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Why small value is worth investing in [Members]
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@TA – excellent as always. Thank you.
Are you able to cludge togeth… errr… scientifically deduce indicative returns of holding say 100% Global LC tracker (inc. US) and say 50/50 and 75/25 All World tracker and All World SCV? Is there a sweet spot for the mix?
Over the last 5 years I reckon, back of the envelope, 100% Global LC about 9%, 50/50 about 8% and 75/25 somewhere in between? Are you able to go further back than that? Could you? Purleeze!!!
There also was a Saturday reading link a few weeks ago (sorry, can’t find it) that suggested over 10 years it’s a bit of a wash as market beta overwhelms all the factor returns. What are your thoughts on that? Though I guess to get to the long run we’ve got to survive the short run so it might help when LC falters.
Given that AVSG is 66% US and a big chunk of financials for me it’s about timings. Now a good time to buy in. (Y/N?)
But I’m erring on yes for all reasons stated above as well as current price and FX.
Interestingly, the annual report states outperformance on benchmark (Sep 24) but I wonder if that’s still true given the current funny farm state of US affairs.
Comprehensive and thought provoking @TA, thanks for writing it.
As with all factor bets, for me the burning question is that of timing. Your graph of SPX vs Small Value over the very long run showing periods of roughly a decade of leadership then a change would suggest a change is due, if indeed history is a guide. It also shows you really do need to time those periods of under and over performance reasonably well for it to be worthwhile or you need the staying power and the horizon to remain contrarian throughout a 10+ year period of underperformance in order to ultimately capture that return premium over decades (Which can get a bit “Jeremy Grantham”…15 years later…any day now). Adding in momentum and quality as a hedge presumably takes you back to something resembling the broad market.
I thought your comment sums it up well:
“Long-term averages may not actually foretell the idiosyncratic periods that prevail in your own lifetime.”
In many ways it goes back to that same old question of if, when and why mega cap tech hits a ceiling and drags on the broad market. I won’t regurgitate the arguments we all know them well but the dilemma persists. April appeared to be the turning point then again those same names lead the recovery.
There’s certainly the valuation argument but with permanently higher rates and a leveraged US small cap index arguably hollowed out by private equity, maybe that historic valuation gap vs net cash mega caps is only logical and this time is (for now at least) somewhat different? Personally I don’t know and it’s the absence of a compelling thesis on timing that holds me back.
Very interesting analysis. Love Betteridge’s law. Makes sense that small value outperformance would persist, because they are genuinely riskier.
I found it hard to compare value funds because they tend to use different filter rules, and that can make a big difference.
A concern about value is that it overweighs financials. E.g. AVSG has ~27% financials, which makes me think of regional banks without the TBTF taxpayer backstop, primed to blow up in the next financial crisis. (NB I haven’t checked what financials exactly they hold.)
@Sparschwein – I think the idea of adding a quality filter to value funds makes sense – and happily AVSG includes that. There doesn’t seem to be one value metric to rule them all, so my ideal fund would include multiple measures. That said, AVSG is the only global small cap value fund readily available – which narrows down the choices a bit 🙂
@AoI – I take comfort in SCV winning across all time frames because I don’t think I can market time. Obvs long-term superiority wouldn’t help me if it lagged for the next 30 years, so I hedge my bets with Momentum and also allocating the lion’s share of my equity proceeds to a vanilla global tracker.
One thing I like about SCV is the opportunity to diversify away from the tech sector – which dominates my other holdings.
@Brod – so going back to 1990 (as far as we can go back with Int small cap value) I get:
100% Global All-Cap: 7.45% annualised
75/25: 7.99%
50/50: 8.47%
Nominal USD returns.
Small cap value allocation is 60/40 US SCV / International SCV
@TA – thanks, that’s brill.
So with a 50/50 portfolio I might receive a massive 0.25% Global SCV return bonus? Not really worth the effort.
Unless they’re counter-cyclical of course.
No worries, though I’m not quite following your o.25%.
50/50 Vanilla / SCV indicates 1% premium.
Pop that into a 50/50 equity/bond portfolio and it’s a 0.5% premium annualised.
That seems worth it to me, aside from the diversification benefits. Let me know if I’m missing something. It’s a bit early in the morning for me 🙂
Great post but any chance you could use colours more friendly to colour blind readers in your graphs? Orange, green and pink are a nightmare!
Sure, can you recommend a site that offers good advice on this?
@TA – Soz, 50% equities in the Portfolio, 75/25 LCB/SCV.
And the pain if SCV underperforms for some length of time. Maybe worth it, maybe not.
I really enjoyed reading this post. Thanks TA!
ERN’s latest post looks at US small value and apparently suggests that the small value premium is probably gone (or have I missed something?). Why do you think ERN’s conclusion disagrees with you? Can you point out something you would be critical about in his analysis?
Cheers, Tom! And as I’ve probably said before, you’re definitely my favourite Dr Who 🙂
The problem with the “small value premium may have disappeared” argument is that the premium is alive and kicking outside the US. ERN doesn’t deal with why that should be so and what it may mean.
2006 is the pivotal point in Karsten’s US data but it’s 14 years after Fama-French publish their findings and it doesn’t align with the availability of easily accessible funds targeting value.
I definitely buy the idea that factor decay will likely reduce the premium, and could erode it completely. It’s also plausible that SCV has stopped working in the US but not elsewhere. But this barren run could simply be cyclical underperformance. SCV is meant to be risky. A credible explanation is that the risk has materialised in the US. I think that argument is bolstered by the fact that SCV has outperformed ex-US of late.
ERN’s SWR results only show that SWR outputs are extremely sensitive to inputs. SCV improves performance in the 1900s and 1910s for example. Precisely the periods in UK history when you most needed the SWR boost. If he ran his analysis again, using international data, the results per decade would be different.
ERN isn’t clear about the shortcomings of his approach, though he’s taken to task on this in the comments. A similar problem affects his analysis of the Golden Butterfly portfolio in the same article.
ERN is right when he says that portfolio is overfitted to work from 1970. But his article doesn’t mention that you must disregard gold returns before 1970, too – because the gold price is government controlled.
If you haven’t read them already, then the comments on the article are well worth a look. ERN’s readers highlight most of these points and I don’t think he pushes back convincingly.
I do agree with his conclusion:
“If you believe that going forward, both HML and SMB will fetch a modest extra return over the boring large-cap blend index, I don’t fault you for tipping your toes into the Small-Cap Value pond. But don’t expect miracles.”
This reader’s comment is great:
https://earlyretirementnow.com/2025/06/02/small-cap-value-swr-series-part-62/#comment-36508
I forgot to add, my personal solution to this is to invest in momentum and small value. Momentum hasn’t suffered from SCV’s bad recent run. Some of the other factors also look fine, which begs the question why haven’t they been arbitraged away too?
I’m an infrequent commenter these days but felt it was worth flagging Tyler’s very thoughtful response on Portfolio Charts: https://portfoliocharts.com/2025/06/11/the-human-complexities-of-correcting-the-record/
If you’ll indulge me on a thought of mine. Whilst I have huge respect for Karsten’s work (he’s clearly a very intelligent and knowledgeable person), he has a big blind spot in acknowledging when he’s made an error or his work has a short-coming. You see it in his responses to the comments in the above linked piece. He has a lack of curiosity in approaching those comments. He strikes me as guy who has strong opinions and will seek to prove them robustly. But if it falls outside of that, he’s not interested. For me that not a good combination – as such I approach all his work with caution.
Cheers, TDM. That was an enjoyable and well argued read.
@TA, @TDM – Thanks TA! I recommend watching Shada if you haven’t watched it yet. Unfinished but also unmissable! Douglas Adams is a great writer (and great authors never die)!
You’ve both made excellent points. I had noticed Karsten’s blind spot a long while back too. Thanks for mentioning the comments. When I read the post there were no comments yet. I’ll go back and read them.
The under performance of SCV in the US might be related to the spectacular (bubble?) performance of large cap tech over the recent decades in their stock market.
“The under performance of SCV in the US might be related to the spectacular (bubble?) performance of large cap tech over the recent decades in their stock market.”
Yes, essentially much of tech sits in the growth part of the stock universe, so its spectacular performance has left value in the shade.
I have not watched Shada but I do remember reading about it years ago in Dr Who magazine. Must get around to it.
Having read the article (fascinating as always) I was sold on small value. But then I looked at the recent performance of the ETF. The last 5 years had been a bit of a horror story. I’d be worried I’m getting in, to go nowhere or on another rapid descent.
I’ve not got the guts or the optimism of a 100 year lifespan to risk such a (recently) volatile fund. Think I’ll have to stick with global tracker, UK ftse 100, euro tracker, global small business, corp bonds, and a bit of momentum for my (admittedly rather conservative) sense of fun.
But, as always, thanks for making me think!
@ColinThames – No worries, cheers for your thoughts. SCV is definitely high risk and high volatility. Personally speaking, I’ve been holding a multi-factor ETF for about 10-years now. It’s been fine but so far that money would have done better in a global tracker 🙂
Just out of interest, which ETF were you looking at?
@general interest – EM small and EM value versus emerging markets: https://larryswedroe.substack.com/p/the-reports-of-factor-investings
@The Accumulator
Thanks for replying.
Oops. On rechecking I realised the Avantis small value ETF (AVSG) has only run for about 6 months. I have no idea which ETF performance data I was looking at. Certainly not the one you’d mentioned and almost certainly not a small value ETF.
Apologies