Can we count on AVUV high performance in the future?
Nov 13, 2024
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Chris Pedersen, Director of Research at Sound Investing and a retired engineer, dives deep into the impressive performance of the AVUV fund compared to Vanguard small-cap value options. He explains AVUV's systematic investment approach and introduces the 'rich minus weak' ratio. The discussion also tackles the future potential of AVUV and its active management style. Additionally, Chris addresses key differences between investment strategies like VTI and AVUS, suggesting AVUS could yield higher returns. Tune in for valuable insights on small-cap strategies and market dynamics!
The recent remarkable performance of small cap value investments, particularly AVUV's impressive compounded returns, highlights the potential for significant earnings growth in favorable conditions.
The systematic management approach employed by funds like AVUV minimizes emotional decision-making and relies on empirical data, promoting consistent performance and informed investment choices.
Deep dives
The Value of Investment Education
Educating investors is crucial for enabling them to manage their portfolios effectively, whether they are doing it independently or alongside an advisor. The emphasis is placed on the importance of understanding various investment strategies and options. Individuals are encouraged to ask insightful questions that may lead to adjustments in their investment approaches. This educational initiative stems from a foundational desire to empower investors with knowledge, ultimately fostering more informed decision-making.
Performance of Small Cap Value Investments
Small cap value investments have recently shown significant performance, particularly highlighted by the impressive one-day return of several funds, such as Avantis small cap value, which was up 7.2%. Over a five-year period, AVUV has compounded at an impressive 14.5%, greatly outperforming its peers. The discussion indicates that this trend may suggest a broader market belief in the potential for small cap companies to achieve higher earnings growth in favorable economic conditions. However, caution is advised, as one day’s returns should not be seen as definitive, requiring a long-term perspective.
Systematic Management of Funds
The systematic management of investment funds plays a key role in delivering consistent performance driven by stable attributes that have historically outperformed. AVUV is noted for its daily management approach, ensuring exposure to the most profitable small cap companies trading at attractive valuations. This method reduces the likelihood of emotional decision-making that can occur in active management and instead relies on empirical data to guide investment choices. Through tools like regression analysis, the stability of these management systems can be verified, providing investors with confidence in their choices.
Diversity in Investment Strategies
The importance of diversification among small cap value funds is emphasized, demonstrating how different funds can represent various categories within the same asset class. Not all small cap value funds are created equal—attributes like size, quality, and sector weightings can significantly affect performance. Combining funds like Avantis and DFA can provide a broader range of exposure and risk mitigation. Investors should ideally diversify their holdings to balance potential returns while reducing the inherent risks associated with concentrating on a single fund or strategy.
Paul mentions his upcoming presentation to the L.A. Chapter of AAII on November 16, 2024 10:30 to noon.
Chris Pedersen and Daryl Bahls join Paul to answer your questions. Paul opens the podcast with a brief introduction of the team and notes how thankful he is for their commitment to helping others.
Paul mentions the huge moves small cap value funds made on November 6. He follows that with a comparison of the 5 year returns of AVUV and 3 Vanguard small cap value funds (VBR, VIOV and VTWV). AVUV compound rate of returns were 3 plus percent higher than the Vanguard funds. Paul’s questions: What caused the higher returns and are they likely to be similar in the future?
Chris responds with a lengthy discussion of the systematic approach that AVUV uses and Paul reads what AVUV says about their systematic approach.
Chris compares the DFA small cap value fund (DFSV) with AVUV. Chris also talks about a relative ranking he wants add to his Best In Class recommendations next year.
Chris discusses the quality factor of AVUV vs. funds that build their small cap value portfolio using the Russell 2000 Small Cap Value Index. He introduced a new term: rich minus weak ratio.Paul and Chris discuss the question: Is AVUV and actively managed fund?
Question: JL Collins recommends VTI (Total Market Index) and Warren Buffett recommends VOO (S&P 500). Which do we recommend? Chris notes the important differences between VTI and AVUS and suggests a likely extra .5% return from AVUS.
For those who want to own only total market funds, the group discusses the possibilities of replacing both VIT(U.S. Total Market) and VXUS (International Total Market) with total market indexes that favor slightly smaller companies with a slightly more value tilt.
Chris, Daryl and Paul weigh in on things they don’t believe about investing.Chris ends with some important comments about how we are likely helping investors.