Reports of Value’s Death May Be Greatly Exaggerated
43 Pages Posted: 2 Dec 2019 Last revised: 3 Jun 2020
Date Written: June 2, 2020
Value investing has underperformed growth investing for over 13 years. We examine several narratives that suggest why the long-term efficacy of the value factor may be dead. Using a bootstrap analysis, we show the likelihood of observing such a large drawdown, based on data from before the drawdown, is about 1 in 20. We decompose the value–growth performance into three components: migration of securities into and out of the growth and value portfolios, differences in profitability and growth rates, and changes in the valuation spread between the growth and value portfolios. The third component explains the drawdown: value is unusually cheap relative to growth. The valuation falls from the 23rd percentile in 2007 to the 100th (bottom) percentile of the historical distribution as of March 2020.
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: Suggested Citation