Bridge over ocean
8 January 2021 Financial Analysts Journal Volume 77, Issue 1

Reports of Value’s Death May Be Greatly Exaggerated

  1. Robert D. Arnott
  2. Campbell R. Harvey
  3. Vitali Kalesnik
  4. Juhani T. Linnainmaa

Flaws in the definition of value (particularly the inclusion of intangibles) are one reason for the value style’s underperformance. Preference for growth stocks is not sustainable in the long term.

Value investing, as defined by the Fama–French high book-to-market minus low book-to-market (HML) factor, has underperformed growth investing since 2007, producing a drawdown of 55% as of mid-2020. The underperformance has led many market observers to argue that value is dead. Our analysis attributes value’s recent underperformance to two sources: (1) The HML book-value-to-price definition fails to capture increasingly important intangible assets, and (2) valuations of value stocks relative to growth stocks have tumbled. Both observations are inconsistent with the argument for value’s death. We capitalize intangibles and show that this measure of value outperforms the traditional measure by a wide margin. We also describe a return decomposition and demonstrate that changes in the valuation spread between the growth and value portfolios explain the entire drawdown, with room to spare. The relative valuation of the value factor falls from the top quartile of the historical distribution at the start of 2007 to the bottom percentile as of June 2020.
Read the Complete Article in Financial Analysts Journal Financial Analysts Journal CFA Institute Member Content
CFA Members Earn 2PL
Record PL credit Manage your Professional Learning credits
Publisher Information
Routledge doi.org/10.1080/0015198X.2020.1842704 ISSN/ISBN: 0015-198X

We're using cookies, but you can turn them off in Privacy Settings. Otherwise, you are agreeing to our use of cookies. Learn more in our Privacy Policy.