Understanding the Performance of the Equity Value Factor

Abstract

After decades of sound performance, doubts have been raised on the ability of the equity value factor to continue to deliver a positive performance in the aftermath of the 2008 Global Financial Crisis. Indeed, in a context dominated by low yields, sluggish growth and subdued inflation combined with an accelerating digitalization of the economy, the performance of value strategies struggled over the past decade. In this paper, we investigate potential drivers behind this performance lag, such as macroeconomic and microeconomic determinants, ESG characteristics or credit-borrowed components. Based on European and American data, we find that inflation and tightening credit spread levels are the most supportive factors for value stocks. As far as interest rates are concerned, their sustained low levels prevented the value stock universe from clearing its most distressed issuers, also known as "deep value", and thus dampened value performance. As a matter of fact, we show that value has not been systematically an investment strategy bearing a heightened default risk. Our ESG analysis corroborates the "transatlantic divide", the historical gap between the U.S. and Europe on this front, and shows that value and growth stocks are not necessarily all brown and green stocks. In addition, we demonstrate that the small cap segment has not been the magical cure to value underperformance. Finally, we conclude that value is not dead yet, and might even have bright days ahead considering the current improvements in market sentiment, especially if inflation does materialize. Nevertheless, we also emphasize that the current value risk factor is probably different in nature from the one we observed during the golden age of value investing at the beginning of the 2000s. Indeed, trading facilities, ease of access to fundamental data for a large number of investors, ESG investing and the digitalization of the economy may have changed the rules of the game.

Keywords: Value, risk factor, risk premium, factor investing, valuation, deep value, inflation, interest rates, ESG, carbon risk

JEL Classification: C50, G11, G12