Global Ex-US Perspective
I’ll next look at the data using Vanguard Total International Stock Index Fund Investor Shares (VGTSX) to represent the total international stock market in a two-equity-fund portfolio.
During this period, the monthly global ex-U.S. size and value premiums were 0.13% and 0.41%, respectively. Those premiums explain most of the difference in returns. But because the global ex-U.S. premiums do not include emerging markets, we need to consider the premiums there as well. During this period, the Dimensional Emerging Markets Value Index provided an annualized return 2.9 percentage point higher than its Emerging Markets Index. This premium helps explain the differences in returns.
Of interest (partly because it comes after a period when many pundits had declared the size premium dead) is that, during this period, the size premium was much larger in U.S. stocks (virtually twice as big as it was in international stocks) while the value premium was much larger internationally (about 3½ times as great as it was domestically). That provides a demonstration of why diversification is important not only across regions, but across factors.
Separating Developed & Emerging
So that we can isolate the performance of developed and emerging markets, I’ll next look at them separately.
As I previously mentioned, during this period, the monthly global ex-U.S. size and value premiums were 0.13% and 0.41%, respectively. Those premiums explain most of the difference in returns.
While we don’t have Fama-French factor premium data available for emerging markets, we can examine the returns of the Dimensional Emerging Markets Index and the Dimensional Emerging Markets Value Index to see if there was a value premium over the period. During this period, the Dimensional Emerging Markets Index returned 8.5% versus the 11.4% return of its Emerging Markets Value Index. The difference explains why DFEVX provided higher returns.
For those interested in seeing how a globally diversified, multifund portfolio would have performed, you can use the portfolio tool available at Portfolio Visualizer. It allows you to test various allocations.
Summarizing, over this period, there were significant size and value premiums around the globe, and investors were well-rewarded for taking those risks. Of course, there will be periods, even very long ones, where this will not be the case. Investors who can’t take the heat that underperformance may bring should stay out of the proverbial kitchen.
Core Funds
I’ll now turn to looking at the performance of the aforementioned core funds. Again, for those interested in exploring how funds might mix in a portfolio, you can test various portfolios at Portfolio Visualizer.
The first full month of inception for Dimensional’s first core equity (multi-asset class/multifactor) fund, DFCEX, was May 2005. The first full month for the other two core equity funds (DFQTX and DFIEX) was October of that year. With the introduction of those funds, we can also look at how core funds have performed since inception compared to the three Vanguard funds.
While Dimensional’s core funds have more exposure to the size and value factors than total market funds do, they are more “marketlike” than DFSVX, DISVX and DFEVX. Thus, they have lower expected returns as well as less tracking error risk.
During this period, the monthly U.S. size and value premiums were 0.16% and -0.08%, respectively. While a negative value premium over such a period was not to be “expected” (over 10-year periods, the size premium in U.S. stocks was negative 23% of the time and the value premium was negative 14% of the time; at 20 years, the figures were 15% and 6%, respectively), it demonstrates long periods of underperformance can occur. This goes to show that discipline is key to being a successful investor.
It’s also worth noting that, while over this more-than-12-year period, there was no benefit to increased exposure to the value premium, DFQTX’s underperformance was relatively small. On the other hand, as you saw with the data that went back to April 1998, there was a large benefit over that much longer period.
