Swedroe: Small Value Funds Not Equal, Part II

August 04, 2014

Revisiting a common misconception.

Smart investors begin their journey by developing an investment plan, or investment policy statement, that includes an asset allocation table. After the plan has been prepared, the next step is to select proper investment vehicles for providing the appropriate exposure to the desired asset classes.

A common error among investors who follow a “passive” investment strategy is to assume that all passive funds in the same asset class are basically identical. In other words, they mistakenly believe these passive funds are “commodities,” or substitutes for one another.

If passive investment products were commodities—in the economic sense, not the physical one—the only criteria needed to make a decision when choosing among them would be cost; in this case, the fund’s expense ratio. However, as we’ll demonstrate, two funds in the same asset class can actually look very different. The differences have implications not only in terms of risk and expected returns, but in terms of how their addition impacts the risks of an overall portfolio.

We’ll demonstrate this point by comparing the metrics of two domestic small value funds, one of which has a large amount of assets under management and another with much less. Vanguard’s Small Value Fund (VISVX) has $14 billion in assets under management, while Bridgeway’s Omni Small Value Fund (BOSVX) has just $400 million in AUM.

Using data from Morningstar, the table below shows five important metrics for each of the funds. Unfortunately, Morningstar’s most recent available data for the two funds is slightly different. The data for VISVX is as of June 30; the data for BOSVX is as of March 31.

During this period, small value stocks rose about 3 percent. However, the impact this has on the following data shouldn’t be significant, though it’s likely the valuation metrics for BOSVX would be slightly higher.

Market Capitalization $2,869M $662M
P/E 17.4 14.1
P/B 1.8 1.2
P/S 0.9 0.6
P/CF 7.7 4.5






As you can see, the two funds look very different. In terms of the size factor, the average market capitalization of VISVX is more than four times that of BOSVX. This is especially important because the research demonstrates that the value premium is greater in small-cap stocks than it is in large-cap stocks.



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