Investigating Patterns Objectively

Shifting my exercise routine to early mornings affords me more workouts on average each week. The tradeoff is nearly an hour’s less sleep each night.¹ In effect, my fitness level is negatively correlated with sleep. However, that does not mean sleeping less gets me in better shape.

As investors look for the cause of the disappointing recent performance for US small cap value stocks, they risk stumbling into a similar correlation-is-not-causation scenario. One example could be the notion that the small cap opportunity set has lost appeal because private companies are waiting longer before publicly listing. The median age for US initial public offerings (IPOs) averaged 10.9 years from 2004–2023, up from 8.6 years over 1980–2003. But plotting annual return differences between US small value and large cap stocks vs. IPO age for the same year yields little discernable relation between the two.

And the decade with the highest median IPO age, 2000–2009, was the strongest for small value’s relative return (12.3% vs. –0.9%).

Even with the benefit of hindsight, it’s challenging to assign cause for market outcomes. There’s not much here to suggest conditions are unfavorable to small cap value investing.

Exhibit 1
Annual Relative Return for Small Value vs. IPO Age
1980–2023

Past performance is not a guarantee of future results.

Each dot represents one year.

Median IPO age stats from Professor Jay Ritter.

US small value represented by the Dimensional US Small Cap Value Index. S&P data © 2024 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.

1. I would make it up with an earlier bedtime, but I need time to relax after the kids go to bed so I don’t dream about episodes of Bluey.