Value small cap

aroominyork

masonic said:

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.

Although in reducing your US growth exposure, you went for SPX4 (balanced US mid cap) instead of USSC (US small cap value). Did you not want to go too far down the cap size? However, SPX4 in green, USSC in blue... cigarette papers come to mind:

Linton said:

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.

I'm already underweight US - they are about 40% of my equities - so I'm not sure I want to veer further away from the index. I'll sit on my hands for how (although sitting on hands doesn't necessaily stop knees jerking!).

masonic

aroominyork said:

masonic said:

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.

Although in reducing your US growth exposure, you went for SPX4 (balanced US mid cap) instead of USSC (US small cap value). Did you not want to go too far down the cap size? However, SPX4 in green, USSC in blue... cigarette papers come to mind:

I actually just invested in SPX4 to extend my US exposure beyond 500ish companies as a diluting measure. I agree with Linton's notion that there is a lower limit for weighting an investment, below which it probably isn't worth it. I could hold 5% of SPX4 with my 45% CSP1 (S&P500) without a significant overweight (S&P400 is about $3tn vs $50tn for S&P500).

I could leave that alone and consolidate my other regional small cap funds into something like AVSG at some stage (perhaps after leaving the clutches of HL, which I can do in August - to avoid the eye watering trading fees). Which would simplify my portfolio and reduce AMC. This would have the effect of increasing my US exposure somewhat without increasing my largest single company exposure.

aroominyork

Linton said:

Diversification is paramount. The only constraint is that funds of less than 5% of the portfolio are not worth the management effort of including.

masonic said:

I agree with Linton's notion that there is a lower limit for weighting an investment, below which it probably isn't worth it. 

Yes, agreed. For equities I invest in chunks of 3%. I only have the minimum 3% in a couple of regional index funds for portfolio balancing purposes; my three active funds are 6%, 9% and 12%. For fixed interest, I use chunks of 5%.

Linton

aroominyork said:

masonic said:

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.

Although in reducing your US growth exposure, you went for SPX4 (balanced US mid cap) instead of USSC (US small cap value). Did you not want to go too far down the cap size? However, SPX4 in green, USSC in blue... cigarette papers come to mind:

Linton said:

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.

I'm already underweight US - they are about 40% of my equities - so I'm not sure I want to veer further away from the index. I'll sit on my hands for how (although sitting on hands doesn't necessaily stop knees jerking!).

There is always small cap US. Meets both objectives with one fund.

aroominyork

Linton said:

aroominyork said:

masonic said:

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.

Although in reducing your US growth exposure, you went for SPX4 (balanced US mid cap) instead of USSC (US small cap value). Did you not want to go too far down the cap size? However, SPX4 in green, USSC in blue... cigarette papers come to mind:

Linton said:

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.

I'm already underweight US - they are about 40% of my equities - so I'm not sure I want to veer further away from the index. I'll sit on my hands for how (although sitting on hands doesn't necessaily stop knees jerking!).

There is always small cap US. Meets both objectives with one fund.

US small cap hasn't given a sufficient risk adjusted premium over time. Yes, it provides diversification to US growth, but not the kind of premium that small cap value has (see the Monevator articles).

aroominyork

Having set the scene using long-run data going back to 1927 and saying "The record shows that long-only US small cap value beat the US market by 2% per year on average", Monevator subsequently looked at different strategies' returns over more recent timeframes. You had to buckle in 25 years ago - or just before the Wall Street Crash - for small cap value to outperform the market. 

It's also interesting how the recent period when the Mag 6/7 led an inexorable charge is the only timeframe when momentum did not beat the market. It is easy to see why most roads eventually lead back to the index.