When The Levy Breaks?

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Article reposted with permission from Servo Wealth ManagementEric Nelson is a friend and former colleague of Equius. 

It has been a tough couple years for diversified asset class investors. Small cap and value stocks in the US have underperformed the market (S&P 500 or Total Stock Indexes), and returns for stocks outside the US have been even worse. We’ve seen short periods of reprieve, such as 2016, but sensible investors who spread portfolios out amongst different global assets have mostly felt as though they are swimming up stream. Large US companies have been the only game in town.

It’s impossible to tell when a short-term result is the start of a longer-term trend, but we’ve certainly seen the former over the last few months, as the world has begun to revert to normalcy. Since September, small cap and value stocks in the US have dramatically outperformed the market (September 3rd through November 7th, per Morningstar):

  • Vanguard US Total Stock Index = +6.3%
  • DFA US Large Value Fund = +10.7%
  • DFA US Small Value Fund = +13.9%

Stocks have done well this fall but large and small value stocks in particular have excelled. This trend is not isolated to US stocks. Non-US stocks have outperformed US companies, again led by small cap and value shares:

  • Vanguard Total International Stock Index = +8.8%
  • DFA Int’l Value Fund = +12.5%
  • DFA Int’l Small Value Fund = +11.1%

You might expect, as value and small cap stock returns have reasserted their leadership, that all funds and indexes targeting these stocks would behave similarly. But that’s rarely the case. DFA’s “asset class” mutual funds provide purer and more consistent exposure than index funds to the value and small cap premiums, and when these are positive, we’d expect to see better performance for DFA funds. Indeed, that’s been the case:

  • DFA US Large Value Fund = +10.7%, Vanguard Value Index = +8.2% (+2.5% difference)
  • DFA US Small Value Fund = +13.9%, Vanguard Small Value Index = +9.4% (+4.5% difference)
  • DFA Int’l Value Fund = +12.5%, Vanguard Int’l Value Fund = +9.8% (+2.7% difference)

I’m typically opposed to discussions of short-term investing returns given the long-term nature of Servo clients and their goals. But I also know that encouragement and perspective can sometimes be a relief in challenging times. It’s too soon to say whether recent returns are a harbinger of things to come. But for today, at least, we can acknowledge the market is capable of behaving in line with the longer-term perspective, and when it does, we are well positioned to benefit from it.

Equius Partners, Inc. is a Registered Investment Advisor.

Past performance is not a guarantee of future results. The data and information set forth herein are provided for educational purposes only and should not be considered tax, legal or investment advice; a solicitation to buy or sell securities; or an opinion on specific situations – as individual circumstances vary. There is no guarantee an investing strategy will be successful. Investing involves risks, including possible loss of principal. Diversification does not eliminate risk, including the risk of market or systemic loss.

Please consider the investment objectives, risks, and charges and expenses of any mutual fund and read the prospectus carefully before investing. Indexes are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.

© 2023 Equius Partners, Inc.

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