Paul Merriman and Small Cap Value

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One Ping
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Re: Paul Merriman and Small Cap Value

Post by One Ping » Fri Jun 01, 2018 4:19 pm

David Jay wrote:
Thu May 31, 2018 6:34 pm
There will be periods of underperformance in any tilting strategy. Jumping in-and-out of various strategies is a portfolio return killer.

As I just wrote on Rick Ferri’s “Simplicity” thread earlier today: "You have to believe in your allocation enough to convince yourself to stay the course though a decade or more of under-performance."

[edit] I am not against an SCV tilt. I tilt SCV and intl SC. But I know why I tilt and I am prepared to hold my tilts regardless of market conditions.
David, I too tilt SCV and while I understand the thought process behind saying you might have to stay the course through a decade or more of SCV underperformance, it has never happened … at least not with US SCV since 1928.

Below I compare the performance of the S&P 500 Index (VFINX) (as a proxy for the Total Stock Market (VTSMX)) to the performance of the Dimensional US Small Cap Value Index for the 90 year period 1928 through 2017.

For reference, here is the portfolio x-ray comparison for VTSMX vs. VFINX. It’s not perfect, but it’s not bad.

Code: Select all

CLASS		VTSMX	VFINX
Large Value	24	29	
Large Core	25	30	
Large Growth	27	32	
Mid Value	6	3	
Mid Core	6	4	
Mid Growth	6	2	
Small Value	2	0	
Small Core	2	0	
Small Growth	2	0	
Below are the annual returns for the S&P 500 Index and the US SCV Index (source, DFA Matrix Books). The longest period of US SCV underperformence relative to the S&P 500 was 5 consecutive years (1928-1932). The next longest period was 4 consecutive years (1984-1987). All other times when SCV underperformed the S&P were 3 years (twice, 1951-1953 and 1955-1957) or less.

Code: Select all

	S&P 500 Index	Dim US SCV Index	
Year	Return		Return
1928	43.6%		32.4%
1929	-8.4%		-37.2%
1930	-24.9%		-43.6%
1931	-43.3%		-55.5%
1932	-8.2%		-10.5%
1933	54.0%		125.2%
1934	-1.4%		-6.3%
1935	47.7%		47.7%
1936	33.9%		66.5%
1937	-35.0%		-50.6%
1938	31.1%		32.6%
1939	-0.4%		-3.9%
1940	-9.8%		-8.1%
1941	-11.6%		-0.2%
1942	20.3%		34.1%
1943	25.9%		78.5%
1944	19.7%		52.6%
1945	36.4%		65.4%
1946	-8.1%		-10.4%
1947	5.7%		8.8%
1948	5.5%		-4.9%
1949	18.8%		19.7%
1950	31.7%		63.4%
1951	24.0%		9.9%
1952	18.4%		8.9%
1953	-1.0%		-10.6%
1954	52.6%		64.4%
1955	31.5%		23.8%
1956	6.6%		1.7%
1957	-10.8%		-18.6%
1958	43.4%		77.0%
1959	12.0%		15.0%
1960	0.5%		-10.7%
1961	26.9%		29.2%
1962	-8.7%		-10.3%
1963	22.8%		29.3%
1964	16.5%		26.1%
1965	12.5%		40.0%
1966	-10.0%		-9.6%
1967	24.0%		69.4%
1968	11.1%		49.0%
1969	-8.5%		-28.9%
1970	4.0%		-1.3%
1971	14.3%		15.1%
1972	19.0%		7.8%
1973	-14.7%		-30.2%
1974	-26.5%		-17.8%
1975	37.2%		65.7%
1976	23.8%		58.7%
1977	-7.2%		22.4%
1978	6.6%		22.9%
1979	18.4%		35.3%
1980	32.4%		24.4%
1981	-4.9%		20.3%
1982	21.4%		36.9%
1983	22.5%		48.9%
1984	6.3%		1.6%
1985	32.2%		29.1%
1986	18.5%		8.6%
1987	5.2%		-5.9%
1988	16.8%		33.9%
1989	31.5%		13.7%
1990	-3.1%		-24.2%
1991	30.5%		47.1%
1992	7.6%		34.8%
1993	10.1%		25.9%
1994	1.3%		2.5%
1995	37.6%		31.4%
1996	23.0%		25.7%
1997	33.4%		38.5%
1998	28.6%		-5.6%
1999	21.0%		8.2%
2000	-9.1%		19.9%
2001	-11.9%		28.6%
2002	-22.1%		-8.4%
2003	28.7%		66.9%
2004	10.9%		24.0%
2005	4.9%		7.4%
2006	15.8%		21.7%
2007	5.5%		-11.9%
2008	-37.0%		-36.9%
2009	26.5%		51.2%
2010	15.1%		31.0%
2011	2.1%		-6.5%
2012	16.0%		16.7%
2013	32.4%		41.9%
2014	13.7%		3.4%
2015	1.4%		-8.4%
2016	12.0%		37.2%
2017	21.8%		7.6%
For me the surprise was that the S&P underperformed US SCV for 7 straight years once (2000-2006), 6 straight years three times (1940-1945, 1963-1968 and 1974-1979) and 4 straight years once (1991-1994).

I realize this is looking at 90 years of historical data and is no guarantee of what may happen in the future. But, 5 times the S&P underperformed US SCV for 4 or more straight years, 2 times US SCV underperformed the S&P for 4 or more straight years.

I know history doesn’t repeat itself, but I do believe it often rhymes.

If over the last 90 years you were trying to convince yourself to hold on to your allocation through long periods of (relative) underperformance it seems you were more likely talking about holding on to the S&P vis-a-vis SCV, not the other way around.

Just my 2 cents,
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Re: Paul Merriman and Small Cap Value

Post by David Jay » Fri Jun 01, 2018 4:39 pm

I take no issue with your data.

My self-quote (I am pretty sure you can’t plagiarize yourself) was generic to tilting - too many people take on a tilt (or, say, buy a sector ETF) without an understanding - and thus an intellectual foundation - to support their position. That makes it tough when the winds blow and the waves crash.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

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Re: Paul Merriman and Small Cap Value

Post by vineviz » Fri Jun 01, 2018 4:43 pm

One Ping wrote:
Fri Jun 01, 2018 4:19 pm
If over the last 90 years you were trying to convince yourself to hold on to your allocation through long periods of (relative) underperformance it seems you were more likely talking about holding on to the S&P vis-a-vis SCV, not the other way around.
Great points. If I recall correctly, SCV outperformed the broad market in something like 94% of all the rolling 20 year periods sine 1930.

That’s not a sure thing, but I’m not going to take the opposing bet lightly.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Paul Merriman and Small Cap Value

Post by One Ping » Fri Jun 01, 2018 5:21 pm

David Jay wrote:
Fri Jun 01, 2018 4:39 pm
I take no issue with your data.

My self-quote (I am pretty sure you can’t plagiarize yourself) was generic to tilting - too many people take on a tilt (or, say, buy a sector ETF) without an understanding - and thus an intellectual foundation - to support their position. That makes it tough when the winds blow and the waves crash.
No worries. I didn't mean it to sound like I was jumping on you. It was just that I hear the phrase "willing to accept a decade or more of underperformance" so often in conjunction with SCV that I wanted to investigate it and see if it was true. It's not. (Before anybody else points it out ... it hasn't been true.) :beer
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Re: Paul Merriman and Small Cap Value

Post by One Ping » Fri Jun 01, 2018 6:30 pm

vineviz wrote:
Fri Jun 01, 2018 4:43 pm
One Ping wrote:
Fri Jun 01, 2018 4:19 pm
If over the last 90 years you were trying to convince yourself to hold on to your allocation through long periods of (relative) underperformance it seems you were more likely talking about holding on to the S&P vis-a-vis SCV, not the other way around.
Great points. If I recall correctly, SCV outperformed the broad market in something like 94% of all the rolling 20 year periods sine 1930.

That’s not a sure thing, but I’m not going to take the opposing bet lightly.
Looking at the data using these 6 US asset classes: LC Value, LC Blend, LC Growth, SC Value, SC Blend and SC Growth, I find that 63 out of 71 (89%) of the rolling 20 year periods since 1928 SCV has had the best performance. Of the other 8 rolling 20-year periods, 4 periods (6%) were SCG and 4 periods (6%) were LCV.
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Re: Paul Merriman and Small Cap Value

Post by vineviz » Fri Jun 01, 2018 6:43 pm

One Ping wrote:
Fri Jun 01, 2018 6:30 pm
vineviz wrote:
Fri Jun 01, 2018 4:43 pm
Great points. If I recall correctly, SCV outperformed the broad market in something like 94% of all the rolling 20 year periods sine 1930.
Looking at the data using these 6 US asset classes: LC Value, LC Blend, LC Growth, SC Value, SC Blend and SC Growth, I find that 63 out of 71 (89%) of the rolling 20 year periods since 1928 SCV has had the best performance. Of the other 8 rolling 20-year periods, 4 periods (6%) were SCG and 4 periods (6%) were LCV.
Thanks for taking the time to check me: sounds like my 94% number was remembering the number of times small caps in general outperformed, not specifically SCV.

Still, at 89% I like my odds.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Paul Merriman and Small Cap Value

Post by JustinR » Fri Jun 01, 2018 6:44 pm

What's a good book or reading about tilting to factors, especially scv (also reit and em)?

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Re: Paul Merriman and Small Cap Value

Post by One Ping » Fri Jun 01, 2018 10:23 pm

vineviz wrote:
Fri Jun 01, 2018 6:43 pm
One Ping wrote:
Fri Jun 01, 2018 6:30 pm
vineviz wrote:
Fri Jun 01, 2018 4:43 pm
Great points. If I recall correctly, SCV outperformed the broad market in something like 94% of all the rolling 20 year periods sine 1930.
Looking at the data using these 6 US asset classes: LC Value, LC Blend, LC Growth, SC Value, SC Blend and SC Growth, I find that 63 out of 71 (89%) of the rolling 20 year periods since 1928 SCV has had the best performance. Of the other 8 rolling 20-year periods, 4 periods (6%) were SCG and 4 periods (6%) were LCV.
Thanks for taking the time to check me: sounds like my 94% number was remembering the number of times small caps in general outperformed, not specifically SCV.

Still, at 89% I like my odds.
Yup. :happy
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Re: Paul Merriman and Small Cap Value

Post by paul merriman » Sat Jun 02, 2018 7:03 pm

JustinR post
What's a good book or reading about tilting to factors, especially scv (also reit and em)?

I think the most readable author on the topic is Larry Swedroe. He has written many internet articles on the subject but his best book is, "Your Complete Guide to Factor-Based Investing: The Way Smart Money Invests Today."

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Re: Paul Merriman and Small Cap Value

Post by cfs » Sat Jun 02, 2018 7:15 pm

Thank you Mister Paul for your last post. Mister Larry is smiling as he reads your post. Gracias por leer / cfs
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Re: Paul Merriman and Small Cap Value

Post by Random Walker » Sat Jun 02, 2018 8:37 pm

With regard to books on factor investing, I certainly agree with the recommendation of Larry’s factor book. But I’d also recommend taking a bit of a more general step backwards first. I strongly recommend Roger Gibson’s Asset Allocation: Balancing Financial Risk. In the book, Gibson shows the benefits of creating portfolios diversified across multiple sources of return. He limits his examples to multi asset class investing, but the thought process can easily be extrapolated to any less than perfectly correlated sources of return including asset classes, factors, styles, alternatives. The book provides the rationale for diversifying across uncorrelated sources of return. Larry’s factor book is extremely valuable not only for describing the factors themselves, but also for describing 5 criteria any investor can use to help decide whether a new source of return is worth considering as a portfolio addition.

Dave

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Re: Paul Merriman and Small Cap Value

Post by privatefarmer » Sun Jun 03, 2018 8:39 am

paul merriman wrote:
Sat Jun 02, 2018 7:03 pm
JustinR post
What's a good book or reading about tilting to factors, especially scv (also reit and em)?

I think the most readable author on the topic is Larry Swedroe. He has written many internet articles on the subject but his best book is, "Your Complete Guide to Factor-Based Investing: The Way Smart Money Invests Today."
c'mon Paul, stop being so humble. Your website, paulmerriman.com , gives away your books for free and they are excellent. And the articles on the website/marketwatch go into great detail on the subject.

also, if anyone really wants to understand this topic they should listen to paul's podcast. listen to past episodes, they're all very worthwhile.

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Re: Paul Merriman and Small Cap Value

Post by snarlyjack » Mon Jun 04, 2018 7:44 pm

Paul,

I read every article on your web site, Paul Merriman.com
(They were excellent by the way).

I ended up going with your ultimate 2 fund strategy.

My favorite investments are in large cap. value funds.
(Big blue cap. funds). For several reasons. Dividends
being 1 of the reasons. I also like the big blue cap. names,
Microsoft, Boeing, Exxon, J & J, etc).

The small cap value funds make a lot of sense to me.
First of all they pay dividends. Second, they will be like
after burners to my large cap. value funds.

I think it could be a excellent portfolio. According to the
portfolio visualizer they match up together very good.
Small cap. value funds should be a excellent addition.

My thinking is expanding...& I wanted to thank you!

Your articles were excellent info... :sharebeer

sj

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Re: Paul Merriman and Small Cap Value

Post by Alchemist » Tue Jun 05, 2018 8:39 pm

One Ping wrote:
Fri Jun 01, 2018 5:21 pm

No worries. I didn't mean it to sound like I was jumping on you. It was just that I hear the phrase "willing to accept a decade or more of underperformance" so often in conjunction with SCV that I wanted to investigate it and see if it was true. It's not. (Before anybody else points it out ... it hasn't been true.) :beer

Umm....it has been true over the last decade. Total Return Per Morningstar over the last ten years:

DFSVX: 9.58%
VTSAX: 9.68%

Technically DFSVX underperformed, just barely. But really in the real world we can call that a tie. However it was a tie that came with more volatility and risk. It also does not account for advisor fees required to get access (in most cases) to DFA funds. Further, all the way out to 13 years VTSAX is noticeably ahead.

With that said, the 15 year performance has DFSVX outperforming by about 1.5% (before advisor fees).

And finally I cannot end this post without saying you have an awesome screen name and avatar :happy

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Re: Paul Merriman and Small Cap Value

Post by JBTX » Wed Jun 06, 2018 4:20 pm


tesuzuki2002
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Re: Paul Merriman and Small Cap Value

Post by tesuzuki2002 » Wed Jun 06, 2018 7:39 pm

GridironGems wrote:
Sun Dec 17, 2017 6:32 pm
Paul Merriman has been talking a lot about small cap value recently including in his new target date funds and had a podcast just on the small cap value subject. He obviously loves this asset class and recommends it over the total stock market. His new target date funds has the majority of it in small cap value. I don't think people here are too fond of small cap value and would only consider a small percentage of it, if at all. Just found it interesting how Paul Merriman keeps talking it up
SCV historically had paid a premium when compared to every other asset class. So It makes sense he would be promoting it when trying to get the highest returns in the market, right??

I use it.

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Re: Paul Merriman and Small Cap Value

Post by garlandwhizzer » Wed Jun 06, 2018 9:18 pm

Alchemist wrote:

Umm....it has been true over the last decade. Total Return Per Morningstar over the last ten years:

DFSVX: 9.58%
VTSAX: 9.68%
Another interesting fact: according to Portfolio Visualizer over the last 15 years (2003 - 2018) DFSVX has slightly underperformed NAESX, Vanguard's SC index fund. DFSVX has not only underperformed but also suffered greater volatility, a significantly higher standard deviation, a significantly higher maximum drawdown during the Great Recession, and a significantly lower Sharpe ratio on its way to underperformance. Holders of DFSVX, a fund run by knowledgeable factor experts including a Nobel Prize winner, over the most recent 15 year period took on more risk, suffered more volatility, had a 7% greater drawdown in the depths of the Great Recession, and the reward for all this was a lower return than a simple Vanguard SC index fund which had much lower size factor exposure, and no value factor exposure at all. I see why Asness himself says beta is his favorite factor. Sometimes 15 years is too short a time period for the SCV premium to emerge, although it allows plenty of time to suffer through the effects of its increased risk. Take home lesson: those who choose to invest strictly in factor approaches may need considerable faith and patience while waiting for the gravy train to finally pull into the station. When (and if ?) the gravy train does arrive, it is likely simply the reward for tolerating long years of increased risk and volatility which was maximal at precisely the wrong time, the depths of the Great Recession. Any outperformance you may eventually harvest in this case, you certainly deserve. Those without rock-solid factor faith and/or considerable patience even in adversity may not be well served by a factor dominated portfolio.

Garland Whizzer

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vineviz
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Re: Paul Merriman and Small Cap Value

Post by vineviz » Wed Jun 06, 2018 11:39 pm

garlandwhizzer wrote:
Wed Jun 06, 2018 9:18 pm
Sometimes 15 years is too short a time period for the SCV premium to emerge, although it allows plenty of time to suffer through the effects of its increased risk.
I suppose that's true: if you look at each rolling 15-year period from January 1930 until December 2017, you'll find that SCV only outperformed the total stock market in 72 of those 74 periods.

During that horrific period from 1985 to 1999, while the total stock market had a CAGR of 17.64% the pitiful SCV portfolio only managed to eke out a dismal 15.78% per year.

The horror.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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vineviz
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Re: Paul Merriman and Small Cap Value

Post by vineviz » Wed Jun 06, 2018 11:45 pm

Let's think back to the year 2000, those heady days when the first three SCV exchange traded funds made their debut.

If you had been foolhardy enough at the end of December 2000 to invest $10,000 into each of them (IJS, IWN, SLYV), you'd have turned that $30k into a measly $162,593.

Meanwhile, the wise investor who chose instead to put that $30k into VFINX would have amassed the small fortune of $85,054.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

JustinR
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Re: Paul Merriman and Small Cap Value

Post by JustinR » Thu Jun 07, 2018 1:59 am

Is VSS (FTSE All-World ex-US Small-Cap) the best you can do at Vanguard for the international portion? It's not really valuey, it's in the middle.

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Re: Paul Merriman and Small Cap Value

Post by vineviz » Thu Jun 07, 2018 7:09 am

JustinR wrote:
Thu Jun 07, 2018 1:59 am
Is VSS (FTSE All-World ex-US Small-Cap) the best you can do at Vanguard for the international portion? It's not really valuey, it's in the middle.
It is the best you can do, but honestly I don't think I'd bother.

In addition to thinking of your portfolio using standard asset class allocation (e.g. 50% US stocks, 25% intl stocks, 25% bonds) you think of your portfolio as also having a factor allocation (e.g. 75% beta, 15% small, 10% value) then I think you'd find that adding VSS to a portfolio which already has exposure to small value isn't adding much diversification. Splitting the international portion of your portfolio between VT and VSS doesn't really change its factor exposure much, and adds an extra level of complication.

If you rely on a fund like VIOV to give you small cap value exposure on the U.S. portion, you don't benefit much from also having VSS on the international side.

If you WANTED to divide the international portion of your portfolio into two ETFs, you'd get more diversification benefit from using VWO (emerging markets) rather than VSS (intl small cap) because VWO has a lower correlation with the rest of the portfolio.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Paul Merriman and Small Cap Value

Post by JBTX » Thu Jun 07, 2018 11:12 am

I finally got around to moving some stuff around and going towards a modest small cap tilt.

The thing I found attractive is in 2 of the 3 really bad periods over the last 50 years SCV has held up very well - in the late 70's inflation scare and in 2000. Of course, 2008 was another story. SCV will probably not hold up well in a straight up financially driven economic collapse.

I was over-weighted in 2000 in Small Cap and SCV and it served me well, and then has time went by I went back to a more market weighted allocation.

Other than the arguments of the theoretical value of holding the entire market at market weights, what are the theoretical arguments against tilting towards SCV? I guess I could see

1. It is more volatile, and can fall harder in market crashes
2. It has under-performed the last 15 years or so (which in my mind is actually an argument for)
3. Just because it has historically over time beat the markets, doesn't mean it will going forward

Any other arguments against SCV tilt?

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Re: Paul Merriman and Small Cap Value

Post by garlandwhizzer » Thu Jun 07, 2018 1:46 pm

vineviz wrote:
I suppose that's true: if you look at each rolling 15-year period from January 1930 until December 2017, you'll find that SCV only outperformed the total stock market in 72 of those 74 periods.
Interesting that the second such very rare 15 year spell of underperformance period for SCV should be now when there is massive proliferation of factor based ETFs and funds and markets are dominated by professionals. Past outperformance before such funds were common and before the markets were dominated by professionals fully aware of factor research may not be predictable about what is going to happen going forward. If DFSVX continues to underperform with greater risk and volatility for the next 5 years, might factor true believers start to question their basic assumptions after 20 years of futility? Does past academic backtesting in market environments not dominated by professionals and not filled to the brim with factor funds/ETFS accurately define a future when those things have massively changed? It seems reasonable to expect capacity restraInts in all sources of the much-sought-after alpha. It is an open question whether current and future overgrazing will diminish factor returns to beta going forward (which implies less than beta after costs). I believe that market action from 1930 to 2003 may be less predictable of the future than what has happened over the last 15 years. Time will tell. One thing I am sure about. No one knows with certainty what is going to outperform over the next 5, 10, or 15 years. All of us make investment bets based on our belief systems which may or may not turn out to be optimal. Many factor adherents have unquestioning faith that they know with certainty what will happen in the investment arena in the fullness of time. IMO that overstates the case.

Garland Whizzer

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Re: Paul Merriman and Small Cap Value

Post by Jags4186 » Thu Jun 07, 2018 3:06 pm

garlandwhizzer wrote:
Thu Jun 07, 2018 1:46 pm
Interesting that the second such very rare 15 year spell of underperformance period for SCV should be now when there is massive proliferation of factor based ETFs and funds and markets are dominated by professionals.
Garland Whizzer
Where is the underperformance of SCV?

Most recent 15 years: 2003-2017

Growth of $10,000

VISVX Vanguard Small Cap Value Index: $49,945
DFSVX Dimensional US Small Cap Value: $54,325
VFINX Vanguard 500 Index: $40,596

Most Recent 10 years: 2008-2017

Growth of $10,000

VISVX Vanguard Small Cap Value Index: $25,069
DFSVX Dimensional US Small Cap Value: $23,242
VFINX Vanguard 500 Index: $22,342

Source: Portfolio Visualizer

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vineviz
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Re: Paul Merriman and Small Cap Value

Post by vineviz » Thu Jun 07, 2018 4:33 pm

garlandwhizzer wrote:
Thu Jun 07, 2018 1:46 pm
Interesting that the second such very rare 15 year spell of underperformance period for SCV should be now when there is massive proliferation of factor based ETFs and funds and markets are dominated by professionals.
That might be interesting if it were true.

From 6/9/2003 to 6/6/2018, growth of $10k:
  • IJS = $50,751
  • SLYV = $49,597
  • Morningstar Small Value Total Return Index = $49,076
  • IWN = $41,249
  • VTSAX = $40,767
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

garlandwhizzer
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Re: Paul Merriman and Small Cap Value

Post by garlandwhizzer » Thu Jun 07, 2018 8:12 pm

I wasn't comparing SCV with the S&P 500 over the last 15 years. Rather I compared DFSVX with NAESX, both funds playing in the small cap space, DFSVX much deeper into the small factor and a deep value fund to boot in contrast to NAESX which contains mid cap stocks and makes no effort to seek the value factor. The size factor was larger in DFSVX and the value factor was hugely larger, yet NAESX with less exposure to those premiums outperformed and did so with lower risk/volatility. If factors actually determined outcomes this is the opposite of what we would expect over a 15 year period. DFSVX did outperform VFINX and VTSMX, both dominated by mega-cap stocks during that time frame. Interestingly according to Portfolio Visualizer, in spite of that outperformance relative to VTSMX, there was substantially greater drawdown during in Great Recession with DFSVX (61.2% versus 54%). Standard deviation was considerably in favor of TSM (19.9% versus 13.2%). In point of fact, the Sharpe ratio (return per unit of risk taken) was actually higher with VTSMX than DFSVX. So in sum two of Vanguard's index funds, one TSM, dominated by mega-caps, the other NAESX, a small-mid cap index fund, both produced higher returns per unit of risk than the much ballyhooed DFSVX. in addition Vanguard's Small Cap index Fund which contains a lot of mid-caps, actually outperformed DFSVX, producing higher returns with less risk over 15 years. Where's the factor magic?

Clearly DFSVX took on more risk and it worked half the time to producing increased return. Factor outperformance in this case, when it occurred at all, was simply due to taking on additional risk. The same result can in theory be achieved by adjusting the portfolio stock/bond mix or using leverage with a TSM equity portfolio if one wishes to increase portfolio risk. Factor investing in both these cases showed no alpha whatsoever from DFSVX. Its only secret was taking on more risk. There are many ways to increase risk and thereby increase portfolio returns for investors with the patience of Job.

Garland Whizzer

JustinR
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Re: Paul Merriman and Small Cap Value

Post by JustinR » Fri Jun 08, 2018 5:54 am

vineviz wrote:
Thu Jun 07, 2018 7:09 am
JustinR wrote:
Thu Jun 07, 2018 1:59 am
Is VSS (FTSE All-World ex-US Small-Cap) the best you can do at Vanguard for the international portion? It's not really valuey, it's in the middle.
It is the best you can do, but honestly I don't think I'd bother.

In addition to thinking of your portfolio using standard asset class allocation (e.g. 50% US stocks, 25% intl stocks, 25% bonds) you think of your portfolio as also having a factor allocation (e.g. 75% beta, 15% small, 10% value) then I think you'd find that adding VSS to a portfolio which already has exposure to small value isn't adding much diversification. Splitting the international portion of your portfolio between VT and VSS doesn't really change its factor exposure much, and adds an extra level of complication.

If you rely on a fund like VIOV to give you small cap value exposure on the U.S. portion, you don't benefit much from also having VSS on the international side.

If you WANTED to divide the international portion of your portfolio into two ETFs, you'd get more diversification benefit from using VWO (emerging markets) rather than VSS (intl small cap) because VWO has a lower correlation with the rest of the portfolio.
Thanks for the suggestion! Right now I'm doing this for the equity portion:

20% Total Stock Market
20% US Small Cap Value
20% Total International (VXUS)
20% FTSE All-World Small-Cap (VSS)
10% REIT
10% Emerging Markets (VWO)

So are you saying I should replace my VSS portion (20%) with all VWO instead?

Is nearly 25% of my equities in emerging markets too much?

How does emerging markets relate to small cap value? I understand it's good for diversification but it doesn't give you small cap value does it?

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CyclingDuo
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Re: Paul Merriman and Small Cap Value

Post by CyclingDuo » Fri Jun 08, 2018 7:04 am

JustinR wrote:
Fri Jun 08, 2018 5:54 am
vineviz wrote:
Thu Jun 07, 2018 7:09 am
JustinR wrote:
Thu Jun 07, 2018 1:59 am
Is VSS (FTSE All-World ex-US Small-Cap) the best you can do at Vanguard for the international portion? It's not really valuey, it's in the middle.
It is the best you can do, but honestly I don't think I'd bother.

In addition to thinking of your portfolio using standard asset class allocation (e.g. 50% US stocks, 25% intl stocks, 25% bonds) you think of your portfolio as also having a factor allocation (e.g. 75% beta, 15% small, 10% value) then I think you'd find that adding VSS to a portfolio which already has exposure to small value isn't adding much diversification. Splitting the international portion of your portfolio between VT and VSS doesn't really change its factor exposure much, and adds an extra level of complication.

If you rely on a fund like VIOV to give you small cap value exposure on the U.S. portion, you don't benefit much from also having VSS on the international side.

If you WANTED to divide the international portion of your portfolio into two ETFs, you'd get more diversification benefit from using VWO (emerging markets) rather than VSS (intl small cap) because VWO has a lower correlation with the rest of the portfolio.
Thanks for the suggestion! Right now I'm doing this for the equity portion:

20% Total Stock Market
20% US Small Cap Value
20% Total International (VXUS)
20% FTSE All-World Small-Cap (VSS)
10% REIT
10% Emerging Markets (VWO)

So are you saying I should replace my VSS portion (20%) with all VWO instead?

Is nearly 25% of my equities in emerging markets too much?

How does emerging markets relate to small cap value? I understand it's good for diversification but it doesn't give you small cap value does it?
Justin, are you confined to using Vanguard ETF's only?

In his best in class ETF's, Paul Merriman suggests DLS (Wisdom Tree International Small Cap Dividend) for international small cap value if you are willing to step outside of Vanguard only by your use of VSS. Pairing of both are used in his Ultimate Buy & Hold Portfolio for the international small cap portion of the portfolio.

Depending on the portfolio, he also suggests the division of Emerging Markets between VWO and EWX (SPDR S&P Emerging Markets Small Cap).

As noted, both DLS and EWX have higher ER's than VSS and VWO.

https://paulmerriman.com/best-in-class- ... portfolio/
"Everywhere is within walking distance if you have the time." ~ Steven Wright

snarlyjack
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Location: Montana

Re: Paul Merriman and Small Cap Value

Post by snarlyjack » Fri Jun 08, 2018 10:14 am

Here is Paul Merriman's table for the 4 fund & 2 fund portfolio.

I thought this table was very educational & informative.
Because of this table I've been moving around my 401K & IRA funds
& brokerage account to better match up with his suggestions.
I feel more comfortable now than I ever have about my strategy.

*** Before in the past I've always talked about dividends. It turns
out I' am basically a value investor at heart. ***

https://paulmerriman.com/wp-content/upl ... Update.pdf

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vineviz
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Re: Paul Merriman and Small Cap Value

Post by vineviz » Fri Jun 08, 2018 10:28 am

JustinR wrote:
Fri Jun 08, 2018 5:54 am
So are you saying I should replace my VSS portion (20%) with all VWO instead?

Is nearly 25% of my equities in emerging markets too much?

How does emerging markets relate to small cap value? I understand it's good for diversification but it doesn't give you small cap value does it?
No, I wouldn't normally recommend a 1-to-1 switch from VSS into VWO.

Conceptually, since VSS is an international small cap fund you can think of it as a mix of VXUS and VBR (I'm not sure which small cap value fund you have, so I'm assuming this one for purposes of discussion). In fact, its returns move mostly in lockstep with VXUS. Mathematically, you can think about the returns of VSS as being equal to (.95 * VXUS) + (.05 * VBR). There's a little bit of idiosyncratic risk unique to VSS left over, but not much.

Because my opinion is that your current allocation to VTI might be less than optimal, I think an equity allocation SOMETHING like the following might strike a balance between having exposure to a variety of sources of risk and not straying farther than necessary from market weights.

Code: Select all

Ticker	Weight	Fund
VTI	25%	Vanguard Total Stock Market ETF
VBR	25%	Vanguard Small-Cap Value ETF
VNQ	10%	Vanguard Real Estate ETF
VXUS	25%	Vanguard Total International Stock ETF
VWO	15%	Vanguard FTSE Emerging Markets ETF
I'm not saying that is the BEST portfolio, or even a good one, but it illustrates how I'd approach the problem for myself.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

garlandwhizzer
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Re: Paul Merriman and Small Cap Value

Post by garlandwhizzer » Fri Jun 08, 2018 12:58 pm

Just my 2 cents worth. If we're talking about adding risk to an equity portfolio to increase long term expected returns, I personally believe that at the present time both EM and INTL, including small cap exposure in those areas, are good choices, worthy of inclusion in the portfolio. US has bested INTL and EM in both return and lower volatility for a long time, but I lack confidence that it will continue in the future. International diversification in equity is attractive in my view in spite of all the obvious current geopolitical risk. My equity allocation is 50%US/ 25%EM/ 25%DM.

Garland Whizzer

snarlyjack
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Location: Montana

Re: Paul Merriman and Small Cap Value

Post by snarlyjack » Fri Jun 08, 2018 1:53 pm

Being a young guy Paul Merriman's numbers (see table) are very close to mine.

I' am 24 years old - age 60 (IRA & 401K open up) = 36 years.
Started at age 20 - mortality age 100 = 80 potential investment years.
(I' am all ready up quite a bit in the past 4 years).

If his numbers are good or for that matter 1/2 as good the
portfolio numbers are astronomical. Right now my portfolio is:

Roth 401K. Small Cap. Blend Fund.
Roth IRA. Small Cap. Value Fund.

Brokerage Account:

VHDYX. High Dividend Yield Value Fund.
Small Cap. Value Fund.

Also, Paul Merriman stated in 1 of his articles that for the Large Cap.
Value Fund large dividends are good. This is his 2 fund strategy.

https://paulmerriman.com/wp-content/upl ... Update.pdf

Decades Returns:

https://paulmerriman.com/decade-returns/

abogler
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Re: Paul Merriman and Small Cap Value

Post by abogler » Tue Jun 12, 2018 6:03 pm

snarlyjack wrote:
Fri Jun 08, 2018 10:14 am
Here is Paul Merriman's table for the 4 fund & 2 fund portfolio.

I thought this table was very educational & informative.
Because of this table I've been moving around my 401K & IRA funds
& brokerage account to better match up with his suggestions.
I feel more comfortable now than I ever have about my strategy.

https://paulmerriman.com/wp-content/upl ... Update.pdf
Hi Snarlyjack,

I have my 401K in Schwab and haven't been able to find an ETF for Intl SCV. I am curious how others have done the same. Any suggestions would be very much appreciated! Thank you!

snarlyjack
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Location: Montana

Re: Paul Merriman and Small Cap Value

Post by snarlyjack » Tue Jun 12, 2018 9:38 pm

abogler,

Welcome to Bogleheads…

If I were you I would call/contact your 401K provider &
ask for suggestions for a Int. SCV ETF. Then go from their...

I hope I helped you & welcome.

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vineviz
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Re: Paul Merriman and Small Cap Value

Post by vineviz » Wed Jun 13, 2018 9:27 am

abogler wrote:
Tue Jun 12, 2018 6:03 pm
I have my 401K in Schwab and haven't been able to find an ETF for Intl SCV. I am curious how others have done the same. Any suggestions would be very much appreciated! Thank you!
Given how small the allocation to international small cap is in the portfolio I'm not sure that worrying about the value exposure there is going to impact your overall portfolio in any measurable way.

The two most promising international SCV funds I've found are WisdomTree International SmallCp Div ETF (DLS) and Invesco FTSE RAFI Dev Mkts ex-US S/M ETF (PDN). Given their high expense ratios, though, my guess is that you'd be better off just choosing something like Schwab International Small-Cap Eq ETF (SCHC).

iShares Edge MSCI Mltfct Intl SmCp ETF (ISCF) has an interesting multi-factor approach but it doesn't actually tilt towards value (this is the ETF I use in my portfolio for international small cap). It's expense ratio is also on the high side, though.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

abogler
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Joined: Tue Jun 12, 2018 5:50 pm

Re: Paul Merriman and Small Cap Value

Post by abogler » Wed Jun 13, 2018 2:58 pm

snarlyjack wrote:
Tue Jun 12, 2018 9:38 pm
If I were you I would call/contact your 401K provider &
ask for suggestions for a Int. SCV ETF. Then go from their...
Thank you snarlyjack for the pointer and the welcome :-)

abogler
Posts: 7
Joined: Tue Jun 12, 2018 5:50 pm

Re: Paul Merriman and Small Cap Value

Post by abogler » Wed Jun 13, 2018 3:13 pm

vineviz wrote:
Wed Jun 13, 2018 9:27 am
The two most promising international SCV funds I've found are WisdomTree International SmallCp Div ETF (DLS) and Invesco FTSE RAFI Dev Mkts ex-US S/M ETF (PDN). Given their high expense ratios, though, my guess is that you'd be better off just choosing something like Schwab International Small-Cap Eq ETF (SCHC).

iShares Edge MSCI Mltfct Intl SmCp ETF (ISCF) has an interesting multi-factor approach but it doesn't actually tilt towards value (this is the ETF I use in my portfolio for international small cap). It's expense ratio is also on the high side, though.
Thank you vineviz for the pointers. I used PDN today on M1 Finance. Checked out ISCF, better performance over 10 years + lower expense ratio than PDN. It's a Foreign Small/Mid Blend vs PDN is Foreign Small / Mid Value. Feel a little conflicted about that, moving away from PDN's Value bend. Thoughts?

snarlyjack
Posts: 780
Joined: Fri Aug 28, 2015 12:44 pm
Location: Montana

Re: Paul Merriman and Small Cap Value

Post by snarlyjack » Wed Jun 13, 2018 5:54 pm

abogler,

Paul Merriman.com is a very informative site.
He has lot's of articles, pod cast & videos on his
strategy. Paul would suggest Small Cap. Value Funds
not Small Cap. Blend Funds.

Hope this helps you...

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