How Often Do Small Cap, Value, and High Profitability Outperform?



Looking at average annualized returns going back decades, small cap stocks have beaten large cap stocks, value has outperformed growth, and high profitability stocks have outgained low profitability stocks. How should investors think about the performance of these premiums over shorter time periods?


• We can evaluate the reliability of the premiums by examining performance during rolling, overlapping periods formed each month (e.g., January to December, February to January, etc.). Here, we assess rolling periods of one, five, and 10 years.


• The premiums were positive over most one- and five-year periods, and they increased over longer stretches. Value, for instance, beat growth in 80% of 1,027 measurable 10-year periods.


Take away:

When investors target the size, value, and profitability premiums, a long-term focus increases the odds of achieving positive outcomes.


Credit to DFA one pager.

Disclosures part 1: 1. Based on monthly rolling returns, computed as follows: Dimensional US Small Cap Index minus S&P 500 Index, June 1927–December 2021; Fama/French US Value Research Index minus Fama/French Us Growth Research Index, July 1926–December 2021; and Fama/French US High Profitability Index minus Fama/French US Low Profitability Index, July 1963–December 2021.

2. Size premium: The return difference between small market capitalization stocks and large market capitalization stocks. Value premium: The return difference between stocks with low relative prices (value) and stocks with high relative prices (growth). Profitability premium: The return difference between stocks of companies with high profitability over those with low profitability.

3. Small vs. Large: 1,124 periods of 1 year; 1,076 periods of 5 years; 1,016 periods of 10 years. Value vs. Growth: 1,135 periods of 1 year; 1,087 periods of 5 years; 1,027 periods of 10 years; High Profitability vs. Low Profitability: 691 periods of 1 year; 643 periods of 5 years; 583 periods of 10 years.



I'm happy to talk this subject over with you on a complimentary call. As a fee-only fiduciary advisor, I never receive commissions and therefore am unbiased on this topic.



Disclaimer: Past performance is no guarantee of future results. Any indices referenced for comparison are unmanaged and cannot be invested into directly. Investments in securities involve the risk of loss. Nothing in this blog should be considered financial advice or recommendations. Your questions are unique to you and your own personal financial circumstances. You should consult with a financial professional before making a financial decision. See full blog disclaimer.


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