“Eugene Fama and Kenneth French called them ‘risk premiums.’ It’s the factors and your exposure to them that explain the vast majority of the differences in risks and returns of a portfolio,” Larry Swedroe, director of research for Buckingham Asset Management and the BAM Alliance, said in the article.
Investor behavior will also affect the investment. For instance, growth stocks typically hold the limelight as they are faster moving and are likely to grab more attention. On the other hand, this leaves less demand for the value play.
“Small growth might be a biotechnology company or biomedical research. People like to talk about them at parties. The behavioral preference is that ‘I want to overweight the GenTechs of the world,’ which would be giving rise to the outperformance of value stocks,” John B. McDermott, associate professor of finance at the Dolan School of Business at Fairfield University, said in the article.
Moreover, small-cap value stocks could provide better risk-adjusted returns. Swedroe pointed out that portfolios with exposure to small-cap value stocks were less volatile than the S&P 500 and returns were also better than the large-cap benchmark for the period between 1970 through 2013.
For more information on small-capitalization stocks, visit our small-cap category.
Max Chen contributed to this article.