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Valuing the Smaller Things

An asset allocation perspective on small- and mid-cap value

Key Insights

  • While U.S. value and small‑ and mid‑cap stocks have been out of favor recently, we believe exposure to these styles can improve portfolio durability.
  • Historically, small‑ and mid‑cap value have played important return‑enhancing and risk‑reducing portfolio roles, helping to reduce downside market exposure.
  • History also suggests that investors who miss the initial months of a small-cap value outperformance cycle may sacrifice a large share of that outperformance.

The dynamic nature of capital markets means that generating durable investment results requires thoughtful portfolio design and ongoing revalidation of allocations through time. One key challenge is that markets evolve, and as a result, investment style leadership (such as the equity value style versus the growth style) tends to rotate over time. Historically, these cycles have lasted several years and have often prompted investors to question if an out‑of‑favor style will ever work again.

For most of the past decade, two equity styles—U.S. value and smaller capitalization (including both small‑ and mid‑cap stocks)—have been out of favor. However, while the shorter‑term performance of these styles has been challenged, longer‑term data (Figure 1) show that both approaches historically have been strong drivers of positive returns and have accounted for a meaningful portion of the broad U.S. equity market, equaling approximately 15% of the Russell 3000 Index as of March 31, 2020.1

Long‑Term Small‑ and Mid‑Cap Value Performance Tells One Story, More Recent Performance Another

(Fig. 1) Historical performance of equity style factors

Long‑Term Small‑ and Mid‑Cap Value Performance Tells One Story, More Recent Performance Another

Past performance is not a reliable indicator of future performance.                

July 31, 1926, through February 29, 2020 (subset December 31, 2009, through February 29, 2020).

Source: Kenneth R. French (©2020). Used by permission. All data analysis by T. Rowe Price. The performance results and the size and style categories shown here are based on long‑term return series constructed by Dr. French using data from the Center for Research in Security Prices. Additional information on Dr. French’s return and factor methodologies can be found at his research site, on the Web at

The goal of this paper is not to validate the continued existence of any specific return premia for small‑ and mid‑cap value stocks. Rather, we focus here on the risk‑based case, hopefully demonstrating to investors the benefits of ensuring that their portfolio positioning is properly diversified through a thoughtful reexamination of their U.S. equity style and size exposures.

To help illustrate possible negative consequences of under‑diversification, we begin our analysis by reexamining the strategic allocation case for small‑ and mid‑cap value stocks, then take a closer look at some of the key attributes of these investment styles.

To find out more, download the full PDF.


This material is being furnished for general informational and/or marketing purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, nor is it intended to serve as the primary basis for an investment decision. Prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.

The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.

Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources' accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of the date noted on the material and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.

The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request.  

It is not intended for distribution to retail investors in any jurisdiction.

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