I suggest weâre at make-or-break extremes for the major reversion trades. For the majority of the last two decades, Growth-centric Large Cap Tech companies dramatically outperformed Value & Small Cap companies to the point where a growing chorus of professional investors wondered if the investing environment going forward could be different this time. That is, maybe the future of the US economy will be dominated by digitally-based firms offering intangible services rather than local, goods-producing industrials.
According to a Bank of America survey tracking the past 15 years, fund managers (on balance) believed large caps would outperform small caps. And they were rightâas market cap weighted indexes like the S&P 500 handily trounced its small cap counterparts.
That thinking changed dramatically in 2020. Is this the beginning of a reversion where riskier small caps return the appropriate premium over large caps?
I generally like to be a contrarian when making âinflection pointâ predictions, and it seems even Barronâs is covering this trend reversal. So that gives me pause. On the other hand, perhaps everything is different this time and the anticipated reversion will come as expectedâonly fasterâas investors pile in at the bottom.
Itâs hard to predict the exact path of dependency, but Small Cap outperformance in the coming decade seems like a high probability trade based on historical analysis. Another investment factor to monitor: Value outperforming Growth.
The Value reversion trade is a little different. While historical data also suggests Value commands long-term outperformance, Bank of Americaâs survey indicates fund managers have been anticipating this one for a long time. (And it hasnât happened yet)
BofAâs survey produces mixed results as a predictive measure in aggregate. Believing Value will outperform and actually allocating assets to that investment factor are two different things, however. Benchmark underperformance is a real career risk, and fund managers need to dance until the music stops.
Holding a combination of assets with a Small Cap / Value tilt is probably a good risk-reward decision in the coming decade. For good measure, you could throw in some International exposure (another underachieving factor). If that is your thing, Vanguardâs FTSE All-World ex-US Small-Cap ETF ($VSS) might be right up your alley.
I wrote a post for tomorrow, but if you donât get a chance to read it, I wish you the happiest of Thanksgivings đŠ - Ryan