Q: As more and more investors know the small cap value premium, do you think they will evaporate in the future?
A: In the coming weeks I will share the history of small cap value returns over many different market cycles. Over the last 87 years, small cap value had long periods of great success, often followed by relatively long periods of under performance. To some extent it will be luck which period we personally experience.
15 years ago all professional investors, most academics and lots of amateur investors were well aware of the small cap value premium. For the 50 years through 1995, the small cap value asset class (as defined by the academics who support DFA Funds) compounded at 15.8%, compared to 11.9% for the S&P 500. During the amazing 1995-1999 S&P 500 run, the performance of small cap value under-performed the S&P 500 by almost 10% a year. Many saw that as the beginning of the end of the small cap value premium. Of course, during the following 15 years the small cap value DFA fund compounded at 11.6% (with management fees)vs. 4.2% for the S&P 500 (without fees).
While I think the small cap value asset class will produce a premium, I am less sure how much that premium will be. It could be less than in the past. Stay tuned for my series of articles and podcasts on performance, and I will share the beliefs (absolutely no guarantees suggested) of the smartest academics I know.