Small cap: growth, value or index?

Legacy_user

I've read that small cap & micro may be the place where there's a good chance of beating the index?

If so is growth or value better for small cap? I've read one persons suggestion that value is better here but that's just hearsay to me

And can you have growth/ value index funds? I wouldn't have thought so if its a representation of an entire index

masonic

Pretty decisive so far.

grey_gym_sock

the academic research says that "value" shares will tend to outperform "growth" shares in the long run - though the long run could take a very long time to arrive, i.e. "growth" might be ahead of "value" for a decade or more - so how long will you be prepared to wait? (all this applies to both big-cap and small-cap shares.)

however, a fund with "value" or "growth" in its name is not necessarily investing in "value" or "growth" in the sense that the academics define it. (but it might be.) so you can't tell much from the name.

it is possible to construct an index which follows "value" shares as the academics define it. (though this is more complicated than a normal index.) it is also possible to run a fund (or an ETF) which tracks such an index.

most of the academics also expect small-cap shares to outperform big-cap shares in the long run. but again, they might fall behind for a decade or 2.

a fund with "small cap" in the name will almost certainly actually be invested in small-cap shares. so that is a bit more straightforward. however, exactly how small-cap those shares are will vary, and can make a difference.

EdGasket

What do you mean by a 'value' share? One with a low price to NAV or one that looks good value because it has a low PE, or something else?

System

I'm wondering, if there isn't miles of difference between growth and value performance, maybe I should just blend for the diversity

I'm personally thinking "small" cap may be more able to grow than micro or nano cap, as more resources are to hand. I also worry about fake nano shares and the liquidity of nano cap

Anyway I think small cap might be better priced than the 100 anyway, as it doesn't have so much pension prominence, I suppose that makes the 100 more like growth stock as a whole

System

Ed - I'll have to look up those terms as I'm a novice

Was just looking from the dividend price/earnings angle

slowpoke_rodriguez

fft...

If the cap fits,
wear it!

System

I hope the size of my cap isn't a reflection on my endowment: p

BrockStoker

EdGasket wrote: »

What do you mean by a 'value' share? One with a low price to NAV or one that looks good value because it has a low PE, or something else?

I think in this context value basically means shares in a company that is struggling but has good prospects for a recovery. Funds which I hold in this category would include Marlborough Special Situations and Henderson Opportunities. I also hold Schroder Recovery although that is more large cap focused.

Personally, since I've become aware of the diferences I've been gradually moving from growth to value in general, and I also prefer small caps for most sectors.

System

Maybe let growth stock be your diversification?

grey_gym_sock

EdGasket wrote: »

What do you mean by a 'value' share?

if you're asking: what definition is used in the academic research ...

they seem to have about 4 definitions. in each case, a "value" share means a share with a low ratio (compared to other shares in the same market) of price-to-something. (note that, because we're looking for a low ratio relative to other shares, there are by definition always some value shares out there in a given market - even if the whole market appears overvalued.)

the "something" used varies:

One with a low price to NAV

that's 1 of them. often called "price to book value".

or one that looks good value because it has a low PE, or something else?

that's another. price to earnings.

there's also price to cash flow.

and price to sales.

so where's the sense in having 4 different definitions? basically, the academics claim that they get similar results, whichever definition they use. so the idea is that any of these methods will given you shares with a low ratio of price-to-intrinstic-value, in some sense.

any 1 share may well appear cheap by 1 ratio, and yet expensive by another. but the point of the research is to use ratios to select the more value-y shares out of a large pool, of 100s or 1000s of shares. so perhaps you pick the cheapest-looking 1/3 or 1/2 of the pool, and invest in them. and when you do that, apparently it doesn't make much difference which ratio you use.

however, it is probably best to use some combination of the above ratios, to be more diversified.

BrockStoker wrote: »

I think in this context value basically means shares in a company that is struggling but has good prospects for a recovery.

that is what many active "value" fund managers are trying to do. the academics would agree that "value" shares are ones in companies which are struggling; but they think that you don't even need to identify the ones that will pull through in order to profit from value shares, because as a group they tend to be priced down too far. a merely average, but well-diversified, collection of value shares, some of which recover well, some of which continue to do badly, or even go bust, is likely to give you somewhat higher returns than just buying the whole market.

at least in the long run. but the long run might take decades to arrive. and meanwhile, value shares are more volatile - i.e. likely to fall further and faster in a bear market.

and of course, the theory might be wrong. or only partly wrong, but wrong enough that you're investments don't perform quite as you hoped.

i find this persuasive enough that i wouldn't want to target "growth" shares - defined as the opposite of "value", i.e. shares with relatively high ratios of price-to-something. (however, active funds with "growth" in the name are not always targeting growth in this sense.)

but i'm less sure whether to go for "value", or just for a blend of value and growth (i.e. a bit of everything). in practice, my portfolio a mixture of value and blend (which is another way of spreading your bets).