For context, these patterns tended to occur over longer periods—at times as short as six months, but more typically 12-18 months – or even several years. As we’ve noted before, we believe we can tell WHERE these extremes occur, but it is essentially impossible to tell WHEN they actually shift. It takes patience to see it play out.
For portfolios, this action means that we sell ETFs that hold Large stocks and allocate the proceeds to what we think is one of the next-best opportunities—in this case, ETFs that hold Mid and Small stocks, split equally between the Core and Value styles¹. We also retain a meaningful allocation to Mid-sized stocks (also split between Core and Value), which became more attractive earlier this year in May. Mid-sized stocks offer some of the most attractive return potential at this point, in our view.
As a MAP investor, you may be wondering whether this tilt changes your portfolio’s customized risk profile and goals. The overarching answer is, no—primarily because we have not changed the overall investment objectives reflected in the allocation to Appreciation (offensive investments like stocks) and Defense (defensive investments like fixed income). The portfolio is diversified to help keep risk/reward in balance, and the offensive playbook contains more than just Large US stocks, but international components, real estate investments, etc., alongside the defensive allocations.
Still, within the “offense” category, we have incrementally moved toward a historically more volatile group in Small stocks, which could add incremental risk. The purpose here is to position the portfolio for improved incremental returns (by tilting from Large to Mid and Small within the offensive playbook) at a time that Small stocks have already lagged. On balance, we believe the risk-reward is in investors’ favor when Mid and Small have statistically high weights within the “Best Ideas” of our fundamental model. We believe it is the right strategy for long-term, patient investors.
Bottom Line: After a period of meaningfully divergent returns, our research has signaled a significant extreme in the risk/reward opportunity between Large, Mid and Small stocks in the US. The role of Large stocks in the Appreciation/Offense allocation is accordingly less attractive at this point; we have sold the ETFs that represent this market cap and increased our allocation to Mid and Small stocks for what we believe will improve the return potential of the portfolio while maintaining an acceptable balance of risk in the overall, diversified portfolio.