Reports of Value’s Death May Be Greatly Exaggerated

38 Pages Posted: 2 Dec 2019 Last revised: 2 Nov 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 Global Advisors

Juhani T. Linnainmaa

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

Date Written: October 19, 2020

Abstract

Value investing, as defined by the Fama–French HML factor, has underperformed growth investing since 2007, producing a drawdown of 55% as of mid-2020. The underperformance leads many to argue that value is dead. Our analysis attributes value’s recent underperformance to two sources: the HML book-value-to-price definition fails to capture the increasingly important intangible assets, and valuations of value stocks relative to growth stocks have tumbled. Both arguments are inconsistent with value’s death arguments. We capitalize intangibles and show that this measure of value outperforms the traditional measure by a wide margin. We also perform a return decomposition and demonstrate that changes in the valuation spread between the growth and value portfolios explain the entire drawdown, with room to spare. The relative valuation of the value factor falls from the top quartile of the historical distribution at the start of 2007 to the bottom percentile as of June 2020.

Forthcoming, Financial Analysts Journal.

Data for our iHML factor can be downloaded here.



First posted to SSRN: November 17, 2019.

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 (October 19, 2020). Available at SSRN: https://ssrn.com/abstract=3488748 or http://dx.doi.org/10.2139/ssrn.3488748

Robert D. Arnott

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Campbell R. Harvey (Contact Author)

Duke University - Fuqua School of Business ( email )

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National Bureau of Economic Research (NBER)

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Vitali Kalesnik

Research Affiliates Global Advisors ( email )

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HOME PAGE: http://https://www.researchaffiliates.com/en_us/home.html

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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