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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.

About the Author(s)

Robert Arnott
Robert D. Arnott

Rob Arnott is founder and chairman of Research Affiliates, LLC, and a former editor of the Financial Analysts Journal. He pioneered several portfolio strategies that are now widely used, including tactical asset allocation, global tactical asset allocation, tax-advantaged equity management, and the Fundamental Index® approach to indexation. Previously, Mr. Arnott served as chairman at First Quadrant, LP; as global equity strategist at Salomon Brothers; as founding president and CEO at TSA Capital Management (now part of Analytic Investors, LLC); and as vice president at The Boston Company. He is a frequent contributor to financial journals and books and is the co-author of The Fundamental Index: A Better Way to Invest. Mr. Arnott has published in such journals as the Journal of Portfolio Management, the Harvard Business Review, and the Financial Analysts Journal. He has received seven Graham and Dodd Scroll Awards from the Financial Analysts Journal and three Bernstein Fabozzi/Jacobs Levy Awards from the Journal of Portfolio Management. Mr. Arnott holds a degree in economics, applied mathematics, and computer science from the University of California, Santa Barbara.

Campbell Harvey
Campbell R. Harvey

Campbell R. Harvey is professor of finance at Duke University and a research associate of the National Bureau of Economic Research in Cambridge, Massachusetts. He served as editor of the Journal of Finance from 2006 to 2012. In 2016, he was elected president of the American Finance Association.

Vitali Kalesnik
Vitali Kalesnik

Vitali Kalesnik is a partner and senior member of the investment team at Research Affiliates, leading research and business strategy in the European region. Previously, Dr. Kalesnik led the equity research team, and he continues to perform general equity-related research. Dr. Kalesnik has co-authored articles that were recognized with three Graham and Dodd Scroll Awards, a Financial Analysts Journal Readers’ Choice Award, a William F. Sharpe Indexing Achievement Award, a Bernstein Fabozzi/Jacobs Levy Award, and a Graham and Dodd Award for "What is Quality." His research strengthens and expands Research Affiliates’ products—in particular, the RAFI Fundamental Index strategies—and supports the firm’s global tactical asset allocation products. He speaks fluent English, Russian, and French. Dr. Kalesnik earned a PhD in economics from the University of California, Los Angeles, where he was a winner of the UCLA Graduate Division Fellowship.

Juhani Linnainmaa
Juhani T. Linnainmaa

Juhani T. Linnainmaa is a professor of business administration at Dartmouth College, Hanover, New Hampshire, and a research associate at the National Bureau of Economic Research, Cambridge, Massachusetts.