Breaking down the value-growth performance into separate components, the authors find that the drawdown is fully explained by changes in valuation spreads. Value has become so cheap relative to growth that its current valuation is in the 97th percentile of the historical distribution. Based on this, the authors conclude that the expected return on value is currently above average.
We appreciate this detailed analysis of the performance of value strategies and share the view that, although painful, the recent drawdown does not imply structural impairment. At the same time, we also try to learn from the recent experience and are working on various ideas to improve value factors.
Finally, the paper focuses on the US market, where the value style has been hit particularly hard due to the rally in big US tech stocks. Value performance has been less bad in international developed markets, and even positive in emerging markets over the past decade.
1Arnott, R. D., Harvey, C. R., Kalesnik, V. and Linnainmaa, J. T., 2019, ‘Reports of Value’s Death May Be Greatly Exaggerated’, working paper.
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