Where is that value premium?

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typical.investor
Posts: 245
Joined: Mon Jun 11, 2018 3:17 am

Re: Where is that value premium?

Post by typical.investor » Wed Oct 10, 2018 1:12 am

Alternative risk premia investing has grown rapidly in popularity in
recent years ...
A February 2017 survey from bFinance
suggests that alternative risk premia has
been the area of greatest investor interest
on a rolling 12-month basis.

In March
2017, Deutsche Bank reported survey
results showing that the percentage of
respondents who allocate to alternative
beta/risk premia strategies had increased
to 26%, up from 20% in 2015 and 15%
in 2014. At a more granular level, nearly
half of all pension fund respondents
reported allocating to alternative beta/risk
premia solutions today, which is nearly
double the proportion observed in the
prior year’s survey.

And interestingly, a
recent survey from Morgan Stanley Prime
Brokerage (Display 3) reports that 79% of
investors with >$5 billion in hedge fund
investments are currently allocating to, or
considering an investment in, risk premia.
So if hedge funds are being replaced by cheaper factor investing, it'd seem like a lot more money pursuing the same premiums. While perhaps the premium wouldn't disappear, the fact that big money is capturing it more effectively with long/short portfolios means the long only premium will get pushed down further.

jalbert
Posts: 3696
Joined: Fri Apr 10, 2015 12:29 am

Re: Where is that value premium?

Post by jalbert » Wed Oct 10, 2018 1:29 am

I own SV Index because even if I am wrong and it never outperforms, I find it hard to imagine that 852 stocks can lag the market by much when they are a meaningful portion of the market. And I have yet to see any research that shows that small & value underperforms.

I wish there were a way to get a greater Small & Value tilt though there is no cost effective alternative IMO.
VIOV in a taxable account-- ER is 20 bp/yr
SLYV in a tax-qualified account-- ER is 15 bp/yr

For some reason, SLYV has distributed capital gains making it less tax-efficient in a taxable account.

VIOV is a bit more tax-efficient than the vanguard small-cap value index fund VBR due to the latter having a higher allocation to REITs. The reduced tax drag of VIOV will offset a little of the additional ER, and you will need less of it, also enhancing portfolio tax efficiency.
Risk is not a guarantor of return.

jalbert
Posts: 3696
Joined: Fri Apr 10, 2015 12:29 am

Re: Where is that value premium?

Post by jalbert » Wed Oct 10, 2018 1:38 am

What I kind of don't understand is why value would do well in overseas developed markets. Doesn't value typically do well in moderate and rising inflation. With the low inflation in many place, it would seem growth should be favored but I guess it's more complicated than that.
Has non-US value overperformed during the period of low inflation internationally? Here are some 10-yr returns.

VTRIX = Vanguard int'l value
DFIVX = DFA int'l value
VTMGX = Developed markets (non-US) total market index
VTIAX = Total int'l index

http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D
Risk is not a guarantor of return.

typical.investor
Posts: 245
Joined: Mon Jun 11, 2018 3:17 am

Re: Where is that value premium?

Post by typical.investor » Wed Oct 10, 2018 4:08 am

jalbert wrote:
Wed Oct 10, 2018 1:38 am
What I kind of don't understand is why value would do well in overseas developed markets. Doesn't value typically do well in moderate and rising inflation. With the low inflation in many place, it would seem growth should be favored but I guess it's more complicated than that.
Has non-US value overperformed during the period of low inflation internationally? Here are some 10-yr returns.

VTRIX = Vanguard int'l value
DFIVX = DFA int'l value
VTMGX = Developed markets (non-US) total market index
VTIAX = Total int'l index

http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D
Yeah, the Schwab Fundamental indexes did a little better especially small, but as you say, that might be due to what countries the index ended up in and not true of value overall.

jalbert
Posts: 3696
Joined: Fri Apr 10, 2015 12:29 am

Re: Where is that value premium?

Post by jalbert » Wed Oct 10, 2018 2:17 pm

Yeah, the Schwab Fundamental indexes did a little better especially small,
Those also have more than just value exposure going on. To assess a comparison between the value factor premium and the inflation rate it is preferred to look at portfolios that load on value but do not tilt to other factors.

VTRIX and DFIVX are not necessarily neutral on other factors, and are aggregated across many countries. I don’t have access to data for the returns of value for individual countries over the last 10 years, but VTRIX and DFIVX returns do not suggest a positive value premium outside the US over the last 10 years.
Risk is not a guarantor of return.

KJVanguard
Posts: 61
Joined: Fri Oct 05, 2018 3:39 am

Re: Where is that value premium?

Post by KJVanguard » Thu Oct 11, 2018 10:10 pm

pascalwager wrote:
Wed Oct 10, 2018 1:04 am
KJVanguard wrote:
Sat Oct 06, 2018 5:40 pm
Nate79 wrote:
Sat Oct 06, 2018 5:13 am
So explain again why there is so much emphasis put to tilting to small cap value instead of small cap growth?
I can easily imagine someone reasonable owning a blend fund.

I must admit that I'm curious who owns growth funds and why?
I don't know who owns them, but John Cochrane says the proper owners are investors who wish to reduce risk.
Since Larry Swedroe argues Value is a risk premium (not a free lunch), I suppose a conservative investor who wants "safe" stocks would own growth. Yes, that does seem ironic when conservative investors swoon over high dividend value stocks.

MotoTrojan
Posts: 2279
Joined: Wed Feb 01, 2017 8:39 pm

Re: Where is that value premium?

Post by MotoTrojan » Thu Oct 11, 2018 10:15 pm

watchnerd wrote:
Mon Oct 08, 2018 7:06 pm
Will the 'small' part persist given the massive decline in the number of publicly traded companies, most of them small?

As Bogle points out, we used to have the Wilshire 5000 index....no longer. Less than 4,000 publicly traded companies now.
Why would less companies decrease the odds of a premium? There are still thousands of public small-caps, and only a handful of private companies in the US worth more than $1B. Many of these small-caps are companies you hear about daily.

jalbert
Posts: 3696
Joined: Fri Apr 10, 2015 12:29 am

Re: Where is that value premium?

Post by jalbert » Sat Oct 13, 2018 12:09 am

Since Larry Swedroe argues Value is a risk premium (not a free lunch), I suppose a conservative investor who wants "safe" stocks would own growth. Yes, that does seem ironic when conservative investors swoon over high dividend value stocks.
Investing in growth may be as risky as investing in value. Investing in a broad market index is almost surely safer than investing in growth.

“Value stocks” and “dividend stocks” are not synonymous.
Risk is not a guarantor of return.

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