Reports of Value’s Death May Be Greatly Exaggerated

doi:10.1080/0015198X.2020.1842704

Robert D. Arnott
Campbell R. Harvey
Vitali Kalesnik
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.

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