Market Map Model : Using Small Cap Value Weighted Portfolio

This article examines Market Map model applied to a portfolio with a tilt towards a small capitalization “value weighted” methodology.  The portfolio constructed using this methodology is based on the Fama/French “factor” model  http://portfoliosolutions.com/latest-learnings/fama-french-three-factor-model; the factors being beta, size, and value. The DFA US Small Cap Value (DFSVX), a mutual fund whose composition utilizes the factor model, was created through the efforts of Dimensional Fund Advisors http://www.dfaus.com.

Additionally, the analysis combines MMap model with a “Sell in May” component, both of which are applied to the small cap data. The initial details of Market Map model (as applied to the S&P500 index) are covered here https://stockmarketmap.wordpress.com/2013/08/29/market-map-model-sp500/ and the “Sell in May” primer is here https://stockmarketmap.wordpress.com/2013/11/01/using-market-map-model-1-with-sell-in-may/ .

The Small Cap indices and historical performance data compiled for the analysis and calculation for the tables below come from:

1) the DFA US Small Cap Value I and Vanguard Small Cap Value Index * 1999 – 2013

2) the “Small capitalization Average Value Weighted” portoflio formed on size and momentum (1927-1998 ) from the Kenneth R. French data libraryhttp://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html#Developed

3) the Nasdaq 100 index (1989-1999) / Powershares QQQ Trust ETF (QQQ) (2000-2013) and

4) Barclays iShares 20+ Year Treasury Bond ETF (TLT) / Vanguard Long-Term Treasury Fund Investor Shares (VUSTX) / or 30 year bond rate.

Table 1

Market Map model + Sell in May allocation dates using Small cap indices data and 30 yr. Bond proxy  1927 – 2013   Notice cash dates starting at the ends of April vs. cash dates starting on 3rd week of Jan with the MM model using SPY / QQQ in previous posts  …

SV signal dates Map sell in May 1927- 1973   SV trade dates Map 2 Sell may SV 1974 - 2013

Table 2

Statistics for table 1 :

Small Cap stats 1927 - 2013

Table 2 shows that over an 86 year period,  both the Market Map model and MM model with the addition of the  “Sell in May” component outperformed the Small Cap value buy an hold with less risk, with the “Sell in May ” component outperforming by a wide margin.

Table 3

Historical statistics comparisons based on small cap value Buy & Hold, MM model with small cap value, MM model with small cap value using “Sell in May”,  and MM model using Nasdaq 100 / QQQ 1989 – 2013  :

Small cap stats 25 years

Table 4

Annualized returns 5, 15, 25, 86 years

Small cap matrix 1927 - 2013

 

In viewing tables 1–4, the Market Map model combined with “Sell in May” component (table 4 item c) outperformed items a & b. We believe that, when used in conjunction with the MMap model / QQQ,  the MM model + Sell in May applied the small cap value portfolio, is valuable in providing diversification across two different stock style universes.

As the work of Fama and French has proven that small cap value  are dominant factors ( size and value) in compound return the performance of the other Morningstar style box classifications http://www.investopedia.com/articles/basics/06/stylebox.asp, an interesting aspect of this study is that the QQQ ETF, while representing a “large cap growth/blend” classification in the style box, has returns comparable to items b and c in table 4 with similar risk characteristics when the Market Map model is applied.

The “Sell in May” component improved the performance of the series when applied to the Small cap value portfolio, but didn’t provide performance improvement when applied to the Nasdaq 100/QQQ index (analysis not shown). The reason for the performance superiority of “Sell in May” when applied to the small cap value universe vs. other indices / stock universes is unknown. Over 90 years, when the extra 3 months of small cap equity exposure  (Feb, Mar, Apr ) occurred within the model signaling heuristics, they produced positive outcomes, in aggregate, vs. when other indices when subjected to equity exposure during the same periods.  Chart 1 below.

Chart 1

 

ScreenHunter_890 Oct. 15 08.11

Chart 2

Recent 20 Year Rolling Compound Growth Rate vs. small cap buy & hold
20 yr CGR Small Cap Value

Chart 3 illustrates the effect of the Map model on reducing drawdowns

Chart 3

Worst Drawdowns 1927 – 2013

Drawdn small cap value

Charts 4 – 8 show 20 year growth vs. MM model using S&P 500 and small cap Buy & Hold

Chart 4

Small Cap 1294 - 1943

Chart 5

Small Cap 1944 - 1963

Chart 6

Small Cap 1964 - 1983

Chart 7

Small Cap 1984 - 2003

Chart 8

Small Cap 2004 - 2014

 

*  The use of the Vanguard Small Cap Value exchange traded fund ( VBR ) ( replicated from Vanguard Small Cap Value Index ( VISVX ) ) can be used as proxy for small cap value as it’s performance is comparable to the DFA US Small Cap Value fund. Similar to the QQQ, the Vanguard Small Cap Value ETF also offers low management fees and tax ratios compared to those of the DFA US Small Cap Value.

” When everyone is looking for the needle in the same haystack, go look in a different haystack”

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