Market Factors - Size and Value

One of the things I have noted over my years of investing is that research points to some notable premiums that can be captured when investing in equities.

The small cap and value premiums are well established over various time horizons in US market history.  See Fama and French Three Factor Model.

The table shows that the average value and small cap premiums in the US equity market have been positive over the indicated periods. The return premiums have been volatile, as indicated by the standard deviations. While the averages have been positive, the annual return differences have been negative for several of the years in the historical record.

The value premium is defined as the difference between the average returns of value stocks and growth stocks (value minus growth). Value is defined as the top 30% of stocks ranked by book-to-market ratio (high-BtM stocks); growth is defined as the bottom 30% of stocks ranked by BtM (low-BtM stocks). NYSE firms are used to determine the breakpoints for value and growth; AMEX and NASDAQ stocks are then added to the NYSE stocks to form the value and growth indexes. The small cap premium is defined as the difference between the average returns of small cap and large cap stocks (or small minus large). The size breakpoint each year for small and large is the median NYSE market equity (i.e., the bottom 50% for small and top 50% for large). AMEX and NASDAQ stocks are added to the NYSE stocks to form the small cap and large cap indexes.

The table shows arithmetic averages of annual premiums. For example, from January 1946 to December 2012, the returns of value stocks exceeded those of growth stocks by an average of 4.56% per year. The return difference had a 13.83% annual standard deviation during this period.