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Size and Value Effects Are Strong Around the World
The size and BtM effects appear in both US and international markets—strong evidence that the risk factors are systematic across the globe.
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The Randomness of Returns (3 Slides)
This example features annual performance of major asset classes in the Canadian, US, international, and emerging markets between 1994 and 2009.
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Equity Returns of Developed Markets (2 Slides)
While stock markets around the world often outperform the Canadian market, this performance is unpredictable and at times extreme.
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Risk and Return are Related
The difference in returns among portfolios is largely determined by relative exposure to the market, small cap stocks, and value stocks. Stocks offer higher expected returns than fixed income due to the higher perceived risk of being in the market. Many economists further believe that small cap and value stocks outperform large cap and growth because the market rationally discounts their prices to reflect underlying risk. The lower prices give investors greater upside as compensation for bearing this risk.
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Fees Matter
Active managers seek to beat the market through stock selection and market timing. They generally charge higher fees than passive managers as compensation for their perceived “skill.”
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World Market Capitalization
Viewing the world map by relative market capitalization illustrates the importance of building a globally diversified portfolio and avoiding a home market bias.
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Warren E. Buffett
Warren Buffett, who built his fortune buying individual stocks, acknowledges the benefits of passive management.
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Distribution of the US Size, Value, & Market Premium (3 Slides)
Histograms quantify the distribution of annual returns for the US market and both small cap and value stocks. Since 1927, the risk premiums for all three have been positive in a majority of years.
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Bull and Bear Markets (5 Slides)
Recent Canadian S&P/TSX Composite, S&P 500 Index, MSCI EAFE (net div) and MSCI World Index (net div) and market history shows that bull market cycles last longer than bear market cycles, and produce cumulative gains that more than offset losses experienced during bear markets.
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Canadian Pension Fund Asset Allocation
Institutional pension funds hold aggregate positions in many asset classes. They also recognize that short-term asset class returns are not obvious outcomes, and that large tactical asset shifts are in fact very difficult to successfully complete consistently over time.
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Missing Opportunity
This graph shows that a few outperforming stocks may account for a disproportionately large share of the US market’s return in a given year.
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Precision in Portfolios
The consulting style box displays a size/BtM grid that is a traditional tool used to identify asset class characteristics of portfolio holdings.
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Yearly Observations of the US Size, Value, and Market Premiums (3 Slides)
The US small cap, value, and market premiums are well documented over the long term, but annual performance is neither consistent nor predictable.
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