Reports of Value’s Death May Be Greatly Exaggerated

40 Pages Posted: 2 Dec 2019 Last revised: 7 Jan 2020

See all articles by Robert D. Arnott

Robert D. Arnott

Research Affiliates, LLC

Campbell R. Harvey

Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER)

Vitali Kalesnik

Research Affiliates LLC

Juhani T. Linnainmaa

Dartmouth College - Tuck School of Business; National Bureau of Economic Research (NBER)

Date Written: January 7, 2020

Abstract

Value investing has underperformed growth investing for over 12 years with a -39.1% drawdown from peak to trough using the classic Fama-French definition of the value factor. The second-longest duration of underperformance occurred during the tech bubble, and while deeper than the recent drawdown, lasted less than 4 years. As a result, many now argue, relying on a variety of narratives, that the value investing style is no longer viable. We examine some of these narratives and find them wanting. We use a bootstrap analysis to show that the likelihood (given the historical data) of observing such a large drawdown is about 1 in 20—unusual but not enough to support structural impairment. We then decompose the value–growth performance into three components: the migration of securities, a profit differential, and the change in a valuation spread. Our analysis of pre- and post-2007 data reveal no significant difference between the migration of stocks (from value to neutral or growth or from growth to neutral or value) in the two periods nor do we observe a difference in profitability. The drawdown is explained by the third component: value has become unusually cheap relative to growth with the valuation now in the 97th percentile of the historical distribution. We show that, even accounting for intangibles, which have eroded the relevance of book value, the drawdown is explained by value becoming exceptionally relatively cheap. Even given the noisy nature of returns, expected returns are always elevated when in the extreme lower tail of a distribution.

Keywords: Value investing, value factor, growth investing, value spread, revaluation, migration, profitability, HML, 3-factor model, iHML, intangibles, book value, intrinsic value, financial accounting, behavioral finance, crowding, data mining, structural change, drawdown

JEL Classification: G11, G12, G14, G23, G40, M40

Suggested Citation

Arnott, Robert D. and Harvey, Campbell R. and Kalesnik, Vitali and Linnainmaa, Juhani T., Reports of Value’s Death May Be Greatly Exaggerated (January 7, 2020). Available at SSRN: https://ssrn.com/abstract=3488748 or http://dx.doi.org/10.2139/ssrn.3488748

Robert D. Arnott

Research Affiliates, LLC ( email )

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HOME PAGE: http://www.researchaffiliates.com/Our%20Firm/Our%20Team/Pages/Rob-Arnott.aspx

Campbell R. Harvey (Contact Author)

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7768 (Phone)

HOME PAGE: http://www.duke.edu/~charvey

National Bureau of Economic Research (NBER)

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Vitali Kalesnik

Research Affiliates LLC ( email )

620 Newport Center Dr
Ste 900
Newport Beach, CA 92660
United States
949-325-8717 (Phone)
949-325-8917 (Fax)

HOME PAGE: http://researchaffiliates.com/index.htm

Juhani T. Linnainmaa

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

HOME PAGE: http://www.tuck.dartmouth.edu/faculty/faculty-directory/juhani-linnainmaa

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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