ITA followers know that even the passively managed portfolios are skewed toward the value side of a broad Strategic Asset Allocation plan. Here is an example from the Schrodinger portfolio Dashboard.
Schrodinger Dashboard: Schrodinger’s Strategic Asset Allocation plan is laid out in the following Dashboard. Check the nine asset classes in the upper left-hand corner and you will see the three value asset classes are each assigned 7.0% of the portfolio while only 3.0% is allocated to each of the three growth asset classes. There is a reason for this value tilt and that is what this blog is about. Stated quickly, over the long run, value stocks tend to outperform growth stocks
Size, Value, and Momentum are seen as market anomalies. In other words, they tend to deviate from the efficient market theory. Here are a few references that argue this point.
http://schwert.ssb.rochester.edu/f532/jfe12_ff.pdf
Are Value Investing and Momentum Investing Robust Anomalies?
Within a few of these articles are links to other useful articles. Take your time perusing this material. Keep in mind that these strategies will not always work.
In my recent search for value-momentum stocks I have yet to concentrate on smaller stocks. This morning I set up a screen where the focus is on small-cap stocks combined with the usual value-momentum screens. Only one stock, RILY, showed up in the screen. In no way is this a recommendation to go out a buy RILY.
As we move closer to 2017 we will continue to test size, value, and momentum so see if they really are anomalies or if they tend to suffer from the Schwert Rule.