Small Value vs. Large Growth

By McKenzie Ebbesen, CFP^®

Here we are, already in March of 2021. I slightly feel as though I am in a time warp, how are we already in March of 2021? This means my baby boy, whom I swear was just born, is now walking, talking and about to turn one! Not only that, somehow in the last year we survived some of the most intense market turbulence in history with near 10% ups and downs in single market days, and in the 33 days of the short-lived bear market of 2020, between February 19 and March 23, the FTSE All-Share Index fell by 33%. BUT if we just simply looked at the trajectory of the equity markets from February 19 until now, you wouldn’t suspect anything like that had happened. Funny how that statement can be made looking all the way back to the beginning of the stock market. We have and will always experience periods of temporary declines, but the long-term trajectory has been positive. Meaning if you had stayed invested, regardless of when you got into the market, you would have made money. Patience is key to being a successful long term investor.

First, a quick snapshot of the index performances as of February 28, 2021. Small caps are crushing it over the last year, up over 40%, with US large caps and emerging markets up there as well.

Asset Class	1 Month	3 Month	YTD	1 YR	3 YR	5 YR
US Bonds	-1.54%	-2.15%	-2.29%	1.27%	5.32%	3.55%
US Large Cap Equity	2.90%	6.36%	2.05%	34.28%	14.98%	17.37%
US Small Cap Value	9.39%	24.27%	15.15%	41.06%	10.14%	14.22%
International Equity	2.02%	7.85%	2.24%	26.98%	5.76%	11.49%
Emerging Markets	1.11%	10.84%	4.41%	32.68%	6.30%	14.90%

_{Index performance is provided as a benchmark. It is not illustrative of any particular investment. An investment cannot be made in an index. Past performance is not an indication of future of results. BBgBarc US Agg Bond Index, Russell 1000 Index, Russell 2000 Value Index, FTSE All-World ex US Index, FSTE Emerging Markets Index. Returns as of 2/28/2021.}

With the recent decade of strong outperformance of large cap growth stocks, my mind takes me back to the 90’s. There is something so eerie about the resemblance of the 90’s and 2010’s. Large cap growth outperforming small cap value significantly, tech stocks leading the majority of the returns, investors questioning the need for diversification…sounds familiar? Well I have good news for those that stuck to their disciplines of remaining diversified heading into the 2000’s, those investors were richly rewarded over the next 10 years, with small cap value stocks beating large cap growth by over 200% (Exhibit 2). For those that gave up on value stocks, they saw large cap growth stocks lose 4.8% per year over the next 10 years.

Exhibit 1 (Jan. 1, 1990 – December 31,1999 cumulative returns compared to Large Cap Growth stocks)

_{Large Cap: Russell 200 Growth Index, Russell 200 Index, Russell 200 Value Index, Mid-Cap: Russell Midcap Growth Index, Russell Midcap Index, Russell Midcap Value Index; Small Cap: Russell 2000 Growth Index, Russell 2000 Index, Russell 2000 Value Index. 10 year returns ending 12/31/1999.}

Exhibit 2 (Jan. 1, 2000 – December 31,2009 cumulative returns compared to Large Cap Growth stocks)

After a decade of large cap growth outperformance, is it possible we are starting to see the tide turn? Only time will tell, but it is nice to report as of March 2, 2021 small cap value over the last 6 months is up 49.4%. Large cap growth is only up 6.7% over that same time period, that’s a difference of 42.7%! Without putting too much weight on short-term performance, this is a great reminder around two lessons:

The premiums can materialize in short bursts that are difficult to predict – you don’t want to miss them when they do show up.
Maintaining discipline and sticking to the plan are vital. The performance of premiums in the recent past doesn’t tell you much about future premiums. So, if your goals haven’t changed, then your asset allocation likely doesn’t need to change.

Maybe this is short lived, maybe history is about to repeat itself, I don’t know…what are your thoughts on small cap value stocks now? Mine, well, I think I’ll stick to our diversified approach and stay away from chasing the hot dot because I prefer not to get burned!

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