19th June 2013: The SmallCap Value Premia

Richard C. Marston‘s Portfolio Design: A Modern Approach to Asset Allocation (Hoboken, NJ: John Wiley & Sons, 2011) is my work commute read for this week. Wiley has excerpts here.


Portfolio Design focuses on return drivers and risk premia for the major asset classes used to allocate assets in diversified portfolios. The ‘modern approach’ includes a focus on data analytics and the available evidence base; a review of recent (Fama-French-influenced) quantitative finance studies; and insights on index benchmarks and portfolio construction.


I’m a couple of chapters in: Marston focuses on smallcap and value return drivers, in contrast to largecap and growth stocks. Although he doesn’t explore this Marston’s insights in his opening chapters are also relevant to two other areas:


  • Penny stick promoters rely on ‘crowded trades’ and rational herding: this is often what the ‘free’ investment newsletters and watchlists are for, to create drawdown market dynamics in relatively illiquid stocks.
  • Venture capital’s asymmetric returns can have large payoffs if opportunity evaluation screening works, and if stage one financing backs a break-out company that creates a new, large market or is a successful disruptive entrant into existing markets.


It’s interesting to see how an experienced, endowment investment adviser handles index benchmarks, portfolio construction, and specific return drivers. Since he is also on Yale’s investment committee Portfolio Design also makes an interesting counterpart to the influential Yale Swensen model detailed in Swensen’s Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment (rev ed.) (New York: The Free Press, 2009).