Good News for Large-Cap Value Investors

The historical data has shown that the value premium is smaller for large-cap securities than for small caps. But new research shows that large-cap investors can increase the premium by pursuing an equal-weighted strategy.

The academic value factor is a long/short portfolio formed by going long value (cheap) stocks and going short growth (expensive) stocks. The empirical research has found that the long/short value factor is generally stronger in smaller capitalization stocks. This should not be a surprise, as small stocks are riskier than large stocks. Over the period 1927-2021, the Fama-French U.S. large-value research index returned an annualized 12.0% versus 14.5% for the Fama-French U.S. small-value index. Over this period the U.S. total stock market (CRSP 1-10 index) returned 10.2%. However, when we confine our lookback to the last 40 years (1982-2021), the outperformance of large-value stocks almost disappears, with the Fama-French U.S. large value research index returning 12.4%, barely outperforming the CRSP 1-10 index return of 12.0%. Over the same period, the Fama-French U.S. small value research index returned 14.8%. In their 2015 paper, “Fact, Fiction, and Value Investing,” Cliff Asness, Andrea Frazzini, Ronen Israel and Tobias Moskowitz reached the conclusion that “by itself, value is surprisingly weak among large-cap stocks.” Such evidence has caused many to question the benefits of long-only value investing.

In his April 2022 paper, “Long-Only Value Investing: Does Size Matter?” Alpha Architect’s Jack Vogel took an interesting look into the value premium and the ability of the typical long-only investor to capture it. He examined long-only value portfolios to determine if size is a less important factor. He chose to compare equal-weighted (EW) large-cap value portfolios to small-cap value portfolios (without microcaps, as they have limited liquidity and can be expensive to trade). Vogel chose an equal-weighting scheme for large value to eliminate the potential influence of a handful of mega-large-cap stocks from driving the results associated with value-weighted (VW, or market-cap weighted) portfolios. By definition, an EW scheme will impart a small-cap tilt to the portfolio relative to a VW scheme.