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Posted by Elle on June 11, 2008, 8:35 am
I thought I saw an article on the net earlier this year
where Vanguard's John Bogle talks thoughtfully about how
small cap indexing has not really proven itself, despite his
belief for some time that it would. Has anyone the link to
it?
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Posted by Ron Peterson on June 11, 2008, 4:44 pm
> I thought I saw an article on the net earlier this year
> where Vanguard's John Bogle talks thoughtfully about how
> small cap indexing has not really proven itself, despite his
> belief for some time that it would. Has anyone the link to
> it?
http://www.indexfunds.com/articles/20030110_bogleQ&A2_int_gen_JS.htm
looks close where he says:
"I just didn't know how fragile those indexes were. For people who
want small-cap exposure, it seems that a small-cap index fund would
make sense, but unfortunately I haven't seen any small-cap indexes
that I'm completely happy with. "
--
Ron
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Posted by Elle on June 11, 2008, 6:26 pm
snip for brevity
http://www.indexfunds.com/articles/20030110_bogleQ&A2_int_gen_JS.htm
Hi Ron, this captures the gist of the message I recall, but,
if memory serves, Bogle elaborated quite a bit more on his
sense of the small cap index fund disadvantage. For some
reason now when I google I cannot find what I am
remembering. Maybe the site was taken down, like it was a
news or magazine site with only a limited time. Thank you
for the basic Bogle message on this, though.
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Posted by Tad Borek on June 12, 2008, 1:19 pm
Elle wrote:
> I thought I saw an article on the net earlier this year
> where Vanguard's John Bogle talks thoughtfully about how
> small cap indexing has not really proven itself, despite his
> belief for some time that it would. Has anyone the link to
> it?
Elle, more broadly -- Bogle in his books and discussions doesn't appear
to be sold on the idea that there is a long-term premium for investments
in small-company stocks, or value stocks. He repeatedly talks about
using total-market funds, which include small-company stocks and value
stocks, but without overweighting them. Or, an S&P 500 fund as a
reasonable proxy for "the market" (because the total market is dominated
by those 500 stocks anyway).
I think these are reasonable arguments...the small-cap premium isn't all
that big based on the academic research, and it's come and gone multiple
times over the years. And buying them piecemeal comes with investment
costs not borne in the total-market approach. So that's one piece --
maybe there isn't much point to buying small-caps separately.
Regarding indexing/passive management with small-cap stocks - some claim
that there are more inefficiencies in small-company stocks that can be
exploited through research, so it's a better area for active management.
You can do a simple reality check on this...pull up the performance for
Vanguard's or DFA's passive small-cap funds. Even at 5 years, Vanguard's
basic small-cap index fund looks to be ahead of 80% of the funds in the
category, based on return figures reported by Yahoo. And that figure is
actually low because of survivorship bias - the funds the disappeared
after only 5 years. Roll that forward for 10 or 15 years and it's hard
to make those arguments about active management in small-cap mutual
funds. So I suspect if Bogle was making a point against small-cap
indexing, it's about the "small-cap" part rather than the "indexing" part.
-Tad
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Posted by Elle on June 12, 2008, 2:58 pm
snip for brevity
> I suspect if Bogle was making a point against small-cap
> indexing, it's about the "small-cap" part rather than the
> "indexing" part.
Tad, this is contradictory to both what Ron cited as well as
other Bogle statements such as: "I'm a big fan of indexing
overall, but I'm not in favor of the small-cap indexes we
have," as quoted in
http://money.cnn.com/magazines/fsb/fsb_archive/2002/05/01/322808/index.htm .
Both of these are consistent with the longer interview I
thought I saw a few months ago but which now seems to be
unavailable via search engines.
On your use of five-year returns, a quick general comment:
Would you (or anyone versed in allocation) use five year
returns to decide on which category of funds to buy? Nor can
one "roll forward" specific category returns based on
five-year performances to mean anything. IIRC Bogle himself
attacked certain studies that showed superior returns of
actively managed small cap funds vs. indices, on grounds
that the time period was too short. You should google for
studies of small cap funds (active management vs. indexing).
The jury clearly seems to be out on whether small cap
indexing beats actively managed small cap funds.
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