What to Make of 10-Year Small-Cap and Value Results

Ken French’s recently updated global factor data shows the global size and value premiums were basically flat for the past 10 years (the value premium was actually about –1 percent per year over this span). This long-term historical result has surprised many people and naturally led some to ask whether these premiums can be expected in the future. Figure 1 graphs the one-, three-, five-, 10-, 15- and 20-year average size and value premiums using the global data set.

Figure 1: Average Annual Global Size and Value Premiums Ending 2015


Figure 1 shows the size and value premiums were weak in periods that extend to 10 years. However, investors should not be entirely surprised to see a 10-year period where size and value premiums are flat (or the equity premium for that matter).

Over the full annual history of the size and value data in the U.S., the size premium has averaged 3.4 percent per year with 14 percent volatility, while the value premium has averaged 5.0 percent per year with 14.1 percent volatility. These equate to Sharpe Ratios of 0.24 and 0.36, respectively. This also means that it can be expected for these premiums to be flat in (very) roughly 20 percent of 10-year periods (or, more precisely, in about 20 percent of 10-year periods for the size premium and 15 percent for the value premium). While 10-year periods such as 2006–2015 shouldn’t happen frequently, one 10-year stretch like this within an investment lifetime is well within the realm of possibility. And it’s important to emphasize that periods like these don’t prove the premiums have disappeared precisely because they are well within the realm of possibility.

Figure 1 also shows that the size premium averaged just 0.8 percent per year over the past 20 years, hardly anything to get excited about. It’s worth digging into these numbers further, though, because they show that the size premium was actually strong in value stocks over this period but extremely weak in growth stocks, a pattern that is familiar and in line with U.S. equities over the long term. Figure 2 reports this result.

Figure 2: 20-Year Average Size Premium in Growth and Value Stocks


2016-01-14T13:55:55+00:00 Jan 2016|Equities|2 Comments


  1. Mark Helm January 28, 2016 at 2:36 am


    Long-term listener, first-time caller. Enjoy the show.

    It’s interesting that the small cap premium appears more robust in value stocks. I’ve seen that turned on its head several times before, i.e. the value premium return predictability is stronger in small cap stocks.

    So which is it? Or do they feed on each other? Either way, if someone is looking to harvest either of these premiums, wouldn’t their best course of action be to own small value stocks as opposed to either small cap stocks or large value stocks?

    Thanks for your thoughts.


  2. Jared Kizer February 1, 2016 at 3:46 pm

    Hi Mark,

    It’s actually both. The size premium is stronger in value stocks and the value premium is stronger in small stocks. This is basically another way of saying that the long-term returns to small-cap growth stocks have been anemically poor, which helps produce both of these results. Directly related to that is the fact that adding an allocation to small-cap value tends to be the most effective way to tilt a portfolio toward size and value.



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