More on the SSR Strategy

A post today in Advisor Perspectives examined small value stocks and the return boost they add to retirement portfolios. The post concluded that given the historical outperformance of Small Value stocks relative to Large-Cap stocks, performance of portfolios can be maximized by maintaining a sizeable small value position in portfolios.

Noble laureate William Sharpe was the first to discover that small stocks tend to outperform large stocks and value stocks tend to outperform growth stocks. Sharpe’s research was ground breaking in the world of finance and provided the basis for the Burney Company’s Size and Style Responsiveness (SSR) Strategy.

The Advisor Perspectives blog post found that the return premium since 1927 for small value stocks average 7.2% as compared to large-capitalization stocks. Much of that return premium is from the period before 1981 and the premium has been more muted in recent years, but evidence for it still exists. A portfolio invested in small value stocks would have outperformed a portfolio invested in large cap stocks over the long run but it is important to remember that small stocks are more volatile than large stocks – the premium compensates for the additional risk.

The Burney SSR Strategy will skew towards small cap and value stocks over the long run to take advantage of the premium but portfolios will not always take that posture. Take a look at this chart of the 15 year average of small value premiums:

Overall, it looks convincing that Small Value is an attractive posture. However, look at the dip in the 1990’s. This was a terrible decade for Small Value stocks – it is the only 15 year period since 1927 in which a negative small value premium exists. The definition of long-term never has an explicit definition but 15 years certainly is a long time.

Here are the 3-year averages:

This is what it means when we say that small value stocks are volatile – yes there are periods of a sizeable premium but there also periods in which negative premiums exists. Times like the late 1990’s are frustrating and test the patience for investors trying to play this style variable. Three years also seems like a long time for your retirement account to underperform.

This is where the Burney Company SSR Strategy comes to play. We make Size and Style bets based on current market conditions and tilt portfolios to the Size and Style box we expect to outperform over the next year and a half, two, three or more years. If market conditions indicate we should posture towards Large and Growth, we will do so. Diversification among size and style will always be present in SSR portfolios so to invest across the whole market but he goal is to avoid long periods of time of underperformance. The SSR strategy allows us to take advantage of the size and style opportunities the market presents investors.