Larry Swedroe, chief research office at Buckingham Strategic noted in a recent post about the underperformance of the size and value factors in the US equity markets.
The Reports of Factor Investing’s Death Are Greatly Exaggerated
I think people need to contextualize and look at what they can gain from shifting to more low volatility, momentum, value, or smaller stocks more in a systematic-active buy-and-hold over a longer period time frame than year by year.
If it is year by year, there will be periods of underperformance.
Larry wish to bring to our attention that everyone knows how well the S&P 500 did over risk-free US Treasury Bills. This is what we call the market beta factor.
In a way, if you say factor investing doesn’t work, then why are you still investing in equities when you could invest in fixed income?
Yet what I see is that some of you would have equities here and there. Perhaps it is more of a blind visual inspection and trust that investing in equities give you better returns.
Still Larry brings out that there are periods where market beta underperform the US Treasury bills:
- 1929 to 1943 – 15 years
- 1966 to 1982 – 17 years
- 2000 to 2012 – 13 years
Those are not short periods.
I tend to argue the gross profitability factor is stronger in the United States.
If you look at the international, you can see evidence of this working, by looking at the real-world Dimensional Fund Advisers’ funds that focus on international.
Here are the returns from Oct 1996 to May 2025 (27-28 years):
- DISVX | International Small Cap Value: 7.85% p.a.
- DFISX | International Small Cap: 7.02% p.a.
- DFIVX | International Value: 6.66% p.a.
- MSCI EAFE Index (net dividends): 5.45% p.a.
Small Cap Value did better than Small Cap. Small Cap did better than the blended (EAFE). Value did better than the blended.
We can also look at the emerging markets from Jan 1999 to May 2025 (25 years):
- DEFVX | Emerging Value: 9.75% p.a.
- DEMSX | Emerging Small cap: 10.51% p.a.
- MSCI Emerging Markets (net dividends): 7.75% p.a.
Larry did not provide any Dimensional emerging small cap value and perhaps there isn’t for Dimensional.
But I dug into Returns Web and found that MSCI has a Small Value index:
- MSCI Emerging Markets Small Value (net dividends): 10.55% p.a.
In a way, it is not always a Dimensional thing. The Small Cap premium does exist.
I think is also important to realize that while some would say international and emerging markets have not done as well as the US, systematically tilting to small cap or value, or both, can improve your performance. Especially when you do not know what will happen in the future.
Larry also posted the results post-GFC, for those who wish to take away the good performance of international and emerging markets during the 2000 to 2009 period.
International:
- DISVX | International Small Cap Value: 9.71% p.a.
- DFISX | International Small Cap: 9.54% p.a.
- DFIVX | International Value: 7.96% p.a.
- MSCI EAFE Index (net dividends): 7.77% p.a.
Emerging Markets:
- DEFVX | Emerging Value: 7.59% p.a.
- DEMSX | Emerging Small cap: 9.93% p.a.
- MSCI Emerging Markets (net dividends): 6.99% p.a.
- MSCI Emerging Markets Small Value (net dividends): I cannot add easily because I am not sure when Larry Started. If start in Jan 2009 it is 10.35% p.a. If Jun 2009 it is 7.68% p.a. If it is Jan 2010 it is 5.69% p.a.
Larry also cite the example of AQR’s Style Premia Alternative R6 (QSPRX).
Objective of QSPRX: Target positive absolute returns with low correlation to stocks, bonds, and credit by harnessing alternative risk premia .
Strategy:
- Systematically invests long and short across five asset classes:
- Equities (sectors), equity indices, fixed income, currencies, commodities.
- Utilizes four factor styles: Value, Momentum, Carry, Defensive .
- Aims for risk-balanced exposure, not naive asset mixing .
QSPRX is purely there to harvest the value, momentum, carry and defensive premiums and have 0 correlation with global equities.
Since June 2015, the fund return 6.5% p.a. This beat Treasury bills by 5% p.a. The performance look low versus US equities, until you realize that this fund have zero correlation with market-risk beta.
The result of QSPRX shows the presence of premiums aside from market risk.
I got curious and decide to tally the returns of QSPRX:
- 2016: -0.37%
- 2017: 12.10%
- 2018 :-12.32%
- 2019: -8.08%
- 2020: -21.91%
- 2021: 25.04%
- 2022: 30.79%
- 2023: 12.84%
- 2024: 21.15%
I don’t think less savvy folks can endure that three down years, only to get back 4 fantastic years lol.
I think as a whole, you can’t really dismiss that there are other risk premia out there aside from market-risk beta. There are evidence that it does work.
The big question would be when we see it head back in the United States.
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