, equities tend to perform in a similar way to how they have in the recent past. This is the well-studied momentum effect. Over the long-term, however, RTM tends to set in on a macro level.

On a macro level, returns are not random.
OK thanks. If I understand correctly, you are saying that past performance and future performance are not statistically independent of one another. Okay, but my point was that RTM does not imply anything one way or the other about independence. I took Tamalak to have understood RTM something along the lines of the gambler's fallacy, and I wanted to point out that it need not be so understood. Yes?
The gambler's fallacy does not apply to asset class returns because the returns are not random (i.e. returns are not independent of each other). RTM does indeed directly imply that returns are not independent of each other.
If by RTM we mean the well-known phenomenon cited above, how does it imply that? Say you flip a fair coin ten times and it comes up heads each time. On the eleventh toss, what is the probability that it comes up heads? 50%. That is reversion to the mean. But the outcomes of each toss are independent.

Maybe you mean something else by RTM?

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willthrill81
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Re: Small cap value vs. total market?

Post by willthrill81 » Fri Jan 05, 2018 9:31 pm

Mark D wrote:
Fri Jan 05, 2018 9:18 pm
willthrill81 wrote:
Fri Jan 05, 2018 4:25 pm
Mark D wrote:
Fri Jan 05, 2018 3:48 pm
willthrill81 wrote:
Fri Jan 05, 2018 1:49 pm
Mark D wrote:
Fri Jan 05, 2018 10:25 am


Hello, I have enjoyed reading these forums from time to time and this is my first post. About RTM: if what Bogle means in that 2002 talk, and what RTM means here, is the phenomenon of reversion to the mean described in probability theory and statistics, then, if I understand correctly, "past performance does not forecast future performance" and RTM are not inconsistent with one another. Yes, RTM says that future performance, in relation to past performance, is going to be worse, but it is not saying that the future performance will be poorer than it would have been if the past outperformance had not occurred. Right?

I think this was explained by TheEternalVortex in 2010. viewtopic.php?p=651182#p651182

Mark
The problem with the "past performance does not predict future performance" statement is that it assumes that returns are 'memory-less'. That is demonstrably false; over the short- and mid-term, equities tend to perform in a similar way to how they have in the recent past. This is the well-studied momentum effect. Over the long-term, however, RTM tends to set in on a macro level.

On a macro level, returns are not random.
OK thanks. If I understand correctly, you are saying that past performance and future performance are not statistically independent of one another. Okay, but my point was that RTM does not imply anything one way or the other about independence. I took Tamalak to have understood RTM something along the lines of the gambler's fallacy, and I wanted to point out that it need not be so understood. Yes?
The gambler's fallacy does not apply to asset class returns because the returns are not random (i.e. returns are not independent of each other). RTM does indeed directly imply that returns are not independent of each other.
If by RTM we mean the well-known phenomenon cited above, how does it imply that? Say you flip a fair coin ten times and it comes up heads each time. On the eleventh toss, what is the probability that it comes up heads? 50%. That is reversion to the mean. But the outcomes of each toss are independent.

Maybe you mean something else by RTM?
"Reversion to the mean, also called regression to the mean, is the statistical phenomenon stating that the greater the deviation of a random variate from its mean, the greater the probability that the next measured variate will deviate less far. In other words, an extreme event is likely to be followed by a less extreme event."
http://mathworld.wolfram.com/ReversiontotheMean.html

Coin tosses are 'memory-less'. There is no real RTM when it comes to coin tosses because each toss is independent of the others. RTM can occur in situations where future events are dependent on past events (e.g. asset classes). As noted above, the probability of future events is dependent on prior events; this is not the case with coin tosses.
“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

venkman
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Re: Small cap value vs. total market?

Post by venkman » Fri Jan 05, 2018 9:32 pm

willthrill81 wrote:
Fri Jan 05, 2018 9:00 pm
Over the last 46 years, TSM had a Sharpe ratio of .42, whereas SCV had a Sharpe ratio of .59. So the risk-adjusted returns are much better with SCV. That's part of the reason that Larry Swedroe recommends SCV over TSM in the "Larry Portfolio."
Fair enough. But SCV companies also have a significantly higher risk of failing completely, which accounts for some part of the risk premium, even if it doesn't show up in the standard deviation. Kinda like high-yield bonds vs. investment-grade.

So, the TOTAL risk-adjusted performance is probably similar, if impossible to pin down mathematically. :happy

Dead Man Walking
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Re: Small cap value vs. total market?

Post by Dead Man Walking » Fri Jan 05, 2018 10:49 pm

Will someone please show me performance statistics that show that retail small cap value mutual funds have outperformed retail small cap blend mutual funds over periods of time more than 15 years. I tilt toward small caps, but don't buy the small cap value argument. I think that the key is small caps period. Please remember that I want stats that are limited to retail mutual funds available to all investors. Academic stats that go back to 1926 are interesting; however, they are not relevant to most investors who invest in retail mutual funds. My point is that most people need information that they can apply to asset allocations in the real world. Thanks in advance to those who reply to this post.

DMW

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Taylor Larimore
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Re: Small cap value vs. total market?

Post by Taylor Larimore » Fri Jan 05, 2018 11:00 pm

Dead Man Walking wrote:
Fri Jan 05, 2018 10:49 pm
Will someone please show me performance statistics that show that retail small cap value mutual funds have outperformed retail small cap blend mutual funds over periods of time more than 15 years. I tilt toward small caps, but don't buy the small cap value argument. I think that the key is small caps period. Please remember that I want stats that are limited to retail mutual funds available to all investors. Academic stats that go back to 1926 are interesting; however, they are not relevant to most investors who invest in retail mutual funds. My point is that most people need information that they can apply to asset allocations in the real world. Thanks in advance to those who reply to this post.

DMW
DMW:

Using past performance statistics to project future performance is useless at best; dangerous at worst. Read what investing experts say about "Past Performance":

What Experts Say About "Past Performance"

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

grog
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Re: Small cap value vs. total market?

Post by grog » Fri Jan 05, 2018 11:10 pm

willthrill81 wrote:
Fri Jan 05, 2018 9:00 pm
venkman wrote:
Fri Jan 05, 2018 8:46 pm
grog wrote:
Fri Jan 05, 2018 4:41 pm
But you wouldn’t sub SCV and TSM one for one, would you? Shouldn’t the comparison be between TSM and SCV diluted with fixed income/cash? Does SCV give you, if not a free lunch, the claimed free dessert?
Not really a free anything, I would say. SCV gives you greater expected return in exchange for taking on greater risk. I would expect the risk-adjusted return of SCV and TSM to be roughly equal over the long term. There could be a free lunch from SCV's diversification value, since it isn't perfectly correlated with TSM.
Over the last 46 years, TSM had a Sharpe ratio of .42, whereas SCV had a Sharpe ratio of .59. So the risk-adjusted returns are much better with SCV. That's part of the reason that Larry Swedroe recommends SCV over TSM in the "Larry Portfolio."
I've noticed a couple of things with my backtests.

1) SCV actually did better in the last two bad markets. In 2008, TSM lost 37% while VBR lost 32% and IJS lost 29% on the calendar year which makes the bond-heavy Larry style portfolio look relatively fantastic for that year (this is a metric everyone seems to focus on). And then in the early 2000s bear market, SCV had relatively phenomenal returns in 2000 and 2001 and a milder loss in 2002. So in both bear markets it somehow did better, yet I doubt that will be generally be the case in future recessions/crises.

2) The relative bond heaviness also backtests well with the falling yields. But again not worth much prospectively.

3) Looking just at SCV, the performance has been decidedly unexceptional from 2003 on. It had a beta of about 1.2 and a slight negative alpha, incidentally pretty much the same as small-cap growth. To be fair though, that isn't true "underperformance," more like neutral. It just hasn't delivered anything special and any number of moderately elevated beta strategies would have worked about as well in a bond heavy portfolio (but with a worse 2008).

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willthrill81
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Re: Small cap value vs. total market?

Post by willthrill81 » Fri Jan 05, 2018 11:11 pm

Dead Man Walking wrote:
Fri Jan 05, 2018 10:49 pm
Will someone please show me performance statistics that show that retail small cap value mutual funds have outperformed retail small cap blend mutual funds over periods of time more than 15 years. I tilt toward small caps, but don't buy the small cap value argument. I think that the key is small caps period. Please remember that I want stats that are limited to retail mutual funds available to all investors. Academic stats that go back to 1926 are interesting; however, they are not relevant to most investors who invest in retail mutual funds. My point is that most people need information that they can apply to asset allocations in the real world. Thanks in advance to those who reply to this post.

DMW
From 2001-2017, VISVX returned 9.76%, while VSGIX returned 9.40%.
“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 vs. total market?

Post by willthrill81 » Fri Jan 05, 2018 11:15 pm

Taylor Larimore wrote:
Fri Jan 05, 2018 11:00 pm
Dead Man Walking wrote:
Fri Jan 05, 2018 10:49 pm
Will someone please show me performance statistics that show that retail small cap value mutual funds have outperformed retail small cap blend mutual funds over periods of time more than 15 years. I tilt toward small caps, but don't buy the small cap value argument. I think that the key is small caps period. Please remember that I want stats that are limited to retail mutual funds available to all investors. Academic stats that go back to 1926 are interesting; however, they are not relevant to most investors who invest in retail mutual funds. My point is that most people need information that they can apply to asset allocations in the real world. Thanks in advance to those who reply to this post.

DMW
DMW:

Using past performance statistics to project future performance is useless at best; dangerous at worst. Read what investing experts say about "Past Performance":

What Experts Say About "Past Performance"

Best wishes.
Taylor
Taylor, we must indeed be very cautious with using and interpreting backtested data to make decisions. However, a great deal of what we 'know' about finance is derived from the historical record. Ignoring that record wholesale seems imprudent, to say the least.

Does this mean that you will no longer post the performance of the 2nd grader portfolio compared to Marketwatch's other monitored portfolios?
“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

Dead Man Walking
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Re: Small cap value vs. total market?

Post by Dead Man Walking » Sat Jan 06, 2018 2:50 am

Taylor Larimore wrote:
Fri Jan 05, 2018 11:00 pm
Dead Man Walking wrote:
Fri Jan 05, 2018 10:49 pm
Will someone please show me performance statistics that show that retail small cap value mutual funds have outperformed retail small cap blend mutual funds over periods of time more than 15 years. I tilt toward small caps, but don't buy the small cap value argument. I think that the key is small caps period. Please remember that I want stats that are limited to retail mutual funds available to all investors. Academic stats that go back to 1926 are interesting; however, they are not relevant to most investors who invest in retail mutual funds. My point is that most people need information that they can apply to asset allocations in the real world. Thanks in advance to those who reply to this post.

DMW
DMW:

Using past performance statistics to project future performance is useless at best; dangerous at worst. Read what investing experts say about "Past Performance":

What Experts Say About "Past Performance"

Best wishes.
Taylor
Taylor,

I agree with the standard warning that past performance is not a guarantee of future results; however, the academics and experts who post here use historical data to support their theories. My post was a challenge to them to provide empirical data using retail mutual funds available to the general public that validates their theories. I have issued this challenge before and have never been given a satisfactory answer. The fact that ivory tower experts can not prove a dumb hick like me wrong says a lot about the value of their theories.

I value your posts about index fund investing. I have referred many neophytes to your 3 fund portfolio. You, Jack, and Mel have greatly influenced my investment philosophy.

Respectfully yours,

DMW

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Re: Small cap value vs. total market?

Post by livesoft » Sat Jan 06, 2018 7:03 am

Ditchwitch wrote:
Fri Jan 05, 2018 8:55 pm
...isn't "rebalancing on it's volatility" just a fancy way of timing the market and short term trading?
Why yes it is.
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Rebalancing -- Definition

Post by Taylor Larimore » Sat Jan 06, 2018 8:17 am

livesoft wrote:
Sat Jan 06, 2018 7:03 am
Ditchwitch wrote:
Fri Jan 05, 2018 8:55 pm
...isn't "rebalancing on it's volatility" just a fancy way of timing the market and short term trading?
Why yes it is.
Bogleheads:

Sometimes the purpose of "rebalancing" is misunderstood. This is Investopedia's definition (underline mine):
Rebalancing is the process of realigning the weightings of a portfolio of assets. Rebalancing involves periodically buying or selling assets in a portfolio to maintain an original desired level of asset allocation.
Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Rebalancing -- Definition

Post by Ditchwitch » Sat Jan 06, 2018 8:38 am

Taylor Larimore wrote:
Sat Jan 06, 2018 8:17 am
livesoft wrote:
Sat Jan 06, 2018 7:03 am
Ditchwitch wrote:
Fri Jan 05, 2018 8:55 pm
...isn't "rebalancing on it's volatility" just a fancy way of timing the market and short term trading?
Why yes it is.
Bogleheads:

Sometimes the purpose of "rebalancing" is misunderstood. This is Investopedia's definition (underline mine):
Rebalancing is the process of realigning the weightings of a portfolio of assets. Rebalancing involves periodically buying or selling assets in a portfolio to maintain an original desired level of asset allocation.
Best wishes.
Taylor
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Re: Small cap value vs. total market?

Post by Mark D » Sat Jan 06, 2018 9:09 am

willthrill81 wrote:
Fri Jan 05, 2018 9:31 pm
Mark D wrote:
Fri Jan 05, 2018 9:18 pm
willthrill81 wrote:
Fri Jan 05, 2018 4:25 pm
Mark D wrote:
Fri Jan 05, 2018 3:48 pm
willthrill81 wrote:
Fri Jan 05, 2018 1:49 pm


The problem with the "past performance does not predict future performance" statement is that it assumes that returns are 'memory-less'. That is demonstrably false; over the short- and mid-term, equities tend to perform in a similar way to how they have in the recent past. This is the well-studied momentum effect. Over the long-term, however, RTM tends to set in on a macro level.

On a macro level, returns are not random.
OK thanks. If I understand correctly, you are saying that past performance and future performance are not statistically independent of one another. Okay, but my point was that RTM does not imply anything one way or the other about independence. I took Tamalak to have understood RTM something along the lines of the gambler's fallacy, and I wanted to point out that it need not be so understood. Yes?
The gambler's fallacy does not apply to asset class returns because the returns are not random (i.e. returns are not independent of each other). RTM does indeed directly imply that returns are not independent of each other.
If by RTM we mean the well-known phenomenon cited above, how does it imply that? Say you flip a fair coin ten times and it comes up heads each time. On the eleventh toss, what is the probability that it comes up heads? 50%. That is reversion to the mean. But the outcomes of each toss are independent.

Maybe you mean something else by RTM?
"Reversion to the mean, also called regression to the mean, is the statistical phenomenon stating that the greater the deviation of a random variate from its mean, the greater the probability that the next measured variate will deviate less far. In other words, an extreme event is likely to be followed by a less extreme event."
http://mathworld.wolfram.com/ReversiontotheMean.html

Coin tosses are 'memory-less'. There is no real RTM when it comes to coin tosses because each toss is independent of the others. RTM can occur in situations where future events are dependent on past events (e.g. asset classes). As noted above, the probability of future events is dependent on prior events; this is not the case with coin tosses.
Note that what you describe in the second paragraph is not what is given in the MathWorld definition. Of course there is reversion to the mean in coin tosses. If you flip a coin ten times and it comes up heads 10 times, the expected value of the number of heads in the next batch of 10 tosses is 5. Or, as MathWorld puts it, the greater the past deviation, the greater the probability that the next deviation will be less than that extreme. But, with coin tosses, that's not because there's any memory of the previous run of tosses. It's because the mean is the most likely outcome in the first place.

My question would be what Bogle means by "reversion to the mean" or "RTM" in that 2002 talk. I think that he means it in the usual mathematical sense, one that applies to coin tosses and does not imply anything about the statistical dependence of future on past events.

RTM is not saying that doing better than average is likely to be followed by doing worse than average. That would require memory. It is saying that doing a lot better than average is likely to be followed by doing not as much different from average. That does not require memory.

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Re: Small cap value vs. total market?

Post by packer16 » Sat Jan 06, 2018 9:30 am

We appear to be back to the old debate of whether SCV adds value to a portfolio. One note SCV is not Value Investing in the Graham & Dodd tradition & to conflate the two is mlsleading. SCV is a trading strategy used by hedge fund to try to beat the market. Now some have tried to turn it into an investment strategy that IMO turns it into an active investment strategy. I am an active value investor since I started to invest in 2000. I am also a believer in market efficiency & thus IMO value investing works in specific situations in primarily lightly traded markets, as there is not enough trading to impound information in a small subset of securities. Even in the lightly traded securities, there is good amount of efficiency.

IMO value investing involves alot more than a SCV screen. If you look at stocks you get out of such a screen and those found in SCV portfolios you will see that these a cheap for a reason, they are primarily highly levered declining businesses & there is the occasional good business with poor near term prospects. Now over time there has been more of the former than the later and thus using a metric like the growth value spread can become meaningless if the growth firms are increasing in quality while the value firms are decreasing, as you would expect in a market that is becoming more efficient.

The additional analysis beyond the screen is the difference between Value Investing and SCV investing. This is also the "secret sauce" Buffet & other value investors add to the process. IMO there can be value added here but it is a zero sum game like SCV investing.

I think you need to examine any active investment strategy in light of market efficiency. This versus past data will tell you if you have a sustainable strategy of not. There is a book "Pitch the Perfect Investment" that deals with the subject of active management & market efficiency in an interesting manner. Market efficiency is dependent upon information dissemination, processing (are there diverse & independent models) & incorporation into prices. Lets look at SCV in this framework. Is the information about SCV disseminated? I would say yes. It was first observed in early 1990s and was into the popular press by the time Larry S. did his NYT article in late 2011. Second, are there independent & diverse models support SCV? I would say yes from the front end of a typical value investors process to the various academic models available. Third, is there a mechanism available to incorporate the information. For SCV I would say yes as the implementations using relatively large and liquid securities to allow for withdraws. There are some funds that invest in the less liquid securities & these IMO have better chance of delivering on the SCV promises. So based upon this model of market efficiency SCV should do no better or worse than total market value but will provide more volatility.

All of the evidence I have seen of outperformance is based upon data pre-2011 when SCV information was not fully disseminated to the market & the strategies were not as widely implemented in the market. Since 2011, the performance has shown what you would expect from an arbed factor. I was a believer in SCV until last year when the expected outperformance did not arrive & I tried to figure out why. As I see it this is a hot space right now & the efficiency process is complete for SCV so much of the outperformance of the past will IMO not happen in the future. Also, the underlying data for the reversion to the mean (the value/growth spread) has not been examined to see if some or most of the spread is warranted via the value stocks becoming crappier and the growth stock becoming higher quality over time as the market becomes more efficient over time as we have more professionals vs. non-professionals in the market.

Now my focus has been in specific segments of the market (Int'l & EM) for value investing and the timing of SCV to distressed situations. As a side note, qualitative judgment (not captured in a screen) may be more important in international & EM than in the US due to culture & governance issues. These are IMO the remaining area where SCV & value investing have not been widely implemented. At some points these areas may be arbed also & I will have to move onto something else.

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Re: Small cap value vs. total market?

Post by Top99% » Sat Jan 06, 2018 12:49 pm

packer16 wrote:
Sat Jan 06, 2018 9:30 am
All of the evidence I have seen of outperformance is based upon data pre-2011 when SCV information was not fully disseminated to the market & the strategies were not as widely implemented in the market. Since 2011, the performance has shown what you would expect from an arbed factor. I was a believer in SCV until last year when the expected outperformance did not arrive & I tried to figure out why. As I see it this is a hot space right now & the efficiency process is complete for SCV so much of the outperformance of the past will IMO not happen in the future.
Pacler
It seems to me like the SCV premium being arbed away argument could also apply to the shift towards TSM (which in reality is a large cap blend) index finds arbing away large cap growth stock (TSM essentially is 80% large cap) returns. The US TSM index space also seems very hot right now with it becoming increasingly prevalent in 401Ks. Granted there is more "space" for investment money in large cap stocks but there seems to be a very large amount of money pouring into the space. Personally I see compelling enough arguments on both sides of the TSM and factor investing continuum to split my bets between both and add in some alts as well.
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Re: Small cap value vs. total market?

Post by saltycaper » Sat Jan 06, 2018 3:45 pm

Taylor Larimore wrote:
Fri Jan 05, 2018 11:00 pm

Using past performance statistics to project future performance is useless at best; dangerous at worst. Read what investing experts say about "Past Performance":

What Experts Say About "Past Performance"

Best wishes.
Taylor
You frequently use past performance statistics when the statistics support the argument you are trying to make, but here and elsewhere you dismiss past performance when it threatens the argument you are trying to make. I see negative value in this approach.

Likewise, you invoke "experts" when they agree with you but seem to dismiss them when they don't. (And sometimes the same "expert"!) I see negative value in this approach as well.
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Re: Small cap value vs. total market?

Post by willthrill81 » Sat Jan 06, 2018 3:59 pm

Mark D wrote:
Sat Jan 06, 2018 9:09 am
willthrill81 wrote:
Fri Jan 05, 2018 9:31 pm
Mark D wrote:
Fri Jan 05, 2018 9:18 pm
willthrill81 wrote:
Fri Jan 05, 2018 4:25 pm
Mark D wrote:
Fri Jan 05, 2018 3:48 pm


OK thanks. If I understand correctly, you are saying that past performance and future performance are not statistically independent of one another. Okay, but my point was that RTM does not imply anything one way or the other about independence. I took Tamalak to have understood RTM something along the lines of the gambler's fallacy, and I wanted to point out that it need not be so understood. Yes?
The gambler's fallacy does not apply to asset class returns because the returns are not random (i.e. returns are not independent of each other). RTM does indeed directly imply that returns are not independent of each other.
If by RTM we mean the well-known phenomenon cited above, how does it imply that? Say you flip a fair coin ten times and it comes up heads each time. On the eleventh toss, what is the probability that it comes up heads? 50%. That is reversion to the mean. But the outcomes of each toss are independent.

Maybe you mean something else by RTM?
"Reversion to the mean, also called regression to the mean, is the statistical phenomenon stating that the greater the deviation of a random variate from its mean, the greater the probability that the next measured variate will deviate less far. In other words, an extreme event is likely to be followed by a less extreme event."
http://mathworld.wolfram.com/ReversiontotheMean.html

Coin tosses are 'memory-less'. There is no real RTM when it comes to coin tosses because each toss is independent of the others. RTM can occur in situations where future events are dependent on past events (e.g. asset classes). As noted above, the probability of future events is dependent on prior events; this is not the case with coin tosses.
Note that what you describe in the second paragraph is not what is given in the MathWorld definition. Of course there is reversion to the mean in coin tosses. If you flip a coin ten times and it comes up heads 10 times, the expected value of the number of heads in the next batch of 10 tosses is 5. Or, as MathWorld puts it, the greater the past deviation, the greater the probability that the next deviation will be less than that extreme. But, with coin tosses, that's not because there's any memory of the previous run of tosses. It's because the mean is the most likely outcome in the first place.

My question would be what Bogle means by "reversion to the mean" or "RTM" in that 2002 talk. I think that he means it in the usual mathematical sense, one that applies to coin tosses and does not imply anything about the statistical dependence of future on past events.

RTM is not saying that doing better than average is likely to be followed by doing worse than average. That would require memory. It is saying that doing a lot better than average is likely to be followed by doing not as much different from average. That does not require memory.
If you'll carefully note the definition I quoted, you'll see that the probability of future events depends on the outcome of past events. For instance, if equity markets perform very poorly in one period and valuations drop significantly, this increases the likelihood of future returns being good (i.e. RTM). In the coin-toss situation, a string of 10 'heads' has absolutely no impact whatsoever on future tosses, so it is impossible for RTM to occur (i.e. an 'extreme' past event does not change the probability of future events).

The problem that many encounter here when it comes to stock returns, for instance, is that they believe that they are randomly distributed when they are not. Siegel pointed this out very clearly in his excellent book "Stocks for the Long Run" more than 20 years ago. Unfortunately, most Monte Carlo analyses do not incorporate mean reversion, and so they overstate the tails, both negative and positive, of long-term return distributions.
Last edited by willthrill81 on Sat Jan 06, 2018 5:58 pm, edited 1 time in total.
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Re: Small cap value vs. total market?

Post by triceratop » Sat Jan 06, 2018 4:47 pm

On the topic of SCV, there are in my mind two questions, that I'll attempt to address:
  • Has Small Cap Value been arbitraged away, either by hedge funds or by a wave of money in "smart beta" products rushing in
  • If Small Cap Value has not been arbitraged away, why not? Over what time horizons should one expect underperformance?
If the Small Cap Value premium has been arbitraged away, why has it underperformed? The following is from Yardeni charts:

Image

I see underperformance, not an arbitraged premium.

The second thing I found interesting recently was in a recent interview of David Swensen, the Yale endowment manager, at the Council on Foreign Relations
Q: My name is Bhakti Mirchandani. I work at a hedge fund called 1 William Street.

You mentioned the damaging effects of short-termism for companies and for markets. And the way you’ve addressed that with Yale’s endowment is to invest largely in longer-term assets. But what about publicly traded companies? Unilever, for example, has stopped quarterly reporting. Other companies have stopped giving quarterly guidance, which is unique to the United States. But what steps would make you most optimistic about publicly traded companies and their investability from a long-termism perspective?

SWENSEN: You know, I think it’s possible to take a long-term approach with publicly traded companies. We have some managers that are engaged in public-securities investing in markets around the world. And in each of our relationships, the managers invest with a long time horizon. I think it gives them an enormous advantage.

If you can invest with a three- to five-year horizon, which is a pretty, pretty difficult thing to do—it might sound like it’s an easy thing to do if market conditions are benign, but you throw a 2008 or a 2009 in there and you have to really work hard to remember that this is temporary and that you need to keep on looking out three to five years when you’re making these decisions.

Ultimately, that, I think, is an incredibly powerful advantage. And the people that are on the quarter-to-quarter timeframe, they’re going to lose almost certainly. And they’re definitely going to be losing to the managers that are using the three- to five-year horizon. So I do know that it’s possible to extend your time horizon and succeed.
If Swensen thinks that it is a "pretty, pretty difficult thing to do" to invest with a long time horizon. Given that these factors often undergo stretches of performance that are at a minimum this long it seems strange to argue that managers have sent the premiums to zero through more efficient pricing. In conclusion, I find the several explanations for why SCV is an investing style of the past which will no longer yield excess returns to be self-contradictory.
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Re: Small cap value vs. total market?

Post by garlandwhizzer » Sat Jan 06, 2018 6:04 pm

Just my two cents worth. I believe that SCV will again show outperformance at some point in the future although no one knows when. Human nature has not been entirely repealed. I also believe, however, that the magnitude of the SCV premium when it does finally show up will be significantly less than in the long term past. Those willing to go high up on the risk/reward scale are more likely to be successful in EM than US SCV IMO. SCV is prone to tracking error and can be difficult to hold onto during its occasional long periods of underperformance. My living expenses come largely from selling equity, so tracking error can be a problem for me. Last year for example, Vanguard's Admiral SCV index underperformed both their SCG and S&P 500 indexes by about 10% in just 12 months. I do believe in the existence of the premium--it makes sense, it should exist--but I am not tempted to do a 100% tilted portfolio in the US market, heavily scrutinized by professionals and factor based etfs and funds, all of which desperately seek outperformance. Waiting for the long delayed US SCV gravy train is not for everyone. Personally, my US equity is 75%TSM/25%SCV.

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Re: Small cap value vs. total market?

Post by HEDGEFUNDIE » Sun Jan 07, 2018 1:55 am

triceratop wrote:
Sat Jan 06, 2018 4:47 pm
In conclusion, I find the several explanations for why SCV is an investing style of the past which will no longer yield excess returns to be self-contradictory.
There is an argument against small cap outperformance that is based in changes to modern industrial structure:

https://www.technologyreview.com/s/6080 ... -be-smart/

https://www.economist.com/news/special- ... ing-global

https://www.theatlantic.com/magazine/ar ... em/497549/

In short, the big companies are keeping the small guys down through the unprecedented power of network effects (due to technology) and monopoly (due to a weakened anti-trust regime).

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Re: Small cap value vs. total market?

Post by venkman » Sun Jan 07, 2018 2:29 am

HEDGEFUNDIE wrote:
Sun Jan 07, 2018 1:55 am
There is an argument against small cap outperformance that is based in changes to modern industrial structure:

In short, the big companies are keeping the small guys down through the unprecedented power of network effects (due to technology) and monopoly (due to a weakened anti-trust regime).
That's an argument that small-cap COMPANIES won't do as well. If the market is aware of this, the stock prices of those companies should be appropriately discounted, so that expected investor returns are aligned with the extra risk being taken.

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Re: Small cap value vs. total market?

Post by fennewaldaj » Sun Jan 07, 2018 10:33 am

So those articles seem to be implying a this time it is different story. Usually it is not different. If it is not different that would imply to current dominance of these companies is a temporary thing (i.e the other companies will get bet at adapting new technologies ect in the future) I wonder if some of the observed small cap value premium from the past is from long histories of this time it is different stories not panning out. There is a real risk that eventually one of the this time it is different stories will be right and the small cap value companies will do terribly for a long time. I am not convinced that there is really anything all that special about this current this time it is different story.

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Re: Small cap value vs. total market?

Post by willthrill81 » Sun Jan 07, 2018 11:11 am

fennewaldaj wrote:
Sun Jan 07, 2018 10:33 am
So those articles seem to be implying a this time it is different story. Usually it is not different.
The reason it's not usually different is because investing is largely dependent on investor behavior, and that doesn't really change. The specific actions that investors take obviously change in different situations, but the underlying way of thinking and the resulting behavior is surprisingly constant.
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Re: Small cap value vs. total market?

Post by Top99% » Sun Jan 07, 2018 11:36 am

venkman wrote:
Sun Jan 07, 2018 2:29 am
HEDGEFUNDIE wrote:
Sun Jan 07, 2018 1:55 am
There is an argument against small cap outperformance that is based in changes to modern industrial structure:

In short, the big companies are keeping the small guys down through the unprecedented power of network effects (due to technology) and monopoly (due to a weakened anti-trust regime).
That's an argument that small-cap COMPANIES won't do as well. If the market is aware of this, the stock prices of those companies should be appropriately discounted, so that expected investor returns are aligned with the extra risk being taken.
Exactly and this also implies big companies are increasingly less risky and the risk premium should be trending lower. It is how companies/sectors/countries perform relative to what has been priced into the market that drives returns in my opinion.
Certainly when one looks at the Callan table is isn't the asset classes with the highest profit growth / industry dominance that lead returns year after year.
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Re: Small cap value vs. total market?

Post by HEDGEFUNDIE » Sun Jan 07, 2018 2:58 pm

Top99% wrote:
Sun Jan 07, 2018 11:36 am
venkman wrote:
Sun Jan 07, 2018 2:29 am
HEDGEFUNDIE wrote:
Sun Jan 07, 2018 1:55 am
There is an argument against small cap outperformance that is based in changes to modern industrial structure:

In short, the big companies are keeping the small guys down through the unprecedented power of network effects (due to technology) and monopoly (due to a weakened anti-trust regime).
That's an argument that small-cap COMPANIES won't do as well. If the market is aware of this, the stock prices of those companies should be appropriately discounted, so that expected investor returns are aligned with the extra risk being taken.
Exactly and this also implies big companies are increasingly less risky and the risk premium should be trending lower. It is how companies/sectors/countries perform relative to what has been priced into the market that drives returns in my opinion.
Certainly when one looks at the Callan table is isn't the asset classes with the highest profit growth / industry dominance that lead returns year after year.
Actually I don't believe the market has fully priced in the idea that SCV will underperform large caps, especially when we see new smart-beta funds still including Size and Value as driving factors of outperformance. The problem with backtesting 100+ years of equity markets is that you miss /discount recent secular shifts in how the world works.

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Re: Small cap value vs. total market?

Post by fennewaldaj » Sun Jan 07, 2018 5:51 pm

Yeah I mean I would not be comfortable with a 100% SCV due to the risk the secular shift you are referencing is real. I think it is likely not (people see a lot more secular shifts then there really are) so I am still tilting but am willing to admit I might be wrong. Given this I am tilting ~1/2 total market 1/3 SCV, 1/6 LCV.

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Re: Small cap value vs. total market?

Post by Top99% » Mon Jan 08, 2018 11:17 am

HEDGEFUNDIE wrote:
Sun Jan 07, 2018 2:58 pm
Top99% wrote:
Sun Jan 07, 2018 11:36 am
venkman wrote:
Sun Jan 07, 2018 2:29 am
HEDGEFUNDIE wrote:
Sun Jan 07, 2018 1:55 am
There is an argument against small cap outperformance that is based in changes to modern industrial structure:

In short, the big companies are keeping the small guys down through the unprecedented power of network effects (due to technology) and monopoly (due to a weakened anti-trust regime).
That's an argument that small-cap COMPANIES won't do as well. If the market is aware of this, the stock prices of those companies should be appropriately discounted, so that expected investor returns are aligned with the extra risk being taken.
Exactly and this also implies big companies are increasingly less risky and the risk premium should be trending lower. It is how companies/sectors/countries perform relative to what has been priced into the market that drives returns in my opinion.
Certainly when one looks at the Callan table is isn't the asset classes with the highest profit growth / industry dominance that lead returns year after year.
Actually I don't believe the market has fully priced in the idea that SCV will underperform large caps, especially when we see new smart-beta funds still including Size and Value as driving factors of outperformance. The problem with backtesting 100+ years of equity markets is that you miss /discount recent secular shifts in how the world works.
Actually I think there is so much money pouring into cap weighted index funds that large cap stocks are at risk of underperforming.
But, like several others I am hedging my bets with a mix of cap weighted index funds, tilts and alts. This time really might be different. Or not.
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Re: Small cap value vs. total market?

Post by Taylor Larimore » Mon Jan 08, 2018 11:54 am

But, like several others I am hedging my bets with a mix of cap weighted index funds, tilts and alts. This time really might be different. Or not.
Top 99%:

Please read my "Simplicity" link below.

Best wishes.
Taylor
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Re: Small cap value vs. total market?

Post by WhiteMaxima » Mon Jan 08, 2018 12:53 pm

I believe small will beat large and value will beat growth. But this will need time to prove. Past data shows this but don't know future will hold.

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Re: Small cap value vs. total market?

Post by willthrill81 » Mon Jan 08, 2018 6:44 pm

Taylor Larimore wrote:
Mon Jan 08, 2018 11:54 am
But, like several others I am hedging my bets with a mix of cap weighted index funds, tilts and alts. This time really might be different. Or not.
Top 99%:

Please read my "Simplicity" link below.

Best wishes.
Taylor
Very true. However, that reminds me of this quote as well.

"Everything should be made as simple as possible, but not simpler."
-Einstein
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Re: Small cap value vs. total market?

Post by Rowan Oak » Mon Jan 08, 2018 8:40 pm

willthrill81 wrote:
Mon Jan 08, 2018 6:44 pm
Taylor Larimore wrote:
Mon Jan 08, 2018 11:54 am
But, like several others I am hedging my bets with a mix of cap weighted index funds, tilts and alts. This time really might be different. Or not.
Top 99%:

Please read my "Simplicity" link below.

Best wishes.
Taylor
Very true. However, that reminds me of this quote as well.

"Everything should be made as simple as possible, but not simpler."
-Einstein
Trying to predict the future always reminds me of this Richard Feynman quote. While he is talking about science it can easily be applied to trying to beat the market.

"The principle is that you must not fool yourself, and you are the easiest person to fool."
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Re: Small cap value vs. total market?

Post by CULater » Tue Jan 09, 2018 10:29 am

Chart showing cumulative returns from 1972-2017:

Blue Line: 28% SCV + 72% 5Yr Treasuries
Red Line: 60% Total U.S. Stocks + 40% 5Yr Treasuries
Yellow Line: 100% 5Yr Treasuries

Image

As you can see, the blue line returns (28% SCV/72% Treasuries) match the red line returns (60/40) at the end of 2017 and exceed the red line returns at almost every previous point, while having nearly the volatility of 5Yr Treasures alone and matching the maximum drawdown of 5Yr Treasuries.
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Re: Small cap value vs. total market?

Post by MindTheGAAP » Tue Jan 09, 2018 10:39 am

CULater wrote:
Tue Jan 09, 2018 10:29 am
Chart showing cumulative returns from 1972-2017:

Blue Line: 28% SCV + 72% 5Yr Treasuries
Red Line: 60% Total U.S. Stocks + 40% 5Yr Treasuries
Yellow Line: 100% 5Yr Treasuries

Image

As you can see, the blue line returns (28% SCV/72% Treasuries) match the red line returns (60/40) at the end of 2017 and exceed the red line returns at almost every previous point, while having nearly the volatility of 5Yr Treasures alone and matching the maximum drawdown of 5Yr Treasuries.
Love this kind of chart - thank you!
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Re: Small cap value vs. total market?

Post by Park » Thu Jan 11, 2018 9:38 am

About tilting to small cap value, the investment products available to retail investors are designed for scalability. This results in an exposure to small and value that is not strong. With the available investment products, you have to have a high asset allocation to them, if you want exposure to small and value that is of significance.

sambb
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Re: Small cap value vs. total market?

Post by sambb » Fri Jan 12, 2018 3:17 am

One of the problems of discussing SCV herein, is the resistance based on attachment of many long time posters of the three fund portfolio. You are dealing with a potential bias based on the audience. Similar could be said for LS or target funds - they are a 4 fund. For unbiased or different bias, SCV may have advantages. I always see some posters criticize based on bogle - that is irrelevant to others who dont beleive in everything he says or predicts. It is always an interesting debate,

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Re: Small cap value vs. total market?

Post by garlandwhizzer » Fri Jan 12, 2018 1:35 pm

CUlater wrote:
As you can see, the blue line returns (28% SCV/72% Treasuries) match the red line returns (60/40) at the end of 2017 and exceed the red line returns at almost every previous point, while having nearly the volatility of 5Yr Treasures alone and matching the maximum drawdown of 5Yr Treasuries.
The posted chart looks at a long time span, 45 years, and it makes the point well. From 1972 to 2017 a lower allocation to SCV and higher allocation to Treasuries produced equivalent returns and less volatility compared to a higher TSM equity allocation and with less bonds. The important question to ask is: does that ensure that the next 45 years this situation will be repeated? I submit the answer is no.

Most of that long 45 period was during the greatest bond bull market in history, 35 years of ever decreasing inflation and interest rates which juiced bond returns well in excess of inflation. No one now expects bond returns to be likewise over the next 45 years. Instead we expect near zero real inflation adjusted return going forward for the foreseeable future, which doesn't do much for total portfolio return when 72% of your portfolio yields essentially no increase in purchasing power. Also for much of the 45 years under consideration the SCV premium had not even been described in the literature and there weren't hundreds of SCV funds and etfs trying to harvest it. Will the SCV premium be as robust over the next 45 years as the past 45 years? Unknown, but I would wager not even though I am not a betting man. So this nice graph does an excellent job of describing the past over this given time frame but it has limited power IMO to accurately predict the future. Yet another example, as if another one was needed, demonstrating how backtesting, even long term backtesting, can be misleading and should not be fully trusted to define the future.

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willthrill81
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Re: Small cap value vs. total market?

Post by willthrill81 » Fri Jan 12, 2018 1:44 pm

garlandwhizzer wrote:
Fri Jan 12, 2018 1:35 pm
Most of that long 45 period was during the greatest bond bull market in history, 35 years of ever decreasing inflation and interest rates which juiced bond returns well in excess of inflation.
I can't remember the source, but I recently heard that researchers have estimated that the long decline in interest rates over this period increased bond returns by around 1% over what they would have been had interest rates remained flat. That's certainly a nice boost, but if this was the greatest bull market ever for bonds, it didn't appear to do a lot to improve returns.

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If I was a bond investor, I'd wish it was 1922 or 1982 again instead of 2018.
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Re: Small cap value vs. total market?

Post by RustyShackleford » Fri Jan 12, 2018 8:19 pm

livesoft wrote:
Mon Dec 11, 2017 1:08 pm
One has to rebalance into SCV when it is doing terrible and out of SCV when it has done great.
What is your algorithm ?

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Re: Small cap value vs. total market?

Post by livesoft » Fri Jan 12, 2018 8:25 pm

RustyShackleford wrote:
Fri Jan 12, 2018 8:19 pm
livesoft wrote:
Mon Dec 11, 2017 1:08 pm
One has to rebalance into SCV when it is doing terrible and out of SCV when it has done great.
What is your algorithm ?
Rebalancing bands and/or RBDs. That means one will hold lots of SCV, but perhaps buy/sell 5% to 20% of it during rebalancing moves. That means one will never have 0% of SCV.

But if you have an algorithm, I'm open to suggestions.
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garlandwhizzer
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Re: Small cap value vs. total market?

Post by garlandwhizzer » Fri Jan 12, 2018 9:25 pm

willthrill81 wrote:
I can't remember the source, but I recently heard that researchers have estimated that the long decline in interest rates over this period increased bond returns by around 1% over what they would have been had interest rates remained flat. That's certainly a nice boost, but if this was the greatest bull market ever for bonds, it didn't appear to do a lot to improve returns.
Willthrill81, I'd like to see the source rather than rely on your memory of what you heard that researchers estimated. Check the graph you posted of 10 yr. Treasury returns minus one year trailing inflation (essentially giving real returns of 10 year Treasuries). If you average out the return graph from 1982 to 2017, the 35 year period in question, it averages out to about +3.5% real over the entire period. That's what you call a bond bull market, 3.5% in excess of trailing inflation on an annual basis. If you want to know what the opposite of a bond bull market looks like check out the the period of about 1939 to 1982, the 43 years before that period, during which bond holders of 10 year Treasuries appeared to have suffered considerable real loss for 4+ decades running. That's what a bond bear market looks like. The difference is rather apparent. Long term real losses of purchasing power in the bear versus 3.5% real return over long periods of time.

Current expectations for 10 year Treasury total returns for the next decade are less than 1% real, so let's not belittle that 1% figure. We all may get a good long taste going forward of what the bond market is like when it's not in full bull mode. Bond bulls and bears are not dramatic swings like equities but in total real return it adds up over decades. When interest rates decline by 13.5% on 10 yr. Treasuries over 35 years (as they did from 1982 to 2012) that adds a lot of excess nominal return just in terms of principal appreciation let alone higher interest payments from older bonds, a situation which goes on continuously for 35 years as rates and inflation decline. The return of Vanguard's Intermediate Term Treasury Fund for the last 5 years is 1.07%, less than inflation. Yes, that's right, investing for 5 years and losing purchasing power. Not a bond bear, but certainly no longer a bull.

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Re: Small cap value vs. total market?

Post by RustyShackleford » Fri Jan 12, 2018 9:42 pm

livesoft wrote:
Fri Jan 12, 2018 8:25 pm
RustyShackleford wrote:
Fri Jan 12, 2018 8:19 pm
livesoft wrote:
Mon Dec 11, 2017 1:08 pm
One has to rebalance into SCV when it is doing terrible and out of SCV when it has done great.
What is your algorithm ?
Rebalancing bands and/or RBDs. That means one will hold lots of SCV, but perhaps buy/sell 5% to 20% of it during rebalancing moves. That means one will never have 0% of SCV.

But if you have an algorithm, I'm open to suggestions.
No, I was just curious. I've been doing a SCV tilt for awhile now (with VBR, and with VSS in foreign) just because it seems to be what the cool kids do. Hadn't really been careful about rebalancing within my equity allocation, and realize I ought to - I believe VBR is underperforming VTSAX, and VSS is overperforming VEU.

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