The Investment Scientist

10-Year Return Perspective of Small Cap Value

Posted on: October 26, 2011

Many investors are puzzled by the underperformance of small cap value since May of this year. They ask: “Is it worth being in an asset class that can’t do well in bad times?

To answer their question, I did a 10-year rolling return comparison between the Fama/French Small Cap Value (SCV) and the S&P 500 index using data from 1931 to 2010. The first 10-year period is 1931 to 1940, the second is 1932 to 1941, and the last is 2001 to 2010. Here is the rolling return chart I got.

Here are the summary statistics:

Small Cap Value S&P 500
Best 10-yr annualized return 33.1%  (1975 – 1984) 19.7%  (1950 – 1959)
Worst 10-yr annualized return 5.9%  (1931 – 1940) -1.8%  (2000 – 2009)
Frequency of outperformance 63 out of 70 ten-year periods 7 out of 70 ten-year periods

If you just look at the chart and the statistics, what is there not to like about small cap value? It outperformed the S&P 500 nine out of every ten 10-year periods, usually by a huge margin, and even when it didn’t, it didn’t by a tiny bit.

But alas, small cap value is not for the faint of heart.  In a bear market, it usually falls quicker and harder than large cap.

Think about it, the market is ultimately fair; those investors who can endure more pain in a down market will reap the reward of higher long-term returns.

Get my white paper: The Informed Investor: 5 Key Concepts for Financial Success.

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Author

Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC. He is also a regular contributor to Morningstar Advisor and Physicians Practice. To explore a long-term wealth advisory relationship, schedule a discovery meeting (phone call) with him.



You may also get his monthly newsletter, or join his Facebook page for regular wealth management insights. Michael's email is info[at]mzcap.com.

Twitter: @mzhuang

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