I spent a lot of time last night going through McQ's thread on the Size and Value premiums. It was interesting to revisit that old thread.So here's one more (anecdotal) data point that what is "pretty much acknowledged" by factor cognoscenti is not what is reaching the general public:It is pretty much acknowledged the size factor never existed as statistically significant after the data was corrected for delisting biases.I have enjoyed the Target-Date Fund as a one-stop shop for our retirement accounts.
However the work of Paul Merriman is very convincing. Overweighting small-cap stocks and possibly small-cap value stocks seems to be a good bet for excess returns. Our time period is about 30 years to retirement, so we have a very long holding period.
Where is the current research on the general market cap index fund vs including some overweighting?
Thank you!
There definitely is a Size factor in the market, the question is whether or not there is a Size premium. There is a minority opinion in academia that Value isn't a factor, that Value's performance characteristics can be explained by the combination of two other factors. The thing is, when you kick out Size and Value from the factor models, they just don't seem to make any sense. I would say that there definitely is a Value factor in the market, intelligent people can debate whether or not ordinary investors can harvest a premium.
Size is indispensable for a factor model and Value is nearly so. Otherwise you would be left with Market, Momentum, Quality, and perhaps Low Volatility if you go by the 5 factors that Larry Swedroe discusses in his book. The Fama/French model five factor model would be reduced to Market, Investment, and Profitability. Just hard to believe that company size by market cap or relative valuations of companies have little effect on stock prices.
You raised a point regarding the Fama/French method of calculating factor premiums being a black box and possibly a trade secret of DFA. If the precise manner by which factor premiums are calculated for the Kenneth French database is a DFA trade secret, then that secret isn't helping DFA returns. McQ pointed out that in the aftermath of the 2020 Covid bear market, DFA funds captured the rebound of the market less successfully than the performance numbers from the French database. I ran some numbers comparing five DFA funds with five Vanguard funds and found that DFA captured the rebound of the market better than Vanguard except for the Large Growth category.
Statistics: Posted by nedsaid — Fri Mar 15, 2024 8:34 pm — Replies 380 — Views 28163
