This post is one of a series looking at returns in the decade after the financial crisis.

Many of the passive investing luminaries such as Bernstein, Swedroe, Ferri, and Hale (though not Bogle or friend of Monevator Lars Kroijer) discuss the higher returns you might be able to garner through exposure to the value and small cap factors.

It’s simple to do these days. You buy your entry ticket (not necessarily a winning one) by concentrating a portion of your portfolio on the bargains (value equities) and minnows (small cap equities) found in most stock markets.

Value and small cap companies are known to be riskier than average. The upside is they’ve historically delivered higher returns, if you’ve been patient and prepared to ride out a decade or more of disappointment.

Well I’ve read the books and I was prepared for disappointment. Which is lucky because that’s exactly what I got.

As usual, Trustnet provides the chart that tells our story1:

Global value and small cap returns 2009 - 2019
Specifically it was the disappointment of my choice – the value factor – represented in the table by the Invesco FTFSE RAFI All-World 3000 ETF (yellow line B).

Value equities have had a bad decade. The RAFI ETF only managed an annualised return of 9.4% versus the MSCI World’s 12.1% (red line C). (See our first article for more on the latter’s stellar run.)

Vanguard’s Global Small Cap Index fund (green line A) wasn’t launched until January 2010, but it’s marginally outperformed the MSCI World since then. At least that supports the possibility that the higher expected returns found in academic theory and the historical record haven’t yet been entirely quashed by the popularity of factor investing.

Of course less than ten years isn’t a very long time, and my books had told me that investments can fail to bear fruit for a decade or two, or even a lifetime. But reading about risk and then experiencing it with your own money is as different to watching someone else getting kicked in the nuts and then having it happen to you.

Rick Ferri warned that factor investing is a lifetime commitment. Jack Bogle warned that the only certainty is the higher fees.

What else can I add? Here’s to not getting kicked in the nuts for the next ten years.

Dividends didn’t really pay dividends

While it was far from the sort of disaster we’ve seen in some previous reviews (*cough* commodities) another strategy that failed to cover itself in glory over the last decade was dividend investing – at least judging by the global dividend tracker available at the time (grey-blue line D).

This might come as a bit of a surprise. Dividend investing was the recipient of a lot of buzz a few years ago, as plummeting bond yields in the wake of the Global Financial Crisis made divi-paying equities a popular alternative for income seekers.

As ever though, there is no free lunch. The danger of a portfolio that concentrates on high dividend equities is that this focus on income payers – often more mature, less growth-y companies – may mean that total returns lag those of the broad market.

And lo, our example high dividend ETF brought in 10.7% annualised versus that 12.1% for MSCI World.

Take it steady,

The Accumulator

We’ll continue to gaze back 10 years to see how several other passive-friendly strategies have fared. Subscribe to get all the posts.

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