Reports of Value’s Death May Be Greatly Exaggerated

Robert D. Arnott, Campbell R. Harvey, Vitali Kalesnik and Juhani T. Linnainmaa

Financial Analysts Journal, 2021, vol. 77, issue 1, 44-67

Abstract: 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 2020Disclosure: Research Affiliates, LLC, has a commercial interest in the subject matter. Editor’s Note: Submitted 3 June 2020Accepted 21 October 2020 by Stephen J. Brown.This article was externally reviewed using our double-blind peer-review process. When the article was accepted for publication, the authors thanked the reviewers in their acknowledgments. Andrew L. Berkin and one anonymous reviewer were the reviewers for this article.Correction: This article was originally published with a production error in Figure 1B and endnote 32, which have now been corrected in the online version. Please see Correction ( https://doi.org/10.1080/0015198X.2021.1895584).

Date: 2021
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DOI: 10.1080/0015198X.2020.1842704

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