Draft Picks & Value Stocks

by Wes Crill

During the National Football League’s recent draft, teams selected from hundreds of prospects to build rosters for the future. It’s my favorite sporting event of the year, mainly because it provides an opportunity to see professional evaluators miss wildly with their projections.1 And while many sources of uncertainty contribute to these misses, NFL teams are often derailed by a self-inflicted error: focusing too much on a prospect’s weaknesses at the expense of all their strengths.

I was thinking about this lesson in the context of small cap value performance. Many investors have expressed concern over small cap value stocks underperforming large caps in the US over the 20 years ending in January. But this was largely an outlier from a global perspective. In major non-US markets, small cap value stocks handily outperformed their large cap counterparts over this period. While a two-decade stretch of underperformance is not what investors hope to see from US small value, it’s important to take notice of what went right for small value over this period.

Thinking globally also reinforces the importance of diversification when emphasizing small cap value stocks. The returns for these stocks may not move in lockstep across regions, and outperformance for non-US stocks can mitigate the impact of disappointing relative returns in the US.