The Small Cap Value Smackdown!

Small beats Large, Value beats growth!  So “small cap value” should perform well. Let’s hold a little contest! Who will win? We chose the time period of 1/1/1999 to 4/30/16 – over 17 years of data. DFA? (DFA US Small Cap Value – DFSVX) Vanguard? (Vanguard Small Cap Value Index Fund – VISVX) The indexes? (Russell 2000, Russell 2000 Value/Growth, US Large Growth) The results were exactly as we would have guessed. DFA came out on top (10.5%) followed by Vanguard (9.3%), Russell 2000 Value (8.5%), Russell 2000 (7.3%), Russell 2000 Growth (5.6%) and finally, as expected, large cap growth index at the bottom (5.0%). We ran the study over the 17+ years from 1/1/1999 to 4/30/16. Let me also point out that a fund outperforming their most relevant index over 17 years (even one year) is very unusual and points out why we rank DFA #1 and Vanguard #2 across all finds families. The trend chart looks like this. (click it to see it larger) The numbers look like this. (click it to see it larger) Why did DFA win? DFA provides a greater tilt towards small and value. Another is that DFA uses techniques to overcome the large bid ask spread that exists for very small thinly traded stocks. Finally DFA also utilizes the profitability premium, which joins small and value as one of the pervasive market premiums available to...

How to Choose the Best Wines and Win Bets at Del Mar!

One of the many great attributes of my family is that the vast majority of the time we do not take ourselves too seriously individually or as a family. Life is too short, isn’t it? Look at how we choose our bottles of wine. So sophisticated…. NOT! If the artwork on the label is cool, or the name of the vintner, or the title of the wine draws us in…we’re there. When we discovered a 2007 Pinot Noir called O’Reilly’s with a beautiful drawing of an Irish Wolfhound silhouette – we would have bought every bottle made if we could. See the O’Reilly’s Pinot Noir label here. Another example of our sophistication (ha,ha) – is when we’re at Del Mar gambling on the horses – if you call $5 a pop gambling! We’re just there for the atmosphere. It’s all about the name of the horse – that’s how we place our bets. We have so much fun with that. Irish names usually do it for us.  “Shamrock surprise”, “Celtic Lady” would each be a great horse for us to pick! (Yes, we do win occasionally!) What really is surprising, once you know more about it – is the game of naming mutual funds. A large part of the time it’s purely marketing strategy – how can we name and market our fund so that it’s not one of the 20% that will go belly up in the next couple years? Or better yet, attract a lot of investors? We’re talking about investing our hard earned money – really – you’re going to market us as we make the important decision...

10 Reasons to be Cheerful!

Courtesy of Dimensional’s Jim Parker and here’s a link to a PDF. Do you ever listen to the news and find yourself thinking that the world has gone to the dogs? The roll call of depressing headlines seems endless. But look beyond what the media calls news, and there also are a lot of things going right. It’s true the world faces challenges in maintaining stable and well-functioning social, environmental, and economic systems. The legacy of the financial crisis is still with us, and concerns about climate change and sustainability are widespread. Europe is grappling with a refugee crisis; China faces a difficult transition from an export and industrial-led economy to one driven by domestic demand; and the US is preoccupied with a sometimes rancorous election campaign. But it’s also easy to overlook significant advances in raising the living standards of millions, increasing global cooperation on sustainability, and efforts to build greater transparency and trust in financial institutions. Many of the 10 developments cited below don’t tend to make the front pages of daily newspapers or the lead items in the TV news, but they’re worth keeping in mind on those occasions when you feel overwhelmed by all the grim headlines. So here’s an alternative news bulletin: Over the last 25 years, 2 billion people globally have moved out of extreme poverty, according to the latest United Nations Human Development Report.1 Over the same period, mortality rates among children under the age of 5 have fallen by 53%, from 91 deaths per 1000 to 43 deaths per 1000. In September 2015, all members of the UN set 17 sustainable...

A Slight Tweak made to our Model Portfolio Designs

We’re talking a really small tweak here. When you model these changes going back 17+ years, the impact is minor. So, nothing to write home about. This goes back to changes we made in the last year or so. In the last year we decided, with the apparent future increases expected in interest rates, to reduce our already low exposure to fixed income with moderate term length to those of only short term length. To accomplish that, we switched out a fund. DFA Intermediate Term Extended Quality was replaced with DFA Short Term Extended Quality and we made this change across all 8 model portfolios.  (Note that the 100% equity portfolio has no fixed income, so the change didn’t impact it.) The Short Term fund would fluctuate less in different interest rate environments. It would have slightly less overall return – although in the short “increasing interest rate environment” expected it would perform better than Intermediate Term. So how are we modifying our approach? The volatility in our most aggressive portfolios, since they have a very high percentage of stock – is driven by stock not by the small percentage in bonds. Therefore we will keep the Intermediate Term bonds in the Models with 85%, 77% and 70% equities. The 40%, 47%, 55% and 63% portfolios will retain the Short Term bonds since the intent of the less aggressive portfolios is less volatility. When we make these changes and model the performance results going back to 1/1/1999 – the results are almost identical, though, as expected we get a slightly higher return in the most aggressive models with the...

A Week in the Life of the Market

You’ve read my blogs about the premiums to be found in the market – they occur most of the time – persistently not constantly. Small beats large, value beats growth, etc. Do I watch the market closely – well – yes – with a focus on the major asset classes noting when the “premiums” are in play and when they are not. We don’t invest for a short time – so though it may be interesting to nerdiest among us to look at a week’s time – it’s not instructive. I noticed at the end of May, that small stocks were in favor for a number of days almost every day over the large stocks indices of S&P500 and Dow Jones. So just for fun I threw together a chart from Tuesday May 24 through Thursday June 2. See the chart below. Click on it to enlarge it. Yes! The small stocks were really performing  well – over 4% in a very short time frame! The chart shows the Russell 2000 (small stocks) +4.06%, Emerging Markets +2.29%, S&P500 +1.83%, International Developed, +1.30% and finally the one we always hear about, the Dow Jones, only 32 stocks, +0.94%. So small stocks were up more than 4 times than the Dow Jones over this brief time period – and all the asset classes shown beat the Dow Jones include Emerging Markets and International Developed. What conclusions can be made? Well, none. Not even remotely close to the 15-30 years of data needed to make a conclusion about returns! Do I enjoy the times that one of the prime premiums (small over...