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This article examines Market Map model 2 applied to a portfolio with a tilt towards a small capitalization "value weighted" methodology. The portfolio constructed using this methodology is based on the Fama/French "factor" model; the factors being beta, size, value, and momentum. The DFA US Small Cap Value (DFSVX), a mutual fund whose composition utilizes the factor model, was created through the efforts of Dimensional Fund Advisors dfaus.com.

Additionally, the analysis combines MMap model 2 with a "Sell in May" component, both of which are applied to the Small cap data. The initial details of Market Map model (as applied to the S&P500 index) are covered here and the "Sell in May" primer is here.

Table 1

Market Map model 2 + Sell in May allocation dates using Small cap indices data and 30 yr. Bond proxy 86 years (1927-2013)

Small Cap Value ( SV )
with Market Map model 2 return per
and Sell in May period
BOND = 75% allocation
01/18/1927SV7.3%
04/31/1927cash1.0%
10/31/1927SV22.5%
04/31/1928cash1.0%
10/31/1928SV15.7%
06/31/1929cash0.5%
10/31/1929SV-3.4%
04/31/1930cash1.0%
10/31/1930SV-3.1%
04/31/1931cash2.0%
04/31/1932SV806.0%
04/31/1937cash2.0%
04/31/1938SV10.0%
04/31/1939cash2.0%
10/31/1939SV4.5%
04/31/1940cash2.0%
02/10/1941SV539.0%
07/08/1946BOND-4.7%
10/01/1946SV3.3%
12/31/1946cash0.0%
04/31/1947SV201.7%
04/31/1953cash2.0%
10/31/1953SV138.2%
04/31/1956cash1.0%
10/31/1956SV8.8%
04/31/1957cash2.0%
04/31/1958SV60.1%
04/31/1960cash0.5%
07/05/1960BOND2.0%
10/31/1960SV27.4%
04/31/1962cash1.0%
09/31/1962SV95.0%
04/31/1965cash1.0%
10/31/1965SV34.6%
04/31/1966cash0.0%
09/31/1966SV6.6%
12/31/1966cash0.0%
02/02/1967SV83.8%
04/31/1968cash1.0%
10/31/1968SV2.2%
04/31/1969cash3.0%
09/31/1970SV27.5%
04/31/1973cash1.0%
10/31/1973SV-11.7%
04/31/1974cash1.0%
09/31/1974SV1.3%
12/31/1974cash45.6%
03/01/1975SV2.0%
04/31/1977cash1.0%
10/31/1977SV29.0%
04/31/1978cash1.0%
09/31/1978SV134.4%
04/31/1981cash1.0%
10/31/1981SV1.2%
04/31/1982cash1.0%
09/03/1982BOND4.1%
10/01/1982SV60.0%
04/31/1984cash1.0%
10/31/1984SV100.8%
06/31/1987cash2.0%
05/31/1988SV33.6%
04/31/1990cash1.0%
09/31/1990SV77.1%
06/31/1992cash3.4%
07/10/1992SV2.4%
09/31/1992 195.3%
07/11/1997BOND5.0%
10/02/1997SV9.7%
04/31/1998cash0.5%
07/02/1998BOND7.3%
10/02/1998SV35.1%
07/09/1999BOND1.1%
10/02/1999SV47.3%
04/31/2000cash0.5%
07/06/2000BOND2.6%
09/28/2000SV-1.1%
04/31/2001cash0.5%
07/06/2001BOND5.6%
10/31/2001SV22.1%
04/31/2002cash13.4%
07/05/2002BOND11.9%
10/04/2002SV6.9%
12/31/2002cash0.0%
02/13/2003SV126.0%
04/31/2008cash0.5%
07/05/2002BOND3.4%
09/31/2008SV1.0%
03/31/2009cash31.8%
07/09/2010BOND5.0%
09/31/2010SV24.3%
07/08/2011BOND16.0%
10/31/2011SV68.8%
hold SVdata through 10/2013

Table 2

Statistics for table 1:

Small Value B&HSmall value Market Map model 2Small value Market Map model 2 + Sell in May
86 year86 year86 year
CAGR17.8%20.7%22.8%
Average19.6%20.8%22.7%
Standard Deviation31%26%25%
Sharpe Ratio0.630.810.92
Cum % during invest (incl Bond % )1906%1937%2152%
cum % during cashn/a-52%-121.6%
# of tradesn/a95100
% of months BOND investedn/a3.4%3.4%
$1 becomes$1,317,675$10,515,200$46,199,342
Max Drawdown2007-200819781978
-51.0%-23.2%-23.2%
Worst month-26.8%-23.2%-23.2%
% positive months64%68%69%

Table 2 shows that over an 86 year period, both the Market Map model 2 and MM model 2 + the "Sell in May" component outperformed the Small Cap value buy an hold with less risk, with the "Sell in May " component outperforming by a wide margin.

Tables 3-6

Historical annual returns tables 25 years:

Small Cap Value
Buy and Hold
YearAnnual return$1 becomes
$1.00
198927.9%1.28
1990-12.6%1.12
199163.9%1.83
199222.1%2.24
199329.0%2.88
19940.7%2.91
199542.8%4.15
199620.4%5.00
199732.1%6.60
19986.2%7.01
199913.30%7.94
20009.00%8.65
200122.30%10.58
2002-9.30%9.60
200359.40%15.30
200425.40%19.19
20057.80%20.68
200621.50%25.13
2007-10.70%22.44
2008-36.80%14.18
200933.60%18.95
201030.90%24.80
2011-7.50%22.94
201221.70%27.92
201338.60%$38.70
Small Cap Value
with Market Map model 2
YearAnnual return$1 becomes
$1.00
198927.9%1.28
1990-2.1%1.25
199163.9%2.05
19923.6%2.13
199329.0%2.74
19940.7%2.76
199542.8%3.94
199620.4%4.75
199719.1%5.65
199826.3%7.14
199914.20%8.16
20003.40%8.43
20017.20%9.04
200220.10%10.86
200362.70%17.66
200425.40%22.15
20057.70%23.86
200621.50%28.99
2007-10.70%25.88
2008-0.80%25.68
200950.30%38.59
201022.10%47.12
201121.50%57.25
201221.70%69.68
201338.60%$96.57
Small Cap Value
with Market Map model 2
and Sell in May
YearAnnual return$1 becomes
$1.00
198927.9%1.28
19903.7%1.33
199163.9%2.17
199221.8%2.65
199329.0%3.42
19940.7%3.44
199542.8%4.91
199620.4%5.92
199714.8%6.79
199845.5%9.89
199927.00%12.56
20009.70%13.78
20017.60%14.82
200220.50%17.86
200359.60%28.51
20049.97%31.35
200522.87%38.52
200621.52%46.81
2007-10.75%41.78
20080.30%41.90
200953.30%64.24
201022.30%78.56
201121.90%95.76
201221.76%116.60
201338.60%$161.61
NDX/QQQ
with Market Map model 2
YearAnnual return$1 becomes
$1.00
198926.3%1.26
19908.5%1.37
199165.5%2.27
1992-6.0%2.13
199310.6%2.36
19941.5%2.39
199542.6%3.41
199642.5%4.86
199724.60%6.06
199845.3%8.80
199931.3%11.55
20007.6%12.43
20015.80%13.15
200231.7%17.32
200351.3%26.22
200410.4%28.95
20051.5%29.38
20066.7%31.36
200718.7%37.22
2008-9.2%33.79
200976.8%59.75
201013.6%67.87
201121.7%82.60
201216.8%96.45
201327.2%$122.71

Table 7

Historical statistics based on tables 2-5 using MM model 2 with Small cap value and Nasdaq 100/QQQ (1989-2013):

Small Value B&HSmall value Market Map model 2Small value Market Map model 2 + Sell in MayNDX/QQQ Market Map model 2
return25year25year25year25year
CAGR15.7%20.1%22.6%21.2%
Average16.1%19.5%21.9%20.9%
Standard Deviation23%19%18.5%18%
Sharpe Ratio0.711.021.191.13
Cum % during invest (incl Bond % )451%536%596%573%
cum % during cashn/a-23%-43.8%-30.8%
# of tradesn/a364136
% of months BOND investedn/a9.5%9.5%9.5%
$1 becomes$39$97$162$123
Max Drawdown2007-20082007-20082007-20082007-2008
-51.0%-14.4%-16.4%-18.5%
Worst month-26.8%-10.0%-11.0%-11.5%
% positive months64%71%70%64%

Table 8

Annualized returns summary 5, 15, 25, 86 years:

Annualized returns
5 Years15 Years25 Years86 Years
a

Small value

Buy & hold

24.0%12.2%15.7%17.8%
bSmall value with Market Map model 230.3%19.0%20.1%20.7%
cSmall value with Market Map model 2 + Sell in May31.0%20.5%22.6%22.8%
dNasdaq 100/ QQQ with Market Map model 229.4%19.2%21.2%n/a

In viewing tables 3-8, the Market Map model 2 combined with "Sell in May" component (table 8 item c) outperformed items a, b, and d. The "Sell in May" component improved the performance of the series when applied to the Small cap value portfolio, but didn't provide performance improvement when applied to the Nasdaq 100/QQQ index (analysis not shown). The reason for the performance superiority of "Sell in May" when applied to the Small cap universe is unknown; perhaps there is/was performance advantage gained during the November-December period years when the "Sell in May" was invested and the MM model 2 was in cash ?.

As the work of Fama and French has proven that a Small cap 4 factor model is dominant in compound return and risk versus the performance of the other Morningstar style box classifications, an interesting aspect of this study is that the QQQ ETF, while representing a "large cap growth/blend" classification in the style box, has returns comparable to items b and c in table 8 with similar risk characteristics when the Market Map model is applied. In determining the best performing asset vehicle for investment in the Market Map program, one aspect that can give the QQQ ETF an advantage over a Small cap value fund over a long investment time frame, is the consideration of management fee and tax ratios. In terms of Tax Cost and Net Expense Ratios, QQQ has much lower ratios than those of the DFA US Small Cap Value.

We believe that a small cap value factor portfolio has greater return potential than the QQQ as measured by the MMap model results and by the research conducted by Fama and French. Yet, until a low expense and low tax ratio exchange traded fund that reflects an underlying Small Value Momentum factor methodology becomes available and accrues reasonable trading history, we favor the use of the QQQ ETF as the appropriate "small cap" investment vehicle for the Market Map model for the foreseeable future.

"When everyone is looking for the needle in the same haystack, go look in a different haystack"

Sources for Small Cap indices and historical performance data compiled for the analysis and calculation for the tables below are:1) the DFA US Small Cap Value I (1999 to 2013) from Morningstar 2) the "Small capitalization Average Value Weighted" portfolio formed on size and momentum (1927-1998 ) from Kenneth R. French data library 3) the Nasdaq 100 index (1989-1999)/Powershares QQQ Trust ETF (QQQ) (2000-2013) and 4) Barclays iShares 20+ Year Treasury Bond ETF (TLT) / Vanguard Long-Term Treasury Fund Investor Shares (VUSTX) / or 30 year bond rate.

Source: Market Map Model 2 : Using Small Cap Value Weighted Portfolio