Value has a tried-and-true history backing its use in a factor investing scenario, but in today’s market, it serves investors better to use a multi-factor approach rather than rely on value itself.
“First off it’s worth remembering that the evidence for value is about as good as it gets in the factor world,” wrote Simon Moore in Forbes. “Data such as Fama and French’s historic studies have found value, based on metrics such as price-to-book, outperforming the market by about 2% a year over history. Of course, this is a bit like driving looking in the rearview mirror. Still, few factors have help up over time and across geographies in the way that value has. For example, Clifford Asness find value (and also momentum) to be two of the more pervasive factors across all of investing. Still, a decade run of weak value performance is quite possible, just as we’re seeing now.”
Even with the advent of the ETF, value is still having a hard time supplanting other factors driving today’s market like growth and momentum. Lower fees are also not helping value’s case.
“Ease of implementation could prove the biggest problem for value strategies,” Moore added. “In the past so-called expert stock-pickers were needed to create a value strategy. Even quality data on valuation was harder to access. Now you can get a credible value strategy via an Exchange Traded Fund (ETF) for a few basis points a year and the associated valuation data is essentially free. Commission are often free now too. The barriers have come down. Perhaps that means value will earn less of a premium going forward. Still that’s a puzzle, if value gets easier and more popular, then in theory maybe returns to the strategy should increase, at least temporarily as it becomes a crowded trade before a lull in performance. It is not clear that happened. It seems like value investing is becoming less popular today, not more. Even if it’s easier to implement.”
With value lagging, Moore stresses the importance of having a multi-factor strategy.
“Value investing is one of the more robust factors in the market, we have multiple explanations for it and robust long-term track records across both time and asset classes,” Moore wrote. “It seems unlikely that value has stopped working. However, as with all factors patience may be required. One of the very reason factors may work is precisely because we have periods such as these, when factors such as value unpredictably and frustratingly lag the market. This is one more reason to consider a multi-factor strategy rather than bet on value, or anything else, in isolation.”
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