Value small cap

Thrugelmir

Linton said:

Thrugelmir said:

BrockStoker said:

El_Torro said:

Small caps are more volatile than a standard global index tracker.

Volatility is only a risk in the short term. Over time, volatility becomes much less of a risk.

Volatility is a measurement of one form of risk. Volatility is in effect uncertainty. When investing in equities there's never going to be total certainty. 

That is why it is essential to have an achievable objective for investing.   For one to rationally invest at all it must be assumed that investments generally increase in value  with volatility seen as the variability about the long term trend. Therefore over time you will get closer to achieving your objective despite volatility.  As this happens you can modify your portfolio to reduce the volatility.

Research has shown that very few companies actually outperform. With the majority performing worse than holding cash or  equivalents. Hence why in more recent decades bonds have been a useful counter balance. In the past few years the concentration of winners has been focused more and more into a select group of companies. Safety in numbers of holdings no longer protects one from volatility. 

Notepad_Phil

Thrugelmir said:

Linton said:

Thrugelmir said:

BrockStoker said:

El_Torro said:

Small caps are more volatile than a standard global index tracker.

Volatility is only a risk in the short term. Over time, volatility becomes much less of a risk.

Volatility is a measurement of one form of risk. Volatility is in effect uncertainty. When investing in equities there's never going to be total certainty. 

That is why it is essential to have an achievable objective for investing.   For one to rationally invest at all it must be assumed that investments generally increase in value  with volatility seen as the variability about the long term trend. Therefore over time you will get closer to achieving your objective despite volatility.  As this happens you can modify your portfolio to reduce the volatility.

Research has shown that very few companies actually outperform. With the majority performing worse than holding cash or  equivalents. Hence why in more recent decades bonds have been a useful counter balance. In the past few years the concentration of winners has been focused more and more into a select group of companies. Safety in numbers of holdings no longer protects one from volatility. 

Do you have a link to that research as I'd be very interested in having a read. I remember Paul Lewis saying something similar a few years ago, but that was comparing a FTSE 100 tracker with the best 1 year fixed rates - so basically active cash management against passive investing in a very small percentage of the world stockmarket, which maybe isn't the fairest comparison.

Thrugelmir

Notepad_Phil said:

Thrugelmir said:

Linton said:

Thrugelmir said:

BrockStoker said:

El_Torro said:

Small caps are more volatile than a standard global index tracker.

Volatility is only a risk in the short term. Over time, volatility becomes much less of a risk.

Volatility is a measurement of one form of risk. Volatility is in effect uncertainty. When investing in equities there's never going to be total certainty. 

That is why it is essential to have an achievable objective for investing.   For one to rationally invest at all it must be assumed that investments generally increase in value  with volatility seen as the variability about the long term trend. Therefore over time you will get closer to achieving your objective despite volatility.  As this happens you can modify your portfolio to reduce the volatility.

Research has shown that very few companies actually outperform. With the majority performing worse than holding cash or  equivalents. Hence why in more recent decades bonds have been a useful counter balance. In the past few years the concentration of winners has been focused more and more into a select group of companies. Safety in numbers of holdings no longer protects one from volatility. 

Do you have a link to that research as I'd be very interested in having a read. I remember Paul Lewis saying something similar a few years ago, but that was comparing a FTSE 100 tracker with the best 1 year fixed rates - so basically active cash management against passive investing in a very small percentage of the world stockmarket, which maybe isn't the fairest comparison.

Google Hendrik Bessembinder

darkidoe

Steve182 said:

Read this and make up your own mind about small cap growth funds being no good...      https://www.trustnet.com/factsheets/o/nfzh/fp-octopus-uk-micro-cap-growth

I think it’s an oversimplication.

The research shows that the lacklustre performance of small cap stocks in general is due to the ‘growthiest’ of the companies in the small cap sector.

If we can eliminate ‘growth’ from the small cap index, there’s higher value exposure and seems to improve risk adjusted returns with a lower SD.

That’s also other factors other than value and size that makes it more robust, ie profitability (RmW) and CmA.

Caveat is that is research and how you bring that into real world practice is the challenge. Some managers might be able to do that successfully (capturing some of the factors at the right balance) perhaps by luck or perhaps by skill.

It’s not so easy to tell what the difference ‘under the tin’ for each ‘small cap growth fund’. 

I think it’s interesting to understand.
The major takeaway for me is perhaps some of the outperformance of active managers is explained by having some factor tilt built into their portfolio although that is difficult to tell whether it’s luck or choice.

https://youtu.be/uErHwq4M6pg

https://gersteinfisher.com/wp-content/uploads/2018/07/Gerstein-Fisher_Research-Returns-Small-Cap-Growth.pdf

https://www.pwlcapital.com/wp-content/uploads/2020/12/Five-Factor-Investing-with-ETFs.pdf

Linton

darkidoe said:

Steve182 said:

Read this and make up your own mind about small cap growth funds being no good...      https://www.trustnet.com/factsheets/o/nfzh/fp-octopus-uk-micro-cap-growth

I think it’s an oversimplication.

The research shows that the lacklustre performance of small cap stocks in general is due to the ‘growthiest’ of the companies in the small cap sector.

If we can eliminate ‘growth’ from the small cap index, there’s higher value exposure and seems to improve risk adjusted returns with a lower SD.

That’s also other factors other than value and size that makes it more robust, ie profitability (RmW) and CmA.

Caveat is that is research and how you bring that into real world practice is the challenge. Some managers might be able to do that successfully (capturing some of the factors at the right balance) perhaps by luck or perhaps by skill.

It’s not so easy to tell what the difference ‘under the tin’ for each ‘small cap growth fund’. 

I think it’s interesting to understand.
The major takeaway for me is perhaps some of the outperformance of active managers is explained by having some factor tilt built into their portfolio although that is difficult to tell whether it’s luck or choice.

https://youtu.be/uErHwq4M6pg

https://gersteinfisher.com/wp-content/uploads/2018/07/Gerstein-Fisher_Research-Returns-Small-Cap-Growth.pdf

https://www.pwlcapital.com/wp-content/uploads/2020/12/Five-Factor-Investing-with-ETFs.pdf

I believe that any outpeformance (or under-performance) of active fund managers is mainly due to factor tilts.  The right combination of tilts is what I look for and is much easier with active funds than passive because they vary so much more.  Looking "under the tin" on how funds are tilted is exactly what morningstar gives you with its Xray analysis.

aroominyork

Why start a new thread when there is a four year old one ready and waiting...

I'm probably not the only person ruminating over Movevator's praise of AVSG at https://monevator.com/avantis-global-small-cap-value-etf-review-avsg/ and https://monevator.com/small-value/ (the second maybe only accessible to members). I'm overweight small caps in the UK but underweight elsewhere so should I nibble... he makes a compelling case. 

masonic

aroominyork said:

Why start a new thread when there is a four year old one ready and waiting...

I'm probably not the only person ruminating over Movevator's praise of AVSG at https://monevator.com/avantis-global-small-cap-value-etf-review-avsg/ and https://monevator.com/small-value/ (the second maybe only accessible to members). I'm overweight small caps in the UK but underweight elsewhere so should I nibble... he makes a compelling case. 

I've always tried to maintain a smaller company allocation ex-US, and more recently, owing to US valuations, took on some small-cap US exposure in the weeks following the US election. I've tended to use Investment Trusts for this (not for recent US exposure) and probably more balanced than value per se. With ETFs like AVSG it does present an opportunity to simplify while tilting further away from growth.

aroominyork

At the most simplistic level, the long-term outperformance of small cap value is counter infinitive. What do you want small companies to do? You want them to grow. But the jury seems to be in about small cap value. 

masonic

aroominyork said:

At the most simplistic level, the long-term outperformance of small cap value is counter infinitive. What do you want small companies to do? You want them to grow. But the jury seems to be in about small cap value. 

Depends on what you are trying to achieve. Some advocate them primarily as a diversifier because they perform well under conditions where large cap blend/growth underperform.

The risk premium for small caps generally is fairly uncontentious, but my observation is that the US is an exception to this in recent decades. But small cap growth is generally just a higher risk proposition without the low correlation specifically attributed to small cap value.

Linton

I would take the view that if it’s there invest in it.  Diversification is paramount. The only constraint is that funds of less than 5% of the portfolio are not worth the management effort of including.

So one is not looking for anything in particular from small value beyond the obvious that it is different to large growth.