Large Cap Value

Do you need more large cap value in your portfolio?

Do I need more Large Cap Value?

Do I need more Large Cap Value?

The other day I asked myself if I needed more large cap value. I have just updated my statement of net worth and asset allocation. My asset allocation is 83/17 right now. Pretty good. I am happy being 70 or 80% stocks, and I have tended towards the high side of that allocation in the past few years.

Currently, my equity (stock) position is:

  • 50% US
  • 21% International
  • 5% Emerging
  • 6.5% REITs

I also have some equity alternatives, such, Wine, Ag land, and Crowdfund RE. Some of those are actually bond-alternatives, but I won’t get into that right now. Crypto is a great equity-alternative!

But when I dive deep into my US equity holdings, I am way underweight large cap value.

Do I need more large cap value?


Do I Need More Large Cap Value?

But this surprised me and made me ask myself, “do I need more large cap value?”

large cap value

Above, you can see my asset classes broken down and compared to an “ideal” 80/20 portfolio.

On the top, large cap growth. You can see I’m a percent or two underweight large growth.

Next large cap value. I have about 10% of my portfolio in large cap value, but should I have more?

You can see in the blue line that I’m way underweight large cap value. The next smaller bar is in green below (corporate bonds, something I don’t have much use for right now, followed by international and high yield bonds – all three I’m actively avoiding).

So, does that mean I’m actively avoiding large value because I’m focused on small cap value?

If you look at the lines going the other direction, I’m the most overweight small cap, with almost 16% of my equities falling into that asset class, compared to the recommended 6%.

Next, I have too many Muni’s. Long story. Trying to save some cash for a possible purchase of recreational land that might come at any time one month or one decade from now. Now that is a hard savings goal.

So, do I need more large cap value?


Should I have Large Cap Value in my Portfolio?

You probably already do have large cap value in your portfolio. But you likely don’t “tilt” toward it or, that is, have it overvalued in your portfolio unless you are focused on doing so. So, for example, if you buy the S&P500 or the total stock market index, you already own all of the large cap value stocks in proportion to their capitalization.

That large cap value stocks are large cap stocks means they get concentrated in these index funds that focus on market capitalization. The larger the company, the more you own as a percentage of the index.

But what does a focus, concentration, or “tilt” to large cap value add to your stocks? Or does it add something to your entire portfolio (including your bonds and other assets) beyond just the diversification it adds to your stocks?

Should I have large Cap Value in my Portfolio? You already do! Let’s look at some of the names.


What is Large Cap Value?

Large Cap means it is a big company. Value means less expensive than a growth company compared to its earning potential. Therefore, value companies are “cheap” and often pay dividends. As they pay more in dividends if you want to maximize your earnings and minimize tax drag, these funds might go best in a tax-protected space.

You might consider putting your value in your tax-sheltered accounts and your growth in the taxable brokerage account. Still, you don’t need to do this as part of your routine tax optimization and optimal asset location.

As for dividend yield, well, it changes over time. But currently, some large cap value ETFs yield about 2.5%, compared to 0.6 for large cap growth and 1.64% for large cap blend. So, you can save some taxes by putting value in tax-protected compared to growth. See my blog on the yield-split asset location strategy.

What sectors are you invested in with large cap value? Financials and health care lead the sector weightings, followed by industrials and information technology. Of note, energy is much more represented compared to large cap blend.

So, why invest in large cap value?


Why Invest in Large Cap Value?

Why do we invest in large cap value? Because it provides diversification to our portfolio and increases risk-adjusted returns over long periods.

All of those components are important. First off: long periods.

Large Cap Value outperforms over long periods of time. However, as with small cap value, this may take decades.

It provides diversification both to your equities and to your portfolio in general. Diversification has been called the only free lunch in investing. Take advantage of it! Over time, you will not “win,” but you will do better than those who are highly concentrated.

Increased risk-adjusted returns. Understand, you don’t get increased returns; you get increased risk-adjusted returns with large cap value in addition to your total market funds. Over the years, sometimes growth and sometimes value does better, leading to changes to decrease your volatility and increase the returns of your portfolio. Let’s look at this now.

what is large cap value

Above, this is a bit busy but hang in there with me for a second. You can see an initial 100k investment invested in 4 different portfolios on the top left. Over 50 years, the reference portfolio (number 1, invested in the S&P500) grew at 10.6%, with a standard deviation (to represent volatility in the case) of 17%. In portfolio number two, they add US large cap value to the portfolio. This improves compound return rates and lowers the volatility!

Next, portfolio three adds small cap blend and portfolio 4 adds US small cap value. Again, you can see both increase volatility and compound returns.

You can see that adding small cap value made the largest difference, but adding large cap value was better than adding just small cap blend to the S&P500.

In summary, you are better to go value than you are size. If you add large cap value to your basic funds, you are better off than if you just add small caps in general!


What Percentage of My Portfolio Should be Large Cap Value?

Let’s look and see what percentage of the US economy falls into large cap value before deciding how much we should have invested.

how much large cap value?

Above, you can see the Morningstar style boxes, which compare equity style for your portfolio against the entire US economy. On the Right is the US Equity. Note 34% are Large Growth, vs. 15% are Large Value.

Note Mid Caps in the US tend to be blend, and small is only 8% of the US market (by capitalization).

My portfolio, for comparison purposes, is on the left. I have only 20% in large cap growth and 14% in large cap value. Finally, instead of 8% small caps, I have 24%. Now that is a tilt!

What is a tilt? When you lean into a factor (size, growth vs value, momentum, quality, etc.) to get extra risk-adjusted returns over the years.

So, I have 3x more small cap value than the market in general. That’s a nice tilt! Maybe too much! (not if you can stick with it over the decades!). I am underweight large cap growth, too. That is a bet against much of the last decade of performance of the US markets. But, as I learned in the Callan Table, results over the decades are always changing, and future expected returns depend on current prices.

We are in too much of a market transition to know if I will “win” this tilt. But, again, “win” what? It is me against my goals, not me against the market.


Disadvantages of Large Cap Value

There are, of course, disadvantages to large cap value tilts.

The main one is profit chasing. Hopping in and out of tilts is a sure way to time the market and lose out on the risk premium you get from these factors.

Merriman Large Cap Value

Above is more great work from Merriman’s archives.

You can see along the top US large cap blend, the large cap value, small cap blend them small cap value.

These are 15-year periods that compare the result for different portfolios.

Note that with the S&P500, your $100 grows to $460 compared to $607 with large cap value.

Then compare large cap value with small cap blend and small cap value.

That is the main disadvantage of large cap value.


Summary: Do You Need More Large Cap Value in Your Portfolio?

So, do you need more large cap value in your portfolio?

There may be a size premium. There is a value premium. There probably is an additional small value premium if you go small and value-e enough. Is there a large cap value premium?

Yes. If you can invest for the decades rather than for the years.

I need more large cap value. I believe in factor investing. Buy and hold.

I buy great ETFs when I have the money, and I sell them if I need the money in the future. Or leave them for the kids to get a step up in basis. I have no fear that a low-cost, broadly diversified large cap value ETF will be around in 40-50 years. It will probably be worth more than a total stock market ETF. But only because I took more risk.

I’m happy to risk my money in a large cap value tilt. Are you?

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One Comment

  1. I just added VTV to my portfolio after reading this and getting confirmation in my RightCapital Asset Allocation detail. Thanks for the article

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