Good post, Dougal. As another way of stressing the importance of the diversification benefits that you mention, I looked at how the correlation between value and growth portfolios changed, in each market cap tier, since the beginning of 1986. Among small-cap stocks (Russell 2000), the correlation between value and growth portfolios was usually between 87.7% and 95.2%, but has dipped as low as 54.9% (in early 2001). Among mid-cap stocks (Russell Midcap) the value-growth correlation was usually between 85.8% and 93.2% but dipped spectacularly to 8.8% in late 2000. Among large-cap stocks (S&P 500) the value-growth correlation was usually between 83.9% and 91.9%, but dipped as low as 47.7% (also in early 2001).
Even investors who pay close attention to persistent market anomalies, such as the value premium, can't know when returns will be consistent with the anomaly and when returns will run counter to them. (Similarly, I often point out that returns are positive during only about two-thirds of months even during an undisputed bull market.) Yes, make use of the value premium and other anomalies in allocating your portfolio--but no, don't go to extremes!
p.s. I compute correlations using monthly returns and a DCC-GARCH methodology.