The current debate about the continued existence of the value premium bears a close resemblance to historical discussions about the equity premium itself, which has been declared dead several times over the years. For example, in 1979, BusinessWeek magazine referred to ‘the death of equities’ as stocks had not earned a premium for over ten years.1
The negative return from equities in the 1970s was explained by high inflation at the time. Companies were not able to grow their net real earnings because of rising costs. This narrative is a useful explanation for disappointing past performance, but is of little use in predicting returns. After that 1979 article, one of the strongest ever bull markets in equities took place.
This shows that the talk about the demise of the equity premium had been highly premature. The bull market ended when the tech bubble burst in 2000, and in 2009, some investors were once again questioning whether the equity premium was dead after another decade of poor returns. Of course, we all know how the 2010s worked out for the stock markets.
One important takeaway from all this is that investors wishing to maximize their chance of successfully harvesting the equity premium need to adopt a long-term horizon and keep a strong hand. If they had gotten nervous and sold when things looked their worst, they could have missed out on huge subsequent returns.
Investors need to think in decades, not in quarters, because stock market returns can swing wildly over short timeframes. This also applies for time-tested factors such as value. For one, our research shows that value returns coming from multiple expansions tend to mean-revert over longer periods of time.
More specifically, when considering holding periods of ten years, we find that value generally becomes cheaper, with multiples expanding, when past returns for value stocks have been low and growth returns have been high. However, we also find that, over the subsequent ten years, value returns tend to be significantly higher than the previous ten years.
From this perspective, current multiples suggest that, over the next ten years, the value premium will probably be substantially higher than its long-term average.
Another important result from our study of long-term investment results is that combining different factors is a good way of reducing a portfolio’s volatility and the probability of prolonged periods of underperformance. Even if value carried no premium at all, it would still help reduce the risk in a multi-factor strategy.
Finally, one last consideration is that while investors are often lured into equity styles, based on their past performance, they actually need strong hands in periods of poor performance to bridge the gap between investment return and investor return. This is because poor timing skills or ‘weak hands’ often cancel out the benefits of being exposed to well-rewarded premiums.
Factors carry premiums, but they inevitably involve periods of pain too. Investors need to be careful not to enter or exit at the worst possible moment – for example, by selling equities in 1979. Value rallies tend to be sharp and difficult to predict, so make sure you stay in the game and live through what is undeniably a ‘value winter’.
The Robeco Capital Growth Funds have not been registered under the United States Investment Company Act of 1940, as amended, nor or the United States Securities Act of 1933, as amended. None of the shares may be offered or sold, directly or indirectly in the United States or to any U.S. Person (within the meaning of Regulation S promulgated under the Securities Act of 1933, as amended (the “Securities Act”)). Furthermore, Robeco Institutional Asset Management B.V. (Robeco) does not provide investment advisory services, or hold itself out as providing investment advisory services, in the United States or to any U.S. Person (within the meaning of Regulation S promulgated under the Securities Act).
This website is intended for use only by non-U.S. Persons outside of the United States (within the meaning of Regulation S promulgated under the Securities Act who are professional investors, or professional fiduciaries representing such non-U.S. Person investors. By clicking “I Agree” on our website disclaimer and accessing the information on this website, including any subdomain thereof, you are certifying and agreeing to the following: (i) you have read, understood and agree to this disclaimer, (ii) you have informed yourself of any applicable legal restrictions and represent that by accessing the information contained on this website, you are not in violation of, and will not be causing Robeco or any of its affiliated entities or issuers to violate, any applicable laws and, as a result, you are legally authorized to access such information on behalf of yourself and any underlying investment advisory client, (iii) you understand and acknowledge that certain information presented herein relates to securities that have not been registered under the Securities Act, and may be offered or sold only outside the United States and only to, or for the account or benefit of, non-U.S. Persons (within the meaning of Regulation S under the Securities Act), (iv) you are, or are a discretionary investment adviser representing, a non-U.S. Person (within the meaning of Regulation S under the Securities Act) located outside of the United States and (v) you are, or are a discretionary investment adviser representing, a professional non-retail investor. Access to this website has been limited so that it shall not constitute directed selling efforts (as defined in Regulation S under the Securities Act) in the United States and so that it shall not be deemed to constitute Robeco holding itself out generally to the public in the U.S. as an investment adviser. Nothing contained herein constitutes an offer to sell securities or solicitation of an offer to purchase any securities in any jurisdiction. We reserve the right to deny access to any visitor, including, but not limited to, those visitors with IP addresses residing in the United States.
This website has been carefully prepared by Robeco. The information contained in this publication is based upon sources of information believed to be reliable. Robeco is not answerable for the accuracy or completeness of the facts, opinions, expectations and results referred to therein. Whilst every care has been taken in the preparation of this website, we do not accept any responsibility for damage of any kind resulting from incorrect or incomplete information. This website is subject to change without notice. The value of the investments may fluctuate. Past performance is no guarantee of future results. If the currency in which the past performance is displayed differs from the currency of the country in which you reside, then you should be aware that due to exchange rate fluctuations the performance shown may increase or decrease if converted into your local currency. For investment professional use only. Not for use by the general public.