Unfortunately they don't show the risk-adjusted returns, and/or whether the returns were independent of the total market. The fact that the 20-year rolling returns were mostly above zero means little. We all know that small caps higher beta and therefore higher expected returns.DFA has a good recent article on this topic:
https://www.dimensional.com/us-en/insig ... nd-presentMany in the industry will recall the disappointing stretch at the end of the 1990s when US small cap value’s trailing 20-year return was statistically indistinguishable from the S&P 500’s. Less familiar might be the periods in 1947 and 1965 when the trailing 20-year premium was similarly flat. In all three cases, small value staged a rapid turnaround.
We can see this by measuring each of the trailing 20-year return spreads again three years later. For example, we compare the observation on December 31, 1999, with the trailing 20-year return difference as of December 31, 2002. In all three previous cases, small cap value’s advantage jumped to more than three percentage points annualized.
No one can say if we’ll get a similar turnaround this time. But history suggests giving up on small cap value after its worst stretches would have been a mistake. Past performance doesn’t upend the logic of expecting a higher return for stocks with low prices relative to their book equity. And, for any remaining skeptics, it’s worth noting that small value’s struggles in the US have not been shared by developed ex US or emerging markets, where small cap value stocks have outperformed their large cap counterparts by 2.7% and 4.0%, respectively, over the past 20 years.
The chart does a good job highlighting that the premium is actually quite persistent (again, roughly 80% win rate), but obviously there are periods where it doesn't work. This is over a long horizon (20 years), which seems about right to judge a strategy. Sometimes it won't work, but often it does. And remember that this chart is for the US market.
The fact that we are getting into uncharted territory with a 20+ year period of rough parity makes me more bullish about this investment class given what has historically occurred. You can't time when it will shift, but patient investors tend to be awarded given the current valuation spreads.
Statistics: Posted by comeinvest — Wed Mar 27, 2024 12:07 am — Replies 639 — Views 45118