Small Value Vs Midcap Value

My column from July 14 on the persistence of the small-value premium resulted in some interesting discussions on the subject. I thought it would be informative to share one of them.

One reader pointed out that in the past 20 years, midcap value stocks had outperformed small-value stocks. For the period from July 1994 to June 2014, the Russell 2000 Value Index returned 11.04 percent while the Russell Midcap Value Index returned 12.47 percent. Thus, for that 20-year period, it looks like midcap value stocks outperformed small-cap value stocks by 1.43 percentage points per year.

Before taking a deeper look at the returns data, it’s important to note that, as with any factor, there’s a non-zero chance small value will provide a negative premium. This is true no matter what the factor or how long the horizon. Thus, while it would be an unexpected outcome, we shouldn’t be totally surprised if midcap value stocks did outperform small-value stocks over a 20-year period, or even a longer one. That’s one reason investors should diversify investments across factors and not concentrate all their eggs in a one-factor basket.

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