時価総額: 大型 / 小型

特別レポート

投資家は、学術面・実務面の双方でバリューとグロースのストラテジーを評価する際に、定義と方法論に特に注意を払うべきです。 バリュー投資家は米国以外の市場、特に新興国のスモールキャップ・ユニバースに注力すべきです。 グロース投資家はラージキャップ、特に米国のラージキャップ・ユニバースに注力すべきです。 スモールキャップ投資家はバリューに注力すべきです。 ラージおよびミッドキャップの投資家は、戦略的にバリューとグロースの間で賭けをしてはなりません。タクティカルなスタイル・ローテーションは、評価差が極端な水準に達した場合にのみ行うべきです。  GAAはバリュー対グロースに関して中立の立場を維持していますが、スタイルの傾きを実装する際にはセクター・ポジショニング（景気敏感株対ディフェンシブ株、金融株対情報技術・ヘルスケア）および国別ポジショニング（ユーロ圏対米国）を用いることを好みます。 スタイルによる投資は投資そのものと同じくらい古い考え方です。バリュー対グロースは、特に最近数週間の急激なスタイル反転を受けて、当社のクライアントからよく問われるテーマの一つです。本レポートでは、バリュー対グロースに関するよくある質問にいくつか答えることを試みます。これらの質問を5つのセクションに分けて整理しました： まず、学術界が主にファマ＝フレンチの枠組みを使用してきたため、バリュー、グロース、及びサイズが時間とともにどのように相互作用してきたかを見るために、ファマ＝フレンチのバリュー・グロース・ポートフォリオの93年分の歴史を見ます。 次に、実務家が主にパフォーマンス・ベンチマークとして使う商業的指数であるエスアンドピー、ラッセル、およびエムエスシーアイを含む、米国のスタイル指数がどれだけ比較可能かを見ます。 第三に、エムエスシーアイのバリュー・グロース指数群を用いて（MSCIはグローバル・カバレッジ下の各市場についてバリュー・グロース指数を作成する唯一の指数提供者です）、国際市場が米国と同様のバリュー―グロースのパフォーマンス周期を共有しているかどうかを調査します。 第四に、S＆Pおよびラッセルのピュア・スタイル指数を標準的な対応物と比較することにより、バリューとグロースへの純粋なエクスポージャーが実際にバリュー―グロースのパフォーマンス差を改善するかどうかを検証します。 最後に、投資結論のセクションでGAAのスタイル傾斜へのアプローチを示します。 1. 長期的にバリューはグロースをアウトパフォームするというのは本当か？ バリュー・プレミアムの存在を支持する学術的証拠は圧倒的です。1 学術的には、「バリュー・プレミアム」はHML（high minus low）ファクタープレミアム、またはバリューのアウトパフォーマンスとも呼ばれ、最も割安な銘柄と最も割高な銘柄のリターン差として定義されます。ファマ＝フレンチは評価基準としてブック・トゥ・プライスを単独で用いましたが2、多くの研究者はブック・トゥ・プライスを利益対価格、売上対価格、配当利回り3など他の評価指標と組み合わせています。 また、「大型株ではバリューのアウトパフォーマンスはほとんど存在しない」という学術的証拠もあります。4 さらに、2014年にファマとフレンチは「A Five-Factor Asset Pricing Model」というワーキングペーパーを発表し、大きな議論を呼びました。そこでは「HMLは冗長なファクターである」と示されており、1963年から2013年の米国データに基づいて「平均的なHMLリターンは（サイズ、収益性、投資パターンなどの）他のファクターへのHMLのエクスポージャーによって説明される」と述べられています。5 資産所有者およびアロケーターは、バリューとグロースのベンチマーク選定時に特に注意を払うべきです。 定量モデルでない実務家、特にロングオンリーの投資家にとって、バリューとグロースは学術的な“バリューファクター”と原則は共有しているものの別個の投資スタイルです。これらの定義はS＆Pダウ・ジョーンズ、FTSEラッセル、エムエスシーアイがバリューとグロースの指数をどのように定義しているかに示されるように様々です（次節の7ページ参照）。一般に、バリュー株は安く、平均以下の収益成長の可能性を持ち、グロース株は平均以上の収益成長の可能性を持つが非常に割高であるとされます。しかし、商業的指数プロバイダーが公表する指数は非常に長い歴史を持つわけではありません。幸いにも、ファマ＝フレンチは公表ウェブサイト上でバリュー・グロース・サイズのポートフォリオを提供しています。6 表 II-1 は、1926年7月から2019年6月までの93年間にわたり、よく知られたファマ＝フレンチ方式に基づく米国のバリューポートフォリオが、イコールウェイト・および時価総額加重のいずれであっても、そのグロース対応よりも高いリターンを上げてきたことを示しています。特に目立つのは、イコールウェイトのスモールキャップ・バリューが絶対リターンで年率10％超でグロースを上回り、リスク調整後リターンでもグロースを2倍以上上回っている点です。 Table II-1 Fama-French Value-Growth-Size Portfolio Performance* 2019年10月 2019年10月 一部の報道は、バリュー株は平均して「より大きく確立された企業」であるため「ボラティリティが低い」と主張してきました。7 これは特定の期間では当てはまるかもしれません。しかしファマ＝フレンチのカバーする93年間では、この一般的な見解は支持されません。実際、ラージおよびスモールの両ユニバースにおいて、どのように構成銘柄をウェイト付けしても、バリュー・ポートフォリオは一貫してグロース・ポートフォリオよりも高いボラティリティを示しています。ただし、超過リターンはその高いボラティリティを相殺しており、4つのペアのうち3つでリターンが勝っている例が見られます。例外は時価総額加重のラージキャップのグロースで、これはバリューよりもはるかに低いボラティリティのために若干高いリスク調整後リターンを示しています。非常に長期的な視点から見ると、バリューのアウトパフォーマンスはより高いリスクを取ることから生じていると言えます。 さらに詳しく見ると、バリューがグロースに対して長期的に優位だった主な期間はファマ＝フレンチの93年サンプルの最初の80年に集中していることがわかります。しかし近年、2007年以降では、4つのファマ＝フレンチのバリュー―グロースペアのうち3つでバリューがグロースに対して大きく劣後しており、唯一の例外はイコールウェイトのスモールキャップ・バリュー―グロースペアです。これは表 II-2に示されています。イコールウェイトのスモールキャップ・バリューは最新の期間でもグロースを上回っていますが、勝率は最初の80年の76％から54％に低下し、年間平均アウトパフォーマンスの大きさも最初の80年の12.5％からわずか1.3％に落ち込んでいます。 Table II-2 The Fight Between Value And Growth* 2019年10月 2019年10月 統計分析は選択する期間に敏感です。バリューとグロースは時間とともにどのように推移してきたのでしょうか？ チャート II-1 は、バリュー、グロース、そしてサイズ間の長期的なダイナミクスを示しています。以下の結論が明確です： Chart II-1 Fama-French Value-Growth-Size Peformance Dynamics* Fama-French バリュー・グロース・サイズ パフォーマンスの動態* Fama-French バリュー・グロース・サイズ パフォーマンスの動態* バリュー投資家はラージキャップよりスモールキャップを好むべきであり、グロース投資家は逆にラージキャップをスモールキャップより好むべきです。ただし、成功の可能性はずっと低くなります（チャート II-1、パネル1）。 スモールキャップ投資家はグロースよりバリューを好むべきです（パネル2）。 ラージキャップ領域でのバリューのアウトパフォーマンス（パネル3）は、スモールキャップ領域（パネル2）ほど強くありません。 ファマ＝フレンチは、CRSP（Center for Research In Security Prices）上のNYSE全銘柄の中央値時価総額に基づいてスモールとラージを定義し、そのNYSE中央値サイズを用いてNYSE、AMEX、NASDAQ（1972年以降）をスモール・グループとラージ・グループに分割します。バリューとグロースの分割はブック・トゥ・プライスに基づき、下位30％がグロース、上位30％がバリューに分類されます。興味深いことに、スモールキャップのバリューとスモールキャップのグロースは、全ユニバースの中でごく小さな割合しか占めていないことがチャート II-2AとII-2Bに示されています。 バリュー株の平均時価総額は、ラージ・スモールの両ユニバースでグロース株の約半分です（チャート II-2AとII-2Bのパネル3）。これも一部メディアの「バリュー株はより大きく確立された企業である」という主張を支持するものではありません。むしろ、すべての投資家がスモールキャップ・バリューを好むべきだという主張をさらに裏付けます。残念ながら「スモールキャップ・バリュー」は非常に小さなユニバースです。2019年6月時点でCRSPにおける米国株式市場の時価総額合計は26.2兆米ドルであり、スモールキャップ・バリューはわずか1.5％（約3,830億ドル）にすぎません。ラージキャップ・バリューでさえ相対的に小さいウェイトで、13％（35,000億ドル）に過ぎません。 Chart II-2A Small-Cap Value-Growth Portfolios* スモールキャップ・バリュー・グロース・ポートフォリオ スモールキャップ・バリュー・グロース・ポートフォリオ Chart II-2B Large-Cap Value-Growth Portfolios* ラージキャップ・バリュー・グロース・ポートフォリオ ラージキャップ・バリュー・グロース・ポートフォリオ   米国市場は56％（2019年6月時点で14.7兆米ドル）の大きなウェイトでラージキャップ・グロース銘柄によって支配されています。これは励みになる点です。学術研究はラージキャップにおけるバリュー・プレミアムが弱いことを示しているからです。しかしラージキャップにおけるバリューの弱さは主に2007年から始まり、最初の80年間のラージキャップ・グロースに対する強さの後に生じたものでした（チャート II-1、パネル3）。 ファマ＝フレンチ方式は1926年からの長い歴史があるため学術研究で広く用いられています。しかし、実務家、特にロングオンリー投資家にとっては、FTSEラッセル、エスアンドピー・ダウ・ジョーンズ、エムエスシーアイといった商業的指数がパフォーマンス・ベンチマークとしてより頻繁に使用されます。本レポートでは、米国およびグローバルにおける一連の商業的バリュー―グロース指数を研究し、バリュー―グロースのダイナミクスと資産アロケーターがそれらを意思決定プロセスに組み込む方法について光を当てます。 2. すべての米国スタイル指数は同じではない スタイル指数を提供する主要な指数プロバイダーは3社あります。FTSEラッセル（業界で最初のバリュー―グロース指数群を1987年に立ち上げた）、エスアンドピー・ダウ・ジョーンズ、エムエスシーアイです。エムエスシーアイはカバレッジ下の各株式市場ごとにバリュー―グロース指数のフルスイートを提供する唯一のプロバイダーです。3社はいずれも親指数の全構成を含む「標準」スタイル指数を提供しますが、FTSEラッセルとエスアンドピー・ダウ・ジョーンズは「ピュア」スタイル指数も提供しています。「標準」と「ピュア」スタイル指数の間には主に2つの違いがあります：1) 標準指数は時価総額加重であるのに対し、ピュア指数はスタイル・スコアに基づいてウェイト付けされる。2) 標準バリューと標準グロースは構成銘柄が重複するが、ピュア・バリューとピュア・グロースは共通の構成銘柄を持たない。 我々はスタイルの傾きをタクティカルに実装する際にセクターと国別のポジショニングを用いることを好みます。 ファマ＝フレンチ方式で用いられるブック・トゥ・プライス以外に、3社はバリューとグロースの判定において異なる変数を追加しています。これらは表 II-3に示されています。これは業界のバリューとグロースに対する理解の進化を反映しています。例えばエムエスシーアイが1997年にスタイル指数を初めて導入した際はブック・トゥ・プライスのみを使用していましたが、2003年5月に現在の「マルチファクター・二次元」フレームワークに変更しました。 Table II-3 Value-Growth Index Criteria 2019年10月 2019年10月 指数構築の方法論の違いのために、米国のバリュー―グロース指数は異なる振る舞いをしてきました。エスアンドピー500、ラッセル1000、そしてエムエスシーアイの標準（ラージおよびミッド）指数は広くフォローされる機関投資家のベンチマークであり、1970年代まで遡るバックテスト履歴があります。チャート II-3 は、3つの指数プロバイダーからの相対的なバリュー/グロース・パフォーマンスのダイナミクスを、ファマ＝フレンチ（時価総額加重、指数プロバイダーのアプローチと整合させるため）とともに示しています。以下の点が観察できます： Chart II-3 Which Value/Growth? バリュー／グロース、どちら？ バリュー／グロース、どちら？ 3つのペアのどれもがファマ＝フレンチの時価総額加重バリュー/グロースと完全に同じ形には見えません。これは、ファマ＝フレンチの長期にわたるバリュー/グロースポートフォリオに基づく歴史的分析を商業的指数にどのように適用できるかという疑問を投げかけます。 1975年から2000年2月までの最初のサイクルでは、3つの指数ペアはいずれも一巡し、バリューとグロースの間でフラットなパフォーマンスでした。また、エスアンドピー500とラッセル1000は相互により近い相関を示しましたが、3社はいずれもかなり似通っていました。 しかし2000年2月に始まった現在のサイクルでは、ラッセルのバリュー/グロースは他の2つよりもはるかに強く反発しました。ただし、2007年に始まった下落局面では、3つの指数は互いに一致したパフォーマンスを示しました（表 II-4参照）。 Table II-4 U.S. Style Index Performance* 2019年10月 2019年10月 さらに、エスアンドピーとラッセルの差はエスアンドピー500とラッセル1000の間だけにとどまりません。これは各時価総額セグメント全体に存在し、チャート II-4に示されています。残念ながら、エムエスシーアイは詳細なキャップ・セグメントについて1975年からの履歴を提供していません。2000年2月以降の現在のサイクルでは、エスアンドピーのバリューは2000年から2006年の間で最も小さく反発しました。なぜでしょうか？ Chart II-4 Know Your Benchmark ベンチマークを把握する ベンチマークを把握する Chart II-5 Value/Growth: Russell Vs. S&P バリュー／グロース：ラッセル対エスアンドピー バリュー／グロース：ラッセル対エスアンドピー さらに調査すると、チャート II-5 に示されるようないくつかの興味深い観察が得られます。 集計レベルでは、エスアンドピー1500、ラッセル3000およびそれらのスタイル指数は、2000年2月に始まる直近のサイクルにおいて大きく一致したパフォーマンスを示しており（チャート II-5、パネル4）、指数収束の業界トレンドを反映しています。 しかし、異なる時価総額セグメントでは相違が依然顕著で、とりわけスモールキャップ領域で顕著です（パネル1）。エスアンドピー600は、バリュー・グロースの両カテゴリで一貫してラッセル2000をアウトパフォームしています。これは異なるスタイル要因に加え、ユニバース、サイズ分布、セクターエクスポージャーの違いも反映しています。これは以前のGAAのスモールキャップに関するスペシャルレポートでも説明されています。8 ラッセル2000をパフォーマンス・ベンチマークとする運用者は、単にラッセル2000とエスアンドピー600とのトータルリターン・パフォーマンスの入れ替えを行うだけでベンチマークを上回ることができるでしょう。 結論：資産所有者およびアロケーターは、バリューとグロースのベンチマークを選定する際に特に注意を払うべきです。  3. グローバルで見た場合、バリューとグロースはどのように振る舞ってきたか？ エムエスシーアイはカバレッジ下の各株式市場ごとに同一の方法論でバリュー―グロース指数を作成する唯一のプロバイダーです。残念ながら、長い歴史を持つのは「標準」（すなわちラージ・ミッドキャップ）ユニバースのみで、1974年12月からのデータがあります。チャート II-6AとII-6Bは、主要な先進国（DM）と新興国（EM）市場におけるバリュー/グロースのダイナミクスを示しています。 MSCIのDMにおけるバリュー対グロースの相対的パフォーマンスは、2000年以降の最新サイクルでは米国と類似したパターンを示しますが、2000年以前の期間では大きく異なります（チャート II-6A）。EMのラージ・ミッドキャップにおけるバリュー対グロースの比率は、DMの同業他社のピークから約5年後の2012年2月までピークに達しませんでした（チャート II-6B、パネル1）。一方、EMのスモールキャップ・バリューは、ラージキャップの同等物とほぼ同時期にピークを迎えた後、2016年初めからグロースに対するアウトパフォーマンスを再開しています。 Chart II-6A Is Value Dead In DM? DMでバリューは死んだのか？ DMでバリューは死んだのか？ Chart II-6B Is Value Dead In EM? EM（新興市場）でバリューは死んでいるのか？ EM（新興市場）でバリューは死んでいるのか？   グローバルなバリュー/グロースのダイナミクスはまた、バリュー・プレミアムがスモールキャップ領域でより顕著であることを示しています。ではなぜ多くの先進国市場でスモール・バリューがスモール・グロースに劣後してきたのでしょうか？我々の説明は、新興国ユニバースは先進国ユニバースより非効率であり、特に新興国スモールキャップ領域に専念するクオンツファンドが多くないためだというものです。加えて一般にEMのスモールキャップはDMのそれよりもずっと小さいという事実もあります。これは一般的にファクタープレミアムがEMユニバースでより顕著であるという我々の発見とも一致します。9 結論：バリュー・プレミアムは米国以外の市場、特に新興国のスモールキャップ・ユニバースでより顕著です。 4. ピュア・スタイル指数はパフォーマンスを改善するか？ エスアンドピー・ダウ・ジョーンズとFTSEラッセルはピュア・バリューおよびピュア・グロースの指数を提供しています。標準のバリュー―グロース指数が親指数の約50％の時価総額をターゲットにするのに対し、ピュア・スタイル指数は最も強いバリューおよびグロースの特性を持つ銘柄のみを含みます。両者の間に重複はありません。 理論的には、ピュア・スタイル指数はスタイル・ファクターへの集中したエクスポージャーのために標準スタイルよりアウトパフォームするはずです。実際にはどうでしょうか？表 II-5は、1998年から2019年の期間について、S＆Pおよびラッセルの18ペア中14ペアでは絶対リターンの面で確かにピュアが上回っていることを示しています。しかし、スタイル・ファクターへのより大きなエクスポージャーから得られた高いリターンは、18ペア中17ペアではるかに高いボラティリティから来ていることが多いです。一般にピュア・スタイルは標準スタイルよりボラティリティが高く、例外はラッセルのミッドキャップ・バリュー領域だけです。このため、リスク調整後の観点ではピュア・スタイルが必ずしも優れているとは言えません。 Table II-5 Purer Is Not Necessarily Better 2019年10月 2019年10月 チャート II-7AとII-7Bは、エスアンドピーおよびラッセル系のスタイル指数の異なるパフォーマンス・ダイナミクスを示しています。 エスアンドピー指数では、ピュア・グロースは3つの時価総額セグメントすべてで標準グロースを通期でアウトパフォームしましたが、ピュア・バリューが標準を上回ったのはエスアンドピー500だけでした。したがって、スタイル特性へのより集中したエクスポージャーはラージキャップ領域でのみバリュー―グロースの差を改善し、ミッドおよびスモールキャップのユニバースではむしろバリュー―グロースの差を悪化させました（チャート II-7A）。 Chart II-7A S&P Pure Styles* S&P ピュア・スタイルズ* S&P ピュア・スタイルズ* Chart II-7B Russell Pure Styles* ラッセル・ピュア・スタイルズ* ラッセル・ピュア・スタイルズ*   ラッセル指数の場合、2000年のテックバブルに向けてピュア・グロース指数に多くのテック株が含まれていたことが明らかです。ピュア・グロースはバブル前に標準グロースよりも大きく上昇し、バブル崩壊後にはより急激に下落しました。全体として、スモールキャップ領域だけがスタイル要因へのより集中したエクスポージャーによってバリュー―グロースの差が改善されました。しかしこの改善は、ピュア・スタイルが標準指数に対してアウトパフォームしたからではありません。実際には、スモールキャップのピュア・バリューとピュア・グロースの両方が標準対応物に劣後しており、ピュア・グロースの劣後がより大きかったのです（チャート II-7Bおよび表 II-5参照）。 5. 投資に関する結論 バリューとグロースは非常に異なる意味を持ち、非常に異なる振る舞いをすることがあります。投資家は、スタイル指数やストラテジーを学術面・実務面の双方で評価する際に、定義と方法論に特に注意を払うべきです。 投資家の運用メンダートによっては、以下を推奨します： バリュー投資家は米国以外の市場、特に新興国のスモールキャップ・ユニバースに注力すべきです。 グロース投資家はラージキャップ、特に米国のラージキャップ領域に注力すべきです。 スモールキャップ投資家はバリューに注力すべきです。 ラージおよびミッドキャップの投資家は戦略的にバリューとグロースの間で賭けをしてはなりません。タクティカルなスタイル・ローテーションは評価差が極端な水準に達した場合にのみ行うべきです。 価格対簿価（Price-to-book）は、学術家と実務家の双方がバリューとグロースを決定する際に用いる唯一の共通変数です。しかし、系統的リターン予測子としての実績は乏しく、チャート II-8AとII-8Bのパネル2に示されているように予測力は低いです。もう一つ長期データがある因子は配当利回りですが、これの予測力は価格対簿価よりさらに悪いです（パネル3）。 Chart II-8A Valuation Is A Poor Timing Tool In The U.S. バリュエーションは米国ではタイミングを測るための有効なツールではない。 バリュエーションは米国ではタイミングを測るための有効なツールではない。 Chart II-8B Valuation Is A Poor Timing Tool Globally バリュエーションはタイミングツールとしては不向きだ バリュエーションはタイミングツールとしては不向きだ   多くの因子が学術家と実務家の双方によって価格対簿価と併用され、バリューとグロースのローテーションのタイミング取りに使われてきました。しかし、その結果はまちまちです。過去に正しく予測した回帰モデルが将来も機能するとは限りません。例えば、1982年1月から1999年10月のデータを用いた評価スプレッドと利益成長スプレッドに基づく回帰モデルは、2000年初めに始まるバリューのリバウンドを正しく予測しました10が、過去数年間にわたるバリュー・ファンドの普遍的な苦戦はこのモデルが多くの誤ったシグナルを出していた可能性を示唆しています。 チャート II-9 は、バリューとグロースのローテーションのタイミング取りに回帰モデルを用いることがいかに難しいかを示しています。バリューとグロースのリターン差（その後の60ヶ月リターン）と相対的な価格対簿価との間で単純回帰を実施しました。1974年12月から2019年7月までのデータについて、エムエスシーアイ・ワールドの決定係数は0.38、米国では0.09でした。振り返ると、どちらのモデルも2000年初めに始まるバリューのアウトパフォーマンスを予測していました。しかし実際値とフィット値の乖離は2000年よりずっと前から開き始めており、1998年末には既に前のサイクルの安値よりも広い乖離になっていたにもかかわらず、バリューがグロースに劣後し続けたため乖離はさらに拡大しました。 Chart II-9 How Good Is The Fit? 適合度はどれほど良いですか？ 適合度はどれほど良いですか？ 投資家は現在これらのモデルに基づいて何をすべきでしょうか？乖離は大きいですが、2000年初めほど大きくはありません。12年以上の劣後の後、どの時点で投資家はバリューへシフトし始めるべきでしょうか？ 我々はしばしば、スタイルの傾きを実装するためにセクターと国別のポジショニングを用いることを好むと書いてきました。11, 12 この好みは変わっていません。 バリューとグロースの指数は時間とともにセクター・ティルトを持ちます。現在、エスアンドピー・ダウ・ジョーンズのラージおよびミッドキャップ・バリュー指数は、グロース指数と比較して明確に金融株のオーバーウェイトであり、情報技術とヘルスケアに対してアンダーウェイトです（表 II-6）。 Table II-6 Sector Bets In Value And Growth Indices* 2019年10月 2019年10月 Chart II-10 Prefer Sector And Country Positioning To Style セクターおよびカントリー・ポジショニングをスタイル・ティルトより重視する セクターおよびカントリー・ポジショニングをスタイル・ティルトより重視する 我々はバリューとグロースの間で中立の立場を取っていますが、米国とユーロ圏の間の国別株式アロケーションや、景気敏感株とディフェンシブ株、さらに金融株と情報技術株間のセクター配分を変更する場合にはこの見解を変える可能性があります（チャート II-10）。 Xiaoli Tang Associate Vice President​​​​​​​ Global Asset Allocation   脚注 1     Antti Ilmanen, Ronen Israel, Tobias J. Moskowitz, Ashwin Thapar, Franklin Wang, “Factor Premia and Factor Timing: A Century of Evidence,” AQR Working Paper, July 2, 2019. 2     Eugene F. Fama and Kenneth R. French, “Common risk factors in the return on stocks and bonds,” Journal of Financial Economics, 33 (1993). 3     Clifford Asness, Andrea Frazzini, Ronen Israel and Tobias Moskowitz, “Fact, Fiction, and Value Investing,” The Journal of Portfolio Management, Vol. 42 No.1, Fall 2015. 4     Ronen Israel and Tobias J. Moskowitz, “The Role of Shorting, Firm Size and Time on Market Anomalies,” Journal of Financial Economics, Vol 108, Issue 2, May 2013 5      Eugene F. Fama and Kenneth R. French, “A Five-Factor Asset Pricing Model,” Working Paper, University of Chicago, September 2014. 6             Fama-French value-growth-size portfolios. 7     Mark P. Cussen, “Value or growth Stocks: Which are Better?” Investopedia, Jun 25, 2019. 8     Please see Global Asset Allocation Special Report titled “Small Cap Outperformance: Fact or Myth?” dated April 7, 2017, available at gaa.bcaresearch.com. 9     Please see Global Asset Allocation Special Report titled, “Is Smart Beta A Useful Tool In Global Asset Allocation?” dated July 8, 2016, available at gaa.bcaresearch.com. 10    Clifford S. Asness, Jacques A Friedman, Robert J. Krail and John M Liew, “Style Timing: Value versus Growth,” The Journal of Portfolio Management, Spring 2000. 11     Please see Global Asset Allocation Quarterly Portfolio Outlook, “Quarterly - March 2016,” dated March 31, 2016, and available at gaa. bcaresearch.com. 12     Please see Global Asset Allocation Quarterly Portfolio Outlook, “Quarterly - April 2019,” dated April 1, 2019 available at gaa.bcaresearch.com.

特別レポート

Highlights Investors should pay particular attention to definition and methodology when evaluating value versus growth strategies, both academically and in practice. Value investors should focus on non-U.S. markets, especially the emerging market small-cap universe. Growth investors should focus on large caps, especially the U.S. large-cap universe. Small-cap investors should focus on value. Large- and mid-cap investors should not be making bets between value and growth strategically. Tactical style rotation should be done only when valuation spreads reach extreme levels.  GAA remains neutral on value versus growth, but prefers to use sector positioning (cyclicals versus defensives, financials versus tech and health care) and country positioning (euro area versus U.S.) to implement style tilts. Feature Investing by way of style is as old as investing itself. Value versus growth has been one of the most frequently asked questions among our clients of late, particularly given the sharp style reversal in recent weeks. In this report, we attempt to answer some of the most often-asked questions on value versus growth. We have arranged these questions into five separate sections: First, we look at 93 years of history of the Fama-French value and growth portfolios to see how value, growth, and size have interacted over time, because academics have mostly used the Fama-French framework. Second, we look at how comparable U.S. style indices are, including the S&P, the Russell and the MSCI, since practitioners mostly use these commercial indices as their benchmarks. Third, we investigate if international markets share the same value-growth performance cycles as the U.S., using the MSCI suite of value-growth indices (since MSCI is the only index provider that produces value-growth indices for each market under its global coverage). Fourth, we investigate if pure exposure to value and growth can actually improve the value-growth performance spread by comparing the pure style indices from the S&P and the Russell to their standard counterparts. Finally, we present the GAA approach to style tilts in a section on our investment conclusions. 1. Is It True That Value Outperforms Growth In The Long Run? There has been overwhelming academic evidence supporting the existence of the value premium.1 Academically, the “value premium”, also known as the HML (high minus low) factor premium, or the value outperformance, is defined as the return differential between the cheapest stocks and the most expensive. Even though Fama and French used book-to-price as the sole valuation criterion,2 many researchers have combined book-to-price with other valuation measures such as earnings-to-price, sales-to-price, dividend yield,3 and so on.  There is also academic evidence suggesting that “value outperformance is almost non-existent among large-cap stocks.”4 What is more, in 2014 Fama and French caused a huge stir by publishing “A Five-Factor Asset Pricing Model” working paper demonstrating that “HML is a redundant factor” because “the average HML return is captured by the exposure of the HML to other factors” (such as size, profitability, and investment pattern) based on U.S. data from 1963 to 2013.5 For non-quant practitioners, especially the long-only investors, value and growth are two separate investment styles, even though the style classification shares the same principle as the academic “value factor.” Their definitions vary, as evidenced by how S&P Dow Jones, FTSE Russell, and MSCI define their value and growth indexes (see next section on page 7). In general, value stocks are cheap, with lower-than-average earnings growth potential, while growth stocks have higher-than-average earnings growth potential but are very expensive. The indices published by commercial index providers do not have very long histories, however. Fortunately, Fama and French also provide value-growth-size portfolios on their publicly available website.6  Table 1 shows that for 93 years, from July 1926 to June 2019, U.S. value portfolios in both large-cap and small-cap buckets based on the well-known Fama-French approach have returned more than their growth counterparts, no matter whether the portfolios are equal-weighted or market-cap-weighted. Most strikingly, equal-weighted small-cap value outperformed its growth counterpart by over 10% a year in absolute terms, and has more than doubled the risk-adjusted return compared to its growth counterpart. Table 1Fama-French Value-Growth-Size Portfolio Performance* Some media reports have claimed that value stocks are “less volatile” because they are on average “larger and better-established companies.”7 This may be true for some specific time periods. For the 93 years covered by Fama and French, however, this common belief is not supported. In fact, value portfolios in both the large- and small-cap universes have consistently had higher volatility than growth portfolios, no matter how the components are weighted. The excess returns, however, have more than offset the higher volatilities in three out of four pairs, with the exception being market cap-weighted large-cap growth, which has a slightly higher risk-adjusted return due to much lower volatility than its value counterpart. From a very long-term perspective, the value outperformance does come from taking higher risk. Further investigation shows that the superior long-run outperformance of value relative to growth came mostly in the first 80 years of Fama and French’s 93-year sample. In more recent years since 2007, however, value has underperformed growth significantly in three out of the four Fama-French value-growth pairs, with the equal-weighted small-cap value-growth pair being the sole exception, as shown in Table 2. Even though the equal-weighted small-cap value has still outperformed its growth counterpart in the most recent period, the hit ratio drops to 54% compared to 76% in the first 80 years, while the magnitude of average calendar-year outperformance drops to a meager 1.3%, compared to 12.5% in the first 80 years. Table 2The Fight Between Value And Growth* Statistical analysis is sensitive to the time period chosen. How have value and growth been performing over time? Chart 1 shows the long-term dynamics among value, growth, and size. The following conclusions are clear: Value investors should favor small caps over large caps, while growth investors should do the opposite, favoring large caps over small caps, albeit with much less potential success (Chart 1, panel 1). Small-cap investors should favor value stocks over growth stocks (panel 2). Value outperformance in the large-cap space (panel 3) is much weaker than in the small-cap space (panel 2). Chart 1Fama-French Value-Growth-Size Peformance Dynamics* Asset owners and allocators should pay special attention when selecting benchmarks for value and growth. Fama and French define small and large caps based on the median market cap of all NYSE stocks on CRSP (Center for Research In Security Prices), then use the NYSE median size to split NYSE, AMEX and NASDAQ (after 1972) into a small-cap group and a large-cap group. The value and growth split is based on book-to-price, with stocks in the lowest 30% classified as growth, and the highest 30% as value. Interestingly, small-cap value and small-cap growth account for only a very small portion of the entire universe, as shown in Charts 2A and 2B. Chart 2ASmall-Cap Value-Growth Portfolios* Chart 2BLarge-Cap Value-Growth Portfolios* Value stocks’ average market cap is about half of that of growth stocks, in both the large- and small-cap universes (panel 3 in Charts 2A and 2B). Again, this does not support some media claims that value stocks are larger and better-established companies. However, it does add further support to the claim that all investors should favor small-cap value stocks. Unfortunately, “small-cap value” is a very small universe. As of June 2019, the CRSP total U.S. equity market cap was $26.2 trillion, with small-cap value accounting for only 1.5% (about $383 billion); even large-cap value comprises only a relatively small weight, 13% (US$3.5 trillion). The U.S. market is dominated by large-cap growth stocks with a heavy weight of 56% (US$14.7 trillion, as of June 2019). This is encouraging because academic research does show that the value premium among large caps is weak. But the large-cap value weakness mostly started from 2007, after 80 years of strength relative to large-cap growth (Chart 1, panel 3). The Fama-French approach is widely used in academic research, partly due to its long history from 1926. For non-quant practitioners, especially long-only investors, however, commercial indexes from FTSE Russell, S&P Dow Jones, and MSCI are more often used as performance benchmarks. In this report, we study a series of commercial value-growth indexes in the U.S. and globally to shed light on value-growth dynamics, and how asset allocators can incorporate them into their decision-making processes. 2. Not All U.S. Style Indexes Are Created Equal Three major index providers have style indices. They are FTSE Russell (which launched the industry’s first set of value-growth indexes in 1987), S&P Dow Jones, and MSCI. MSCI is the only provider that has a full suite of value-growth indices for all individual markets under coverage. While all three provide “standard” style indices that include the full component of the parent index, the FTSE Russell and the S&P Dow Jones also provide “pure” style indices. There are two major differences between “standard” and “pure” style indices: 1) the standard indices are market-cap weighted, while the “pure” indices are weighted based on style score. 2) Standard value and standard growth have overlapping components, while pure value and pure growth do not share any common components. Other than book-to-price, the value variable used by the Fama-French approach, the three providers have added different variables in the determination of value and growth, as shown in Table 3. This also reflects the evolution of the industry’s understanding on value and growth. For example, when MSCI first launched its style index in 1997, it used only book-to-price, but changed its approach in May 2003 to the current “multi-factor two-dimension” framework. Table 3Value-Growth Index Criteria Because of the differences in index construction methodology, value-growth indices for the U.S. have behaved differently. The S&P 500, the Russell 1000, and the MSCI standard (large and mid-cap) indices are widely followed institutional benchmarks, with back-tested history dating to the 1970s. Chart 3 shows the relative value/growth performance dynamics from the three index providers, together with that from Fama and French (market value-weighted, to be consistent with the approach from the index providers). One can observe the following: Chart 3Which Value/Growth? None of the three pairs looks exactly like Fama-French’s market-cap value-weighted value/growth. This raises the question of how historical analysis based on the long history of Fama-French value/growth portfolios can be applied to the commercial indices. In the first cycle from 1975 to February 2000, all three index pairs made a round trip, with flat performance between value and growth. Also, even though the S&P 500 and Russell 1000 were more closely correlated with one another than with the MSCI, the three were quite similar. In the current cycle that began in February 2000, however, Russell value/growth has rebounded much more strongly than the other two. But in the down period that started in 2007, the three indices performed in line with each other, as shown in Table 4. Table 4U.S. Style Index Performance* In addition, the difference between S&P and Russell does not just lie between the S&P 500 and the Russell 1000. It actually exists in every market-cap segment, as shown in Chart 4. Unfortunately, MSCI does not provide history from 1975 for the detailed cap segments. In the current cycle since February 2000, S&P value rebounded the least between 2000 and 2006. Why? Chart 4Know Your Benchmark Further investigation reveals some interesting observations, as shown in Chart 5. Chart 5Value/Growth: Russell Vs. S&P At the aggregate level, the S&P 1500, the Russell 3000 and their respective style indices have performed largely in line with one another in the most recent cycle starting from February 2000 (Chart 5, panel 4), reflecting the industry trend of index convergence. In different market cap segments, however, the divergence is still prominent, especially in the small-cap space (panel 1). The S&P 600 has consistently outperformed the Russell 2000 in both the value and growth categories. In addition to different style factors, this consistency also reflects different universes, size distribution, and sector exposure, as explained in an earlier GAA Special Report on small caps.8 Managers with Russell 2000 as their performance benchmark could simply beat it by doing a total-return-performance swap between the Russell 2000 and the S&P 600. Bottom Line:  Asset owners and allocators should pay special attention when selecting benchmarks for value and growth.  3. How Have Value And Growth Performed Globally? MSCI is the only index provider that also produces value-growth indices for each equity market under its global coverage, using the same methodology. Unfortunately, only the “standard” (i.e., large- and mid-cap) universe has a long history, dating from December 1974. Charts 6A and 6B show the value/growth dynamics in major DM and EM markets. The relative performance of MSCI DM value versus growth shares a similar pattern to that of the U.S. in the latest cycle since 2000, but looks very different in the period before 2000 (Chart 6A). The ratio of EM large- and mid-cap value versus growth did not peak until February 2012, about five years after the peak of its DM peer (Chart 6B, panel 1). On the other hand, EM small-cap value has resumed its outperformance versus growth since early 2016 after having peaked around the same time as its large-cap counterpart. Chart 6AIs Value Dead In DM? Chart 6BIs Value Dead In EM? The global value/growth dynamics also show that the “value outperforming growth” effect is more prominent in the small-cap space. But why has small value also underperformed small growth in most DM markets? Our explanation is that the EM universe is much less efficient than the DM universe because there are not many quant funds dedicated to the EM small-cap space –  in addition to the fact that, in general, EM small caps are much smaller than those in DM markets. This is also in line with our finding that, in general, factor premia are more prominent in the EM universe.9 Bottom Line: Value premium is more prominent in non-U.S. markets, especially the EM small-cap universe. 4. Do Pure Style Indices Improve Performance? Both S&P Dow Jones and FTSE Russell provide pure-value and pure-growth indices. Unlike the standard value-growth indices, which target about 50% of the parent market cap, the pure-style indices include only stocks with the strongest value and growth characteristics. There is no overlap between the two. We prefer to use sector and country positioning to implement style tilts tactically. In theory, the pure-style indices should outperform the standard-style indices because of their concentrated exposure to style factors. How do they do in reality? Table 5 shows that in terms of absolute return, this is indeed the case for 14 out of the 18 pairs of indices from S&P and Russell for the period between 1998 and 2019. However, the higher returns from greater exposure to style factors have largely come from much higher volatility in 17 out of the 18 pairs. Pure style has higher volatility than standard style in general, the only exception being the Russell mid-cap value space. As such, on a risk-adjusted basis, pure style is not necessarily better. Table 5Purer Is Not Necessarily Better Charts 7A and 7B show the different performance dynamics for the S&P and Russell families of style indices. For the S&P indices, pure growth has outperformed standard growth for the entire period in all three market-cap segments, but only the S&P 500 pure value outperformed its standard counterpart. Therefore, more concentrated exposure to style characteristics has improved the value-growth spread only in the large-cap space, but it has actually worsened the value-growth spread in the mid- and small-cap universes (Chart 7A). Chart 7AS&P Pure Styles* Chart 7BRussell Pure Styles* For the Russell indices, it’s clear that there were a lot more tech stocks in its pure-growth indices leading up to the 2000 tech bubble, because pure growth shot up significantly more than the standard growth before the bubble burst, and also crashed more severely following it. Overall, only in the small-cap space did the value-growth spread improve by the more concentrated exposure to style factors. However, this improvement was not because of the outperformance of the pure-style relative to the standard indices. In fact, both pure value and pure growth in the small-cap universe underperformed their standard counterparts, but pure growth performed even worse (Chart 7B and Table 5). 5. Investment Conclusions Value and growth can mean very different things and behave very differently. Investors should pay special attention to the definitions and methodologies when evaluating style indices or strategies, both academically and in practice.  Depending on an investor’s mandate, the following is recommended: Value investors should focus on non-U.S. markets, especially the emerging market small-cap universe. Growth investors should focus on large caps, especially the U.S. large-cap space. Small-cap investors should focus on value. Large-and mid-cap investors should not make bets between value and growth strategically. Tactical style rotation should be done only when valuation spreads reach extreme levels. Price-to-book is the only common variable used in the determination of value and growth by academics and practitioners. Its track record as a systematic return predictor has been poor, as shown in panel 2 of Charts 8A and 8B. Another factor we have a long history for is dividend yield. Its predictive power is even worse than that of price-to-book (panel 3). Chart 8AValuation Is A Poor Timing Tool In The U.S. Chart 8BValuation Is A Poor Timing Tool Globally Many factors have been used in conjunction with price-to-book by both academics and practitioners to time the rotation between value and growth. However, the results have been mixed. Regression models that correctly predicted in the past may not work in the future. For example, a regression model based on valuation spread and earnings-growth spread using data from January 1982 to October 1999 successfully predicted the rebound of value outperformance starting in early 2000,10 but the universal suffering of value funds over the past several years implies that this model may have given many false signals. Chart 9 demonstrates how difficult it is to use regression models as a timing tool for value and growth rotation. A simple regression is conducted between value and growth return differentials (subsequent 60-month returns) and relative price-to-book. For data from December 1974 to July 2019, the r-squared for the MSCI world is 0.38 and for the U.S. it is 0.09. In hindsight, both models predicted the value outperformance starting in early 2000. However, the gaps between actual value and fitted value started to open, long before 2000. By late 1998, the gaps were already wider than the previous cycle lows, yet they continued to widen as value continued to underperform growth until February 2000.  Chart 9How Good Is The Fit? What should investors currently do, based on these models? The gaps are large, but not as large as in early 2000. At which point should investors start to shift into value given its more than 12 years of underperformance? We have often written that we prefer to use sector and country positioning to implement style tilts.11, 12 This preference has not changed. Value and growth indices have sector tilts that change over time. Currently, the S&P Dow Jones large- and mid-cap value indices have a clear overweight in financials but an underweight in tech and health care compared to their growth counterparts (Table 6). Table 6Sector Bets In Value And Growth Indices* Chart 10Prefer Sector And Country Positioning To Style Tilts We have been neutral on value and growth, but would likely change this view if we change our country equity allocation between the U.S. and the euro area, and our equity sector allocation between cyclicals and defensives as well as between financials and information technology (Chart 10).     Xiaoli Tang, Associate Vice President xiaoliT@bcaresearch.com Footnotes 1Antti Ilmanen, Ronen Israel, Tobias J. Moskowitz, Ashwin Thapar, Franklin Wang, “Factor Premia and Factor Timing: A Century of Evidence,” AQR Working Paper, July 2, 2019. 2Eugene F. Fama and Kenneth R. French, “Common risk factors in the return on stocks and bonds,” Journal of Financial Economics, 33 (1993). 3Clifford Asness, Andrea Frazzini, Ronen Israel and Tobias Moskowitz, “Fact, Fiction, and Value Investing,” The Journal of Portfolio Management, Vol. 42 No.1, Fall 2015.  4Ronen Israel and Tobias J. Moskowitz, “The Role of Shorting, Firm Size and Time on Market Anomalies,”Journal of Financial Economics, Vol 108, Issue 2, May 2013 5Eugene F. Fama and Kenneth R. French, “A Five-Factor Asset Pricing Model,” Working Paper, University of Chicago, September 2014. 6Fama-French value-growth-size portfolios. 7Mark P. Cussen, “Value or growth Stocks: Which are Better?” Investopedia, Jun 25, 2019. 8Please see Global Asset Allocation Special Report titled “Small Cap Outperformance: Fact or Myth?” dated April 7, 2017, available at gaa.bcaresearch.com. 9Please see Global Asset Allocation Special Report titled, “Is Smart Beta A Useful Tool In Global Asset Allocation?” dated July 8, 2016, available at gaa.bcaresearch.com 10Clifford S. Asness, Jacques A Friedman, Robert J. Krail and John M Liew, “Style Timing: Value versus Growth,” The Journal of Portfolio Management, Spring 2000. 11Please see Global Asset Allocation Quarterly Portfolio Outlook, “Quarterly - March 2016,” dated March 31, 2016, and available at gaa. bcaresearch.com. 12Please see Global Asset Allocation Quarterly Portfolio Outlook, “Quarterly - April 2019,” dated April 1, 2019 available at gaa.bcaresearch.com.  

We are removing the large cap bias we have had on a tactical basis since our December 2018 High-Conviction Call report and booking gains of 9% (top panel). We are also setting a stop near the 10% return mark to protect cyclical profits since the May 7, 2018 inception of the large cap bias. Rising interest rates along with diminishing odds of an ultra-easy Fed in the upcoming September FOMC meeting have kept the dollar upbeat with some trade-weighted Fed indexes vaulting to all-time highs. Large caps have significant foreign sourced sales exposure and an appreciating currency will eat into profits, a headache that small caps do not have to sweat over. In addition, there are early signs that investors are beginning to treat small caps as trade war insulated companies anew, given their domestic focus. Bottom Line: While we are not ready to book cyclical profits in our large over small cap preference (please see this Weekly Report for more details),1 in the near term our confidence in additional large cap gains has decreased and we recommend removing the large cap bias from the high-conviction call list for a gain of 9% since inception.   1      Please see U.S. Equity Strategy Weekly Report, “Cracks Forming” dated June 24, 2019, available at uses.bcaresearch.com

Bearishness toward small vs. large caps has been pervasive over the past year, raising the question: Does it still pay to prefer large caps to small caps? The short answer is yes. Five key reasons underpin our large/mega cap preference in the size bias: First, a small cap margin squeeze has been underway since the 2012 cyclical peak. Simply put, small business labor costs are rising at a faster clip than overall wage inflation, warning that small cap profit margins have further to fall compared with large caps margins (middle panel). Second, relative indebtedness has been widening. Debt saddled small caps have been issuing debt at an accelerating pace at a time when cash flow growth has not been forthcoming. Small cap net debt-to-EBITDA is now almost three times as high as large cap net debt-to-EBITDA. Investors have finally realized that rising indebtedness is worrisome, especially at the late stages of the business cycle (bottom panel). Bottom Line: Small cap underperformance has staying power. Continue to prefer large/mega caps to their small cap brethren. Please see our most recent Weekly Report for the other three reasons why we believe small caps will underperform large caps.

Highlights Portfolio Strategy Melting inflation expectations, widening relative indebtedness, expensive adjusted relative valuations, high odds of a further drop in relative profit margins and the high-octane small cap status all signal that large caps continue to have the upper hand versus small caps. Modest deterioration in credit quality, weakening prospects for loan growth and falling inflation expectations, compel us to put the S&P bank index on downgrade alert. Recent Changes We got stopped out on the long S&P managed health care/short S&P semis trade on June 10 for a gain of 10% since inception. We got stopped out on the long S&P homebuilders/short S&P home improvement retailers trade on June 14 for a gain of 10% since inception. Table 1 Feature Equities surged to all-time highs last week, as investors cheered the Fed’s dovish stance and increasing likelihood of a late-July interest rate cut. The addiction to low interest rates and global dependence on QE are evident and simultaneously very worrisome signs. We are nervous that the U.S. economy is in a soft-patch, thus vulnerable to a shock (maybe sustained trade hawkishness is the negative catalyst) that can tilt the economy in recession. The risk/reward tradeoff on the overall equity market remains to the downside on a cyclical (3-12 month) time horizon as we first posited two weeks ago (this is U.S. Equity Strategy’s view and is going against BCA’s cyclically constructive equity market House View). In fact, using the NY Fed’s probability of a recession in the coming 12 months data series signals that there’s ample downside for stocks from current levels (recession probability shown inverted, Chart 1).1 We heed this message and reiterate our cautious equity market stance. Chart 1Watch Out Down Below Importantly, drilling deeper with regard to the excesses we are witnessing this cycle, Chart 2 is instructive and an unintended consequence of QE and zero interest rate policy. In previous research we highlighted the cumulative equity buybacks corporations have completed this cycle near the $5tn mark. Chart 2Financial Engineering What is worrying is that this “accomplishment” has come about at a great cost: a massive change in the capital structure of the firm. In other words, all of the buybacks are reflected in debt origination from the non-financial business sector (using the Fed’s flow of funds data), confirming our claim that the excesses this cycle are not in the financial or household sectors, but rather in the non-financial business sector (please refer to Chart 4A from the June 10 Weekly Report). One likely trigger of a jumpstart to a default cycle, other than a U.S./China trade dispute re-escalation, is dwindling demand. On that front, we are bemused on how much weight market participants place on the Fed’s shoulders bailing out the economy and the stock market. Chart 3 is a vivid reminder of this narrative. On the one side of the seesaw is the mighty Fed with its forecast interest rate cuts and on the other a slew of slipping indicators. Our sense is that these eighteen indicators will more than offset the Fed’s about-to-commence easing cycle and eventually tilt the U.S. economy in recession, especially if the Sino-American trade talks falter. S&P 500 quarterly earnings are contracting on a year-over-year basis and the semi down-cycle points to additional profit pain for the rest of the year (top panel, Chart 4). On the trade front, exports are below the zero line and imports are flirting with the boom/bust line (second panel, Chart 4). Overall rail freight, including intermodal (retail segment) freight is plunging and so is the CASS freight shipments index at a time when the broad commodity complex is also deflating (third & bottom panels, Chart 4). The latest Q2 update of CEO confidence was disconcerting, weighing on the broad equity market’s prospects (top panel, Chart 5). Non-residential capital outlays have petered out and private construction is sinking like a stone. In fact, the latter have never contracted at such a steep rate during expansions over the past five decades (second panel, Chart 5). Real residential investment has clocked its fifth consecutive quarter of negative growth during an expansion, for the first time since the mid-1950s. Single family housing starts and permits are contracting (third panel, Chart 5). Chart 4Cracks… Chart 5…Are… Light vehicle sales are ailing (bottom panel, Chart 5) and the latest senior loan officer survey continued to show that there is feeble demand for credit across nearly all the categories the Fed tracks (bottom panel, Chart 6). Non-farm payrolls fell to 75K on a month-over-month basis last month and layoff announcements are gaining steam signaling that the labor market, a notoriously lagging indicator, is also showing some signs of strain (layoffs shown inverted, third panel, Chart 6). The latest update of the U.S. Equity Strategy’s corporate pricing power gauge is contracting (please look forward to reading a more in-depth analysis on our quarterly update on July 2) following down the path of the market’s dwindling inflation expectations. Finally, the yield curve remains inverted (top and second panels, Chart 6). Chart 6…Forming Chart 7The “Hope" RallyAdding it all up, we deem that the equity market remains divorced from the economic reality and too much faith is placed on the Fed’s shoulders to save the day. Thus, we refrain from positioning the portfolio on “three hopes”: first that the Fed will engineer a soft landing, second that the U.S./China trade tussle will get resolved swiftly, and finally that the Chinese authorities will inject massive amounts of liquidity and reflate their economy (Chart 7). This week we are putting a key financials sub-sector on downgrade alert and update our view on the size bias. Large Cap Refuge While small caps shielded investors from the U.S./China trade dispute that heated up in 2018 (owing to their domestic focus), this year small caps have failed to live up to their trade war-proof expectations and have lagged their large cap brethren by the widest of margins. In fact, the relative share price ratio sits at multi-year lows giving back all the gains since the Trump election, and then some (Chart 8). Chart 8Stick With A Large Cap Bias As a reminder, our large cap preference has netted our portfolio 14% gains since the May 10 2018 cyclical inception and this size bias is also up 9% since our high-conviction call inclusion in early December 2018. Five key reasons underpin our large/mega cap preference in the size bias. Bearishness toward small vs. large caps has been pervasive raising the question: does it still pay to prefer large caps to small caps? The short answer is yes. Five key reasons underpin our large/mega cap preference in the size bias. First, melting inflation expectations have been positively correlated with the relative share price ratio, and the current message is to expect more downside (Chart 8). While the SPX has a higher energy weight than the S&P 600, financials and industrials dominate small cap indexes and likely explain the tight positive correlation with inflation expectations (Table 2). Table 2S&P 600/S&P 500 Sector Comparison Table Second, relative indebtedness has been widening. Debt saddled small caps have been issuing debt at an accelerating pace at a time when cash flow growth has not been forthcoming. Small cap net debt-to-EBITDA is now almost three times as high as large cap net debt-to-EBITDA. Investors have finally realized that rising indebtedness is worrisome, especially at the late stages of the business cycle, and that is why small caps have failed to insulate investors from the re-escalating trade dispute (top & middle panels, Chart 9). Third, a large number of small cap companies (100 in the S&P 600 and 600 in the Russell 2000) have no forward EPS. Very few S&P 500 companies have negative projected profits. Thus, while, relative valuations have been receding, the relative forward P/E trading at par is masking the relative value proposition of the indexes. Were the S&P or Russell to adjust for this, small caps would trade at a significant forward P/E premium to large caps (bottom panel, Chart 9). Chart 9Mind The Debt Gap Fourth, a small cap margin squeeze has been underway since the 2012 cyclical peak and the relative margin outlook is even grimmer. Simply put, small business labor costs are rising at a faster clip than overall wage inflation, warning that small cap profit margins have further to fall compared with large caps margins (Chart 10). Finally, small cap stocks are higher beta stocks and typically rise when volatility gets suppressed. As such, they also tend to outperform large caps when emerging markets outperform the SPX and vice versa. Tack on the recent yield curve inversion, and the odds are high that the size bias has entered a prolonged period of sustained small cap underperformance. Netting it all out, melting inflation expectations, widening relative indebtedness, expensive adjusted relative valuations, high odds of a further drop in relative profit margins and the high-octane small cap status all signal that large caps continue to have the upper hand versus small caps (Chart 11). Chart 10Relative Margin Trouble Chart 11Shay Away From Small Caps Bottom Line: Small cap underperformance has staying power. Continue to prefer large/mega caps to their small cap brethren. Put Banks On Downgrade Alert In the context of de-risking our portfolio we are taking the step and adding the S&P banks index on our downgrade watch list. The Fed’s signal of a cut in the upcoming July meeting steepened the yield curve last week. While the yield curve has put in higher lows in the past eight months, relative bank performance has been facing stiff resistance and has failed to follow the yield curve’s lead (Chart 12). One of the reasons for the Fed’s dovishness is melting inflation expectations. The latter are joined at the hip with relative bank performance and signal that downside risks are rising especially if the Fed fails to arrest the lower anchoring of inflation expectations (Chart 13). Chart 12Banks Are Not Participating Chart 13Melting Inflation Expectations Are Anchoring Banks With regard to credit demand, the latest Fed Senior Loan Officer survey remained subdued confirming the anemic reading from our Economic Impulse Indicator (a second derivative gauge of six parts of the U.S. economy, bottom panel, Chart 14). Lack of credit demand translates into lack of credit growth, despite the fact that bankers are, for the most part, willing extenders of credit. U.S. Equity Strategy’s overall loans & leases growth model has crested (second panel, Chart 15). Chart 14Anemic Loan Demand… Chart 15…Will Weigh On Loan Origination Similarly, the recent softness in a number of manufacturing surveys signal that C&I loan growth in particular – the largest credit category in bank loan books – is at risk of flirting with the contraction zone (third panel, Chart 15). Worrisomely, not only is the overall U.S. credit impulse contracting, but also U.S. Equity Strategy’s bank credit diffusion index is collapsing (second panel, Chart 16). Such broad breadth of loan growth deterioration warns that loan growth and thus bank earnings are at risk of underwhelming still optimistic sell-side analysts’ expectations (not shown). On the credit quality front there are now two loan categories that are starting to show some modest signs of stress. Credit card net chargeoffs and non-current loans are spiking and now C&I delinquent loans have ticked up for the first time since the manufacturing recession (third & bottom panel, Chart 16). Our bank EPS growth model does an excellent job in capturing all these forces and signals that bank EPS euphoria is misplaced (bottom panel, Chart 15). Nevertheless, despite these softening bank sector drivers there are four significant offsets. First the drubbing in the 10-year yield has been reflected nearly one-to-one on the 30-year fixed mortgage rate and the recent surge in mortgage applications signals that residential real estate loans (second largest bank loan category) may reaccelerate in the back half of the year (top panel, Chart 17). Chart 16Deteriorating Credit Quality Chart 17Some Significant… Second, while there have been credit card and C&I loan credit quality issues, as a percentage of total loans they just ticked higher and remain near cyclical lows, at a time when banks have been putting more money aside to cover for these potential loan losses (bottom panel, Chart 17). Third, bank source of funding remains very cheap as depositors have not been enjoying higher short term interest rates, at least not at the big money center banks. In other words, banks have not been passing higher interest rates to depositors sustaining relatively high NIMs (not shown). Finally, banks are one of the few sectors with pent up equity buyback demand. The upcoming release of the Fed’s stress test will likely continue to allow banks to pursue shareholder friendly activities, that they have been deprived from for so long, and raise dividend payments and increase share buybacks (Chart 18). Chart 18…Offsets In sum, melting inflation expectations, modest deterioration in credit quality, and weakening prospects for loan growth compel us to put the S&P bank index on downgrade alert. Bottom Line: We remain overweight the S&P banks index, but have put it on downgrade alert and are looking for an opportunity to downgrade to neutral. The ticker symbols for the stocks in this index are: BLBG: S5BANKX – WFC, JPM, BaAC, C, USB, PNC, BBT, STI, MTB, FITB, CFG, RF, KEY, HBAN, CMA, ZION, PBCT, SIVB, FRC.   Anastasios Avgeriou, U.S. Equity Strategist anastasios@bcaresearch.com Footnotes 1      https://www.newyorkfed.org/research/capital_markets/ycfaq.html Current Recommendations Current Trades Size And Style Views Favor value over growth Favor large over small caps

Prefer Large Caps To Small Caps (High-Conviction) Small caps have been underperforming their large cap brethren this month as the latter internationally-exposed group has been benefitting disproportionally from news of a potential trade deal ending the U.S. - China dispute. While this transitory benefit of an easing in trade tensions was expected, we think the focus should remain sharply on the diverging fundamentals of the groups. Large cap operating margins are at levels not far from record highs while small cap profits have fallen off a cliff (second panel). Though small cap margins have recovered somewhat in the last year, investors could be forgiven for expecting more, considering their profligacy in expanding their balance sheets, particularly when compared to the relative discipline shown by large caps (third panel). At the same time, small caps trade at a 30% premium to large caps on a cyclically-adjusted P/E basis, making them particularly prone to a fall should investors decide that equity risk premiums do not reflect the much-worsened leverage ratios. Bottom Line: We reiterate our high-conviction call favoring large over small caps.

Key Portfolio Highlights The S&P 500 has started 2019 with a bang as dovish cooing from the Fed has proven a tonic for equities. While we have not entirely retraced the path to the early-autumn highs, our strategy of staying cyclically exposed, based on our view of an absence of a recession in 2019, has proven a profitable one as investor capitulation reached extreme levels (Charts 1 & 2). Chart 1CapitulationChart 2Selling Is Exhausted Importantly, risk premia have been deflating as the end-of-year spike in volatility has subsided and junk spreads have narrowed from the fear-induced heights in December (Chart 3). Chart 3Risk Premia Renormalization Nevertheless, in order for the reflex rebound since the late-December lows to morph into a durable rally, the macro/policy backdrop has to turn from a headwind to a tailwind. We are closely monitoring three potential positive catalysts: A definitively more dovish Fed, which would help restrain the greenback A continuation of the earnings juggernaut A positive U.S./China trade resolution With respect to the first of these, the S&P 500 convulsed following the December 19 Fed meeting and suffered a cathartic 450 point peak-to-trough fall two months ago. The Fed likely made a policy error, and Fed Chair Powell’s resolve is getting tested as has happened with every Chair since Volcker (Charts 4 & 5). Chart 4Powell's Resolve Getting Tested Chart 5Fed Policy Mistake The rising odds of a pause in the Fed tightening cycle, at least for the first half of the year, will likely serve as a welcome respite for equities. Our second catalyst has been gaining steam through the Q4 earnings season which has seen continuation of the double-digit earnings growth of the prior three quarters. Our earnings model points to a moderation of earnings growth in the year to come, in line with sell-side expectations (Chart 6). Our 2019 year-end target remains 3,000 for the SPX, based on $181 2020 EPS and a 16.5x multiple.1 This represents a 6% EPS CAGR, assuming 2018 EPS ends near $162. Chart 6EPS Growth > 0 In Chart 7, we show that financials, health care and industrials are responsible for 61% of the SPX’s expected profit growth in 2019 while technology’s contribution has fallen to a mere 7.2%. While the risk of disappointment encompases financials, health care and industrials, there are high odds that tech surprises to the upside as it has borne the brunt of recent negative earnings revisions (Charts 8 & 9). Chart 8Earnings Revisions... Chart 9...Really Weigh On Tech Lastly, the negativity surrounding the slowdown in China is likely fully reflected in the market (Chart 10), implying an opportunity for a break out should a positive resolution to the U.S./China trade spat be delivered. China’s reflation efforts suggests that the Chinese authorities remain committed to injecting liquidity into their economy (Chart 11). Chart 10China Slowdown Baked In The Cake Chart 11Reflating Away Already, the PBOC balance sheet, with over $5.5tn in assets, is expanding anew. Empirical evidence suggests that SPX momentum and the ebb and flow of the PBOC balance sheet are joined at the hip, and the current message is positive (Chart 12). All of these underlie our style preferences for cyclicals over defensives2 and international large caps over domestically-geared small caps. Chart 12Heed The PBoC Message Chris Bowes, Associate Editor chrisb@bcaresearch.com S&P Financials (Overweight) The divergence between the directions for our CMI and valuation indicator (VI) for S&P financials has reached stunning levels, with the former accelerating into pre-GFC territory and the latter falling to two standard deviations below fair value. Our technical indicator (TI) is sending a relatively neutral message, though this does not diminish the most bullish signal in our cyclical indicator’s history (Chart 13). Chart 13S&P Financials (Overweight) The ongoing strength of the U.S. economy is the driver of such a positive indicator, particularly with respect to the key S&P banks sub index. Our total loans & leases growth model and BCA’s C&I loan growth model (second & bottom panels, Chart 14) are in positive territory. The latter is significant given that C&I loans are the single biggest credit category in bank loan books. Importantly, C&I loans have gone vertical recently topping the 10.5% growth mark despite softening capex intentions and CEO confidence. Further, multi-decade highs in consumer confidence are offsetting the Fed’s tightening cycle and suggest that consumer loans, another key lending category, will also gain traction (third panel, Chart 14). In the context of the generationally high employment rate, the implied lower defaults should drive amplified profit improvement from this credit growth. We reiterate our overweight recommendation. Chart 14Loan Growth Drives Profits S&P Industrials (Overweight) The still-solid domestic footing has maintained our industrials CMI close to its cyclical highs, which are also some of the most bullish in the history of the indicator. However, stock prices have not responded accordingly and our VI has descended mildly from neutral to undervalued. Our TI sends a much more definitive message and stands at a full standard deviation into oversold territory (Chart 15). Chart 1515. S&P Industrials (Overweight) While their cyclical peers S&P financials are almost exclusively a domestic play, S&P industrials have been weighed down by trade flare ups for most of the past year (bottom panel, Chart 16). Accordingly, much of the benefit of positive domestic capex indicators and the more tangible capital goods orders maintaining a supportive trajectory has failed to show up in relative EPS growth (second & third panels, Chart 16), though the latter has recently hooked much higher. Chart 16Industrial Earnings Growth Has Recovered S&P Materials (Overweight) Our materials CMI has made a turn, rising off its lowest level in 20 years. This has coincided with our VI bouncing off its cyclical low, though it remains in undervalued territory. The signal is shared by our TI which has only recently recovered from a full standard deviation into the oversold zone, a level that has historically presaged S&P materials rallies (Chart 17). Chart 17S&P Materials (Overweight) When we upgraded the S&P materials sector to overweight earlier this year, we noted that China macro dominates the direction of U.S. materials stocks. On the monetary front, the Chinese monetary easing cycle continues unabated and the near 150bps year-over-year drop in the 10-year Chinese Treasury yield will soon start to bear fruit (yield change shown inverted and advanced, bottom panel, Chart 18). The renminbi also moves in lockstep with relative share prices. The apparent de-escalation in the U.S./China trade tensions has boosted the CNY/USD and is signaling that a playable reflation trade is in the offing in the S&P materials sector (top panel, Chart 18). Chart 18Chinese Data Drives Materials Performance S&P Energy (Overweight) Our energy CMI has moved horizontally for the past six quarters, though this followed a snap-back recovery from the extremely depressed levels of 2016 and 2017. Meanwhile both our VI and TI have descended steeply into buying territory with the former approaching two standard deviations below fair value (Chart 19). Chart 19S&P Energy (Overweight) As with the CMI, the relative share price ratio for the S&P energy index has moved laterally since our mid-summer 2017 upgrade to overweight. Interestingly, the integrated oil & gas energy subindex neither kept up with the steep oil price advance until the end of September, nor with the recent drubbing in crude oil prices (top panel, Chart 20). Put differently, oil majors never discounted sustainably higher oil prices, and are also refraining from extrapolating recent oil prices weakness far into the future. Chart 2020. The Stage Is Set For A Recovery In Crude Prices Nevertheless, the roughly 30% per annum growth in U.S. crude oil production is unsustainable and, were production to remain near all-time highs and move sideways in 2019, then the growth rate would fall back to the zero line. Such a paring back in the growth rate would likely balance the oil market and pave the way for an oil price recovery (oil production shown inverted, bottom panel, Chart 20). This echoes BCA’s Commodity & Energy Strategy service, which continues to forecast higher oil prices into 2019, a forecast which should set the stage for a sustainable rebound next year in S&P energy profits, the opposite of what analysts currently expect (Chart 7). S&P Consumer Staples (Overweight) An improving macro environment is reflected in our consumer staples CMI that has vaulted higher in recent months. However, the strong recent relative outperformance has also shown up in our VI which, though still in undervalued territory, has recovered significantly. Our TI has fully recovered and now sends a neutral message (Chart 21). Chart 21S&P Consumer Staples (Overweight) The surging S&P household products sector has been carrying the S&P consumer staples index on its back as solid pricing efforts have been dragging results and forward guidance higher. While household product sales have been enjoying a multi-year growth phase (second panel, Chart 22), it has largely been driven by volumes. However, the recent resurgence in pricing power (third panel, Chart 22) has given volume gains an added kick, pushing sales further. Meanwhile, exports have continued their two-year ascent despite the tough currency environment and the upshot is that relative EPS growth will likely remain upbeat (bottom panel, Chart 22). In light of challenged EM consumer spending growth, this signal is very encouraging. Chart 22Household Products Is Carrying Staples S&P Health Care (Neutral) Our health care CMI has been treading water recently. Further, a recovery in pharma stocks has taken our VI from undervalued to a neutral position, while our TI sends a distinctly bearish message as health care stocks have been overbought (Chart 23). Chart 23S&P Health Care (Neutral) Healthcare stocks have outperformed in the back half of 2018. Recently a merger mania that has swept through the pharma and biotech spaces has underpinned relative share prices. The last three months have seen an explosion of deals, including the largest biopharma deal ever (Bristol-Myers Squibb buying Celgene for approximately $90 billion) with other global deals falling not too far behind (Takeda buying Shire for $62 billion mid-last year). Such exuberance has clearly confirmed that merger premia are alive and well in the S&P pharma index. It is not merely rising premia that have taken pharma higher either. Pricing power has entered the early innings of a recovery (top panel, Chart 24) while the key export channel points to increasingly bright days ahead (second panel, Chart 24). However, the rise of regulatory pressure from the Trump administration may cause better pricing to prove fleeting. Chart 24Merger Mania In Pharma Further, pharma’s consolidation phase has come at a cost to sector leverage ratios that have dramatically expanded (bottom panel, Chart 24). Such profligacy may come to haunt the sector should the pricing power recovery falter. S&P Technology (Neutral) Our technology CMI has been moving laterally for the better part of the last three years, though the S&P technology index has ignored the macro headwinds and soared higher over that time. Our VI remains on the overvalued side of neutral, despite the recent tech selloff while our TI has been retrenching into oversold territory (Chart 25). Chart 25S&P Technology (Neutral) Until the end of last year, we maintained a barbell portfolio within the sector by recommending an overweight position in the late-cyclical and capex-driven technology hardware, storage & peripherals and software indexes while recommending an underweight position in the early-cyclical semi and semi equipment indexes. However, we recently upgraded the niche semi equipment to overweight for three reasons. First, trade policy uncertainty has dealt a blow to this tech subindex. Not only are 90% of sales foreign sourced, but a large chunk is also China-related sales. Second, emerging market financial indicators are showing some signs of life, underscoring that semi equipment demand may turn out to be marginally less grim than currently anticipated (second panel, Chart 26). Third, long term semi equipment EPS growth estimates have recently collapsed to a level far below the broad market, indicating that the sell side has thrown in the towel on this niche sector (third panel, Chart 26). Chart 26A Bottom In Semi Equipment Overall, and despite our more bullish view on semi equipment, we continue to recommend a neutral weighting in S&P technology. S&P Utilities (Underweight) Our utilities CMI has recovered recently, bouncing off its 25-year low, driven by the modest easing in interest rates, (Chart 27). This has also manifested in a recovery in the S&P utilities index as this fixed income proxy has reacted to the recent fall in Treasury yields (change in yields shown inverted, top panel, Chart 28) and jump in natural gas prices. Further, utilities are typically seen as a domestic defensive play and the recent trade troubles have made utilities soar in a flight to safety. Chart 27S&P Utilities (Underweight) We think the tailwinds lifting utilities are transitory and likely to shift to headwinds. First, one of our key themes for the back half of the year is rising interest rates; a move higher in yields will have a predictably negative impact on these high-dividend paying equities. Second, a flight to safety looks fleeting; the ISM manufacturing new orders index usually moves inversely in lock step with utilities and the most recent message is negative for the S&P utilities index (ISM manufacturing new orders index shown inverted, second panel, Chart 28). Meanwhile, S&P utilities earnings estimates have continued to trail the broad market, having taken a significant step down this year (third panel, Chart 28). Chart 28Rising Rates In Late-2019 Will Be A Headwind For Utilities Our VI and TI share this bearish message as the VI is deeply overvalued and the TI is in overbought territory (Chart 27). S&P Real Estate (Underweight) Our real estate CMI has recently started to turn up, though this is off the near decade-low set last year and remains deeply depressed relative to history (Chart 29). This is principally the result of the backup in interest rates since late last year and the lift they have given to the sector, which has been a relative outperformer over the past six months (top panel, Chart 30). Much like the S&P utilities sector in the previous section, and in the context of BCA’s higher interest rate view, we continue to avoid this sector. Chart 29S&P Real Estate (Underweight) Along with the modest reprieve in borrowing rates, multi family construction continues unabated (second panel, Chart 30), likely driven by all-time highs in CRE prices (third panel, Chart 30). In the absence of an outright contraction in construction, recent weakening in occupancy (bottom panel, Chart 30) will likely prove deflationary to rents, and thus profit prospects. Chart 30Falling Occupancy Will Hurt REIT Profits Our VI suggests that REITs are modestly overvalued, though the recent outperformance has driven our TI to an overbought condition (Chart 29). S&P Consumer Discretionary (Underweight) Our consumer discretionary CMI has ticked up recently, pushed higher by resiliency in consumer data. However, the S&P consumer discretionary index has clearly responded, pushing against 40-year highs relative to the S&P 500 and taking our VI to two standard deviations above fair value (Chart 31). Much of this should be attributed to Amazon (roughly 30% of the S&P consumer discretionary index) and their exceptional 12% outperformance relative to the broad market over the past year. Chart 31S&P Consumer Discretionary (Underweight) While we have an underweight recommendation on the S&P consumer discretionary index, we have varying intra-segment preferences, highlighted by the recent inception of a pair trade going long homebuilders and short home improvement retailers (HIR). Housing starts and building permits are extremely sensitive to interest rates, depend on first time home buyers and move in lockstep with the homeownership rate. Currently, interest rates are easing, the homeownership rate is coming out of its GFC funk and first time home buyers are slated to make a comeback this spring selling season. This is a boon for homebuilders at the expense of HIR (top & middle panels, Chart 32). Further, the price of lumber is a key determinant of relative profitability: lumber represents an input cost to homebuilders whereas it is an important selling item in Big Box building & supply retailers that make a set margin on it. The recent drubbing in lumber prices should ease margin pressures on homebuilders but eat into HIR profits (momentum in lumber prices shown inverted and advanced in bottom panel, Chart 32). Chart 32Long Homebuilders / Short Home Improvement Retailers S&P Communication Services (Underweight) As the newly-minted communication services has little more than four months of existence, we do not have adequate history to create a cyclical macro indicator. However, we have created Chart 33 with a number of valuation indicators, though we caution that they too are less reliable than the other indicators presented in the preceding pages, owing to a dearth of history. Chart 33S&P Communication Services (Underweight) Rather, we refer readers to our still-fresh initiation of coverage on the sector3 and look forward to being able to deliver something more substantive in the future. Size Indicator (Favor Large Vs. Small Caps) Our size CMI has been hovering near the boom/bust line, as it has for most of the last two years (Chart 34). Despite the neutral CMI reading, we downgraded small caps in the middle of last year,4 and moved to a large cap preference, based on the diverging (and unsustainable) debt levels of small caps vs. their large cap peers (bottom panel, Chart 35). This size bias remains a high conviction call for 2019. Chart 34Favor Large Vs. Small Caps Macro data too has turned against small caps. Recent NFIB surveys have shown that small business optimism has continued to fall through the end of the year, albeit from a very high level (top panel, Chart 35). This has coincided with the continued slide of small cap stocks relative to their large cap peers. Chart 35Small Caps Have A Big Balance Sheet Problem Further, the percentage of small businesses with planned labor compensation increases continues to set new all-time highs and deviates substantially from the national trend (second panel, Chart 35). This divergence becomes more worrying when plotted against those same firms increasing prices (third panel, Chart 35), which has trailed for some time and recently flattened. The inference is that margin pressure is intensifying and likely to continue for the foreseeable future. In the context of the absence of small cap balance sheet discipline during the past five years, ongoing large cap outperformance seems ever more likely. Footnotes 1      Please see BCA U.S. Equity Strategy Weekly Report, “ Catharsis,” dated January 14, 2019, available at uses.bcaresearch.com. 2      Please see BCA U.S. Equity Strategy Weekly Report, “ Don't Fight The PBoC,” dated February 4, 2019, available at uses.bcaresearch.com. 3      Please see BCA U.S. Equity Strategy Daily Insight, “New Lines Of Communication,” dated October 1, 2018, available at uses.bcaresearch.com. 4      Please see BCA U.S. Equity Strategy Daily Insight, “Small Caps Have A Big Balance Sheet Problem,” dated May 10, 2018, available at uses.bcaresearch.com.