Has size contributed to value’s recent revival?

Posted by Robin Powell on June 24, 2021

Has size contributed to value’s recent revival?



Both value stocks and smaller companies have outperformed so far this year. But since value-oriented companies are typically smaller than their growth counterparts, is the recent resurgence of the value premium simply a consequence of its smaller size exposure? HAMISH PRESTON from S&P Dow Jones Indices takes a closer look.



After more than a decade of underperformance, and in stark contrast to Growth’s dominance for much of 2020Value has made an impressive comeback so far in 2021, outperforming Growth around the world, including across the size spectrum in the U.S. In fact, Value’s YTD outperformance against Growth in mid and small caps is the largest it’s ever been as of the end of May, while the S&P 500® Value’s 9.5% YTD outperformance is the second highest in its history through the first five months of a year.


Value has outperformed growth in 2021 so far


Smaller companies have also outperformed so far this year, which helps to explain why Equal Weight indices, with their smaller size tilt, have outperformed their cap-weighted parents. But the outperformance of smaller size raises an obvious question: since value-oriented companies are typically smaller than their growth counterparts (see Exhibit 2), is Value’s recent resurgence simply a consequence of its smaller size exposure?


Value stocks are typically smaller than growth stocks


In order to analyse the role of size in explaining Value’s recent returns, S&P 500, S&P MidCap 400®, and S&P SmallCap 600® constituents are divided into quintiles based on their market capitalisations at the end of 2020. Quintile 1 contains the largest 20% of stocks (by stock count) in each size segment, while Quintile 5 contains the smallest stocks.

Exhibit 3 shows the proportion of Value’s YTD excess returns that are attributed to selection and allocation effects across the different quintiles in large, mid, and small caps. If size was the only determinant of Value’s relative returns, the allocation effect would equal the total effect: there would be no impact from selecting value-oriented stocks. However, the choice of value-oriented constituents (selection effect) was typically more important than allocations to different size quintiles (allocation effect) and the selection effect accounted for the majority of Value’s YTD outperformance.


the selection of value-oriented companies helped value outperform recently


As a result, Value’s recent resurgence has been driven by the outperformance of more value-oriented companies rather than by their smaller size. And while we will have to wait and see what happens across the style box in the coming months, many investors may be enjoying riding the value wave for the first time in a few years.


HAMISH PRESTON is Associate Director, US Equity Indices, at S&P Dow Jones Indices. 
This article was first published on the Indexology blog.



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Robin Powell

Robin is a journalist and campaigner for positive change in global investing. He runs Regis Media, a niche provider of content marketing for financial advice firms with an evidence-based investment philosophy. He also works as a consultant to other disruptive firms in the investing sector.


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