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Valuing the Smaller Things

Som Priestley, CFA, Multi-Asset Solutions Strategist
Christina Moore, CFA, Multi-Asset Solutions Associate Strategist

An asset allocation perspective on small‑ and mid‑cap value.

Key Insights

  • While U.S. value and small‑ and mid‑cap stocks have been out of favor recently, we believe exposure to these styles can improve portfolio durability.
  • Historically, small‑ and mid‑cap value have played important return‑enhancing and risk‑reducing portfolio roles, helping to reduce downside market exposure.
  • History also suggests that investors who miss the initial months of a small-cap value outperformance cycle may sacrifice a large share of that outperformance.

The dynamic nature of capital markets means that generating durable investment results requires thoughtful portfolio design and ongoing revalidation of allocations through time. One key challenge is that markets evolve, and as a result, investment style leadership (such as the equity value style versus the growth style) tends to rotate over time. Historically, these cycles have lasted several years and have often prompted investors to question if an out‑of‑favor style will ever work again.

For most of the past decade, two equity styles—U.S. value and smaller capitalization (including both small‑ and mid‑cap stocks)—have been out of favor. However, while the shorter‑term performance of these styles has been challenged, longer‑term data (Figure 1) show that both approaches historically have been strong drivers of positive returns and have accounted for a meaningful portion of the broad U.S. equity market, equaling approximately 15% of the Russell 3000 Index as of March 31, 2020.1

Long‑Term Small‑ and Mid‑Cap Value Performance Tells One Story, More Recent Performance Another
(Fig. 1) Historical performance of equity style factors

Past performance is not a reliable indicator of future performance.               
July 31, 1926, through February 29, 2020 (subset December 31, 2009, through February 29, 2020).
Source: Kenneth R. French (©2020). Used by permission. All data analysis by T. Rowe Price. The performance results and the size and style categories shown here are based on long‑term return series constructed by Dr. French using data from the Center for Research in Security Prices. Additional information on Dr. French’s return and factor methodologies can be found at his research site, on the Web at http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/index.html.

The goal of this paper is not to validate the continued existence of any specific return premia for small‑ and mid‑cap value stocks. Rather, we focus here on the risk‑based case, hopefully demonstrating to investors the benefits of ensuring that their portfolio positioning is properly diversified through a thoughtful reexamination of their U.S. equity style and size exposures.

To help illustrate possible negative consequences of under‑diversification, we begin our analysis by reexamining the strategic allocation case for small‑ and mid‑cap value stocks, then take a closer look at some of the key attributes of these investment styles.

To find out more, download the full PDF.

1 The historical equity performance results and the size and style categories shown in Figures 1, 6, and 7 in this paper are based on long-term return series constructed by Dr. Kenneth French, a professor of finance at Dartmouth University, using data from the Center for Research in Security Prices. They are reproduced here by permission. Additional information on Dr. French’s return and factor methodologies can be found at his research site, on the Web at http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/index.html.


Important Information — Hypothetical Portfolio

The information presented herein for the hypothetical portfolio is hypothetical in nature and is shown for illustrative, informational purposes only. It does not reflect the actual returns of any portfolio /strategy but rather a theoretical blend of the indicated benchmarks. The assumption of constant benchmark weights has been made for modelling purposes and is unlikely to be realized. The hypothetical portfolio does not reflect the impact that material economic, market or other factors may have on weighting decisions. If the weightings change, results would be different. Transaction costs, taxes, and other potential expenses, are not considered and would reduce returns. Actual results experienced by clients may vary significantly from the hypothetical illustrations shown. Data shown for the hypothetical portfolio is as of the dates shown and represents the manager’s analysis as of that date and is subject to change over time. The information is not intended as a recommendation to buy or sell any particular security, and there is no guarantee that results shown will be achieved.


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I/B/E/S © 2020 Refinitiv. All rights reserved.

Copyright © 2020, S&P Global Market Intelligence (and its affiliates, as applicable). Reproduction of any information, data or material, including ratings (“Content”) in any form is prohibited except with the prior written permission of the relevant party. Such party, its affiliates and suppliers (“Content Providers”) do not guarantee the accuracy, adequacy, completeness, timeliness or availability of any Content and are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, or for the results obtained from the use of such Content. In no event shall Content Providers be liable for any damages, costs, expenses, legal fees, or losses (including lost income or lost profit and opportunity costs) in connection with any use of the Content. A reference to a particular investment or security, a rating or any observation concerning an investment that is part of the Content is not a recommendation to buy, sell or hold such investment or security, does not address the suitability of an investment or security and should not be relied on as investment advice. Credit ratings are statements of opinions and are not statements of fact.

MSCI and its affiliates and third party sources and providers (collectively, “MSCI”) makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein.  The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products.  This report is not approved, reviewed, or produced by MSCI.  Historical MSCI data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction.  None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.


Important Information

This material is being furnished for general informational and/or marketing purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, nor is it intended to serve as the primary basis for an investment decision. Prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.

The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.

Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources’ accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of the date written and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.

The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request. It is not intended for distribution to retail investors in any jurisdiction.

EEA ex-UK—Unless indicated otherwise this material is issued and approved by T. Rowe Price (Luxembourg) Management S.à r.l. 35 Boulevard du Prince Henri L-1724 Luxembourg which is authorised and regulated by the Luxembourg Commission de Surveillance du Secteur Financier. For Professional Clients only.

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UK—This material is issued and approved by T. Rowe Price International Ltd, 60 Queen Victoria Street, London, EC4N 4TZ which is authorised and regulated by the UK Financial Conduct Authority. For Professional Clients only.

202005‑1174607