Today begins a two-part series exploring premiums, starting with the size premium. With the dramatic outperformance of U.S. small-cap stocks over the past several years, we’ve had many stories in the financial media warning investors about their future performance. Since valuations are the best predictors of future returns that we have, we can examine the warnings to see if the hold up.
We’ll begin by first looking at the returns of small caps relative to the total U.S. market. From January 2008 through March 2014, Dimensional Fund Advisors Small Cap Portfolio (DFSTX) provided a total return of 87.5 percent (annualized return of 10.6 percent). Over the same period the U.S. total stock market, as represented by the Center for Research in Security Prices (CRSP) 1-10 index, returned 54.5 percent (annualized return of 7.2 percent). Thus, DFSTX outperformed by a total of 33 percent (an annualized difference of 3.4 percent). (Full disclosure: My firm Buckingham recommends Dimensional funds in constructing client portfolios.)
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