About a month ago, I posted a question about micro-cap value vs small-cap value. That question assumed that micro / small-cap value stocks / funds are good investments that did very well from 2001 through 2013, have been out of favor since then, and presumably will eventually come back into favor. I think this is the majority view but, recently, I have seen a couple of articles that hypothesize that the recent under performance of micro / small caps might be due to changes in the market.
Larry Swedroe in a column, "What Happened to the Size Premium?", published on the Morningstar site, argues that "It's still here, but investors may need to venture into private equity to use it." (See https://www.morningstar.com/alternative ... ze-premium.) A few exerpts:
"... in the 1990s, 15% of companies in the Russell 2000 had negative 12-month trailing earnings, today that share is about 40%!"
"Because the passage in 2002 of the Sarbanes-Oxley Act greatly increased the cost of being a public company, today companies are waiting to become much larger before going public. The result is that by 2020 the number of US publicly listed stocks had fallen 50% over the prior 20 years, to about 3,500."
"Another outcome from the passage of Sarbanes-Oxley has been that the smallest quintile is made up of much larger stocks today than has been the case historically. For example, Vanguard Small-Cap ETF VB, with $54 billion in assets under management, had an average market cap of $6.8 billion (not so small cap) at the end of March 2024. The takeaway is that to capture the takeover premium in small companies, private markets (in the form of private equity) provide a greater opportunity than in public markets."
Likewise, Spencer Jakab, in the WSJ's Heard on the Street column from July 8, 2024, asks "Where Have All the Good Stocks Gone?" (See https://www.wsj.com/finance/stocks/wher ... os1&page=1, subscription required.) This article notes that "there are fewer stocks to buy and the quality of the remaining ones is surprisingly bad."
Roughly 81% of my US equity exposure is through Fidelity (FSKAX, in IRA) and Vanguard (VTSAX, in taxable account) total market index funds. Roughly 11% of my US equity exposure is through T. Rowe Price Small-cap Value (PRSVX) and Vanguard Tax Managed Small-cap (VTMSX). Both of these are held in taxable accounts. I consider them to be good funds and they have large enough unrealized capital gains (>50% and >80% of current value respectively) that I am reluctant to sell. (I am taking distributions in cash.) This question is about the last 8%. (Note: Percentages are for the portion of my portfolio where allocation is determined by me, e.g., excludes target date funds that determine their own asset allocation.)
The largest positions in that last 8% are micro-cap (BRSIX and individual stocks). I am undecided if I should keep the micro-caps, switch to a small cap value index, e.g. VSIAX, or a small-cap value active ETF, e.g, AVUV, DFSV, or BSVO (that may try to screen out low quality stocks), reallocate to something other than micro / small cap value (if there aren't any good investment vehicles available), or a mix of the alternatives.
Larry Swedroe in a column, "What Happened to the Size Premium?", published on the Morningstar site, argues that "It's still here, but investors may need to venture into private equity to use it." (See https://www.morningstar.com/alternative ... ze-premium.) A few exerpts:
"... in the 1990s, 15% of companies in the Russell 2000 had negative 12-month trailing earnings, today that share is about 40%!"
"Because the passage in 2002 of the Sarbanes-Oxley Act greatly increased the cost of being a public company, today companies are waiting to become much larger before going public. The result is that by 2020 the number of US publicly listed stocks had fallen 50% over the prior 20 years, to about 3,500."
"Another outcome from the passage of Sarbanes-Oxley has been that the smallest quintile is made up of much larger stocks today than has been the case historically. For example, Vanguard Small-Cap ETF VB, with $54 billion in assets under management, had an average market cap of $6.8 billion (not so small cap) at the end of March 2024. The takeaway is that to capture the takeover premium in small companies, private markets (in the form of private equity) provide a greater opportunity than in public markets."
Likewise, Spencer Jakab, in the WSJ's Heard on the Street column from July 8, 2024, asks "Where Have All the Good Stocks Gone?" (See https://www.wsj.com/finance/stocks/wher ... os1&page=1, subscription required.) This article notes that "there are fewer stocks to buy and the quality of the remaining ones is surprisingly bad."
Roughly 81% of my US equity exposure is through Fidelity (FSKAX, in IRA) and Vanguard (VTSAX, in taxable account) total market index funds. Roughly 11% of my US equity exposure is through T. Rowe Price Small-cap Value (PRSVX) and Vanguard Tax Managed Small-cap (VTMSX). Both of these are held in taxable accounts. I consider them to be good funds and they have large enough unrealized capital gains (>50% and >80% of current value respectively) that I am reluctant to sell. (I am taking distributions in cash.) This question is about the last 8%. (Note: Percentages are for the portion of my portfolio where allocation is determined by me, e.g., excludes target date funds that determine their own asset allocation.)
The largest positions in that last 8% are micro-cap (BRSIX and individual stocks). I am undecided if I should keep the micro-caps, switch to a small cap value index, e.g. VSIAX, or a small-cap value active ETF, e.g, AVUV, DFSV, or BSVO (that may try to screen out low quality stocks), reallocate to something other than micro / small cap value (if there aren't any good investment vehicles available), or a mix of the alternatives.
Statistics: Posted by TomBH — Wed Jul 17, 2024 6:02 pm — Replies 3 — Views 568