The Performance of Relative-Value Equity Strategies

22 Pages Posted: 21 Sep 2016

See all articles by Nicholas Anderson

Nicholas Anderson

Thornburg Investment Management; University of Chicago Booth School of Business

Date Written: August 1, 2016

Abstract

This paper examines investment strategies that combine time-series and cross-sectional stock sorts based on scaled price-to-earnings ratios, which I describe as relative-value strategies. Relative-value strategies buy (short) stocks that are below (above) their long-run historical absolute or market-relative valuation. I test the performance of relative-value strategies versus a traditional value strategy. I find that a relative-value effect exists, but is dwarfed by the traditional value effect. On average, the tested relative-value strategies deliver long-short returns of 1.25% p.a. and long-only excess returns of 0.69% p.a. over 1990 to 2014. The traditional value strategy produces long-short returns of 5.50% p.a. and long-only excess returns of 4.33% p.a. Relative-value strategies offer an alternative but not necessarily superior source of returns. I evaluate returns after adjusting for common risk factors. I explore the effect on returns from alternative portfolio formation and rebalancing rules. I discuss possible explanations for the findings and implications for investors.

Keywords: Value Effect, Value Investing, Relative Value, Behavioral Finance

JEL Classification: G12, G14

Suggested Citation

Anderson, Nicholas, The Performance of Relative-Value Equity Strategies (August 1, 2016). Available at SSRN: https://ssrn.com/abstract=2782945 or http://dx.doi.org/10.2139/ssrn.2782945

Nicholas Anderson (Contact Author)

Thornburg Investment Management ( email )

2300 North Ridgetop Road
Santa Fe, NM 87506

University of Chicago Booth School of Business ( email )

Chicago, IL
United States

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