Rebalancing and the Value Effect

Posted: 10 Jan 2012 Last revised: 26 Sep 2022

See all articles by Denis B. Chaves

Denis B. Chaves

The Capital Group Companies

Robert D. Arnott

Research Affiliates, LLC

Date Written: January 10, 2012


It is amply documented that a value portfolio outperforms a growth portfolio over long spans in most markets worldwide. Less well known, however, is how this outperformance is achieved. Decomposing the total returns of these strategies, we find that (a) value portfolios enjoy higher dividend income and (b) the average growth stock enjoys faster dividend growth than the average value stock; but, surprisingly, (c) value portfolios experience higher growth in dividends than growth portfolios. We argue that the first two findings are expected, but the third one is not completely understood by investors.

This third result is a consequence of the nature of the rebalance rules for growth and value portfolios. Each rebalance replaces lower-yielding value stocks with new higher-yielding replacements, and replaces higher-yielding growth stocks with new lower-yielding replacements. It is, therefore, the act of rebalancing and reconstituting the growth and value portfolios that increases the growth rate for dividend income in value strategies, and rather sharply reduces it in the case of growth strategies.

While this is analogous to the findings of Fama and French in their Migration paper, our results more specifically attribute much of the advantage of value strategies to the acts of reconstituting and rebalancing and their side effects on dividends. In so doing, we shed some light on the faster dividend growth of value portfolios.

Keywords: value, growth, rebalancing

Suggested Citation

Chaves, Denis Biangolino and Arnott, Robert D., Rebalancing and the Value Effect (January 10, 2012). Journal of Portfolio Management, Vol. 38, No. 4, 2012, Available at SSRN: or

Denis Biangolino Chaves (Contact Author)

The Capital Group Companies ( email )

333 S. Hope Street, 53rd Floor
Los Angeles, CA 90071
United States

Robert D. Arnott

Research Affiliates, LLC ( email )

620 Newport Center Dr
Ste 900
Newport Beach, CA 92660
United States
949-325-8700 (Phone)
949-325-8901 (Fax)


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