By VWArticles
History shows, and investment strategists tout, that small-cap stocks are the best-performing asset class. While small caps outperformed the runner-up, large-cap stocks, over the last nearly 100 years, research has shown that the outperformance hasn't persisted over all multi-year time periods and that the outperformance is concentrated in microcap stocks.
We have always been go-anywhere, all-cap investors. In the early 2000s, when we were finding little value in large caps and a plethora of value in small caps, we became concentrated in that area. And while our declared preference is to be all-cap investors, availing ourselves of a greater opportunity set - knowing that smaller companies can get absurdly undervalued, which rarely occurs with larger companies - our preference is to emphasize large caps. Because we do believe potential returns from large caps can match that of small caps. Larger, more well-known companies trade more efficiently; and therefore, tend to revert more quickly to fair value. Also, in order to use our macro overlays - which are designed to alert us to a recession or bear market - we wish to have the opportunity to exit positions, rather than being liquidity constrained (as one might be in small caps), in order to limit the impact of market drawdowns.
Value vs. Undervalued
We don't buy value stocks per se. We buy undervalued stocks. There's a difference. Value stocks are generally understood to be those that trade at low multiples of earnings or book value. And many investors practice their trade by purchasing what they believe to be cheap stocks by finding those that are trading at relatively lower multiples than the market or industry peers. We prefer a stricter approach, analyzing companies and arriving at appraisals of fair value such that we have an absolute (as opposed to relative) view of the company's price with respect to
