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The Vanishing Value Premium

Jan. 04, 2021 2:34 AM ETDFLVX, SPY, VTI4 Comments
Louis Kokernak, CFA profile picture
Louis Kokernak, CFA


  • Value stocks are distinguished by lower-than-average price/book and price/earnings ratios.
  • Value stocks across national boundaries and market caps have lagged broader averages since the Great Recession.
  • There is no clear analytical explanation for the poor relative performance of value stocks.
  • The empirical evidence for a value premium in the US large cap space has weakened.
  • There is minimal downside to reducing value tilt for large stocks.

2020 has been a tumultuous one for the stock market. Equities fell precipitously after COVID-19 made its way to western countries. Yet markets recovered remarkably well with the implementation of aggressive fiscal and monetary stimulus. The US stock market is up comfortably during the pandemic largely on the performance of its surging high tech sector.

Market action during the pandemic has amplified a trend that has prevailed since the Great Recession. Value stocks, characterized by low price/book and price/earnings ratios, have underperformed growth stocks that are typified by high market valuations relative to current fundamental measures.

The persistent success of growth stocks has raised questions in the minds of evidence-based investors who have long believed that value equities delivered superior long-term results. There is a wealth of research documenting a "value premium" attributable to stock portfolios that trade at low prices relative to conventional accounting measures. Studies that span many decades across multiple national markets showed that these value stocks outperform the broader market.

Dissipating Value Premium

Recent results have not conformed to long-term trends. Since the Great Recession, value stock portfolios have substantially underperformed their growth counterparts. Let's review some basic aggregates first - the Russell 1000 Growth Index against the Russell 1000 Value Index.

It's fair to say that value stocks in the US are in a slump. In fact, academics that take a nuanced view of stock performance believe that this is a "historic" slump. Research Affiliates concluded that value stocks underperformed their growth counterparts by 55% from 2007 through mid 2020, and the lag continues as of this writing. This is the largest drawdown observed since 1963. Certainly worth another examination.

Many observers have forwarded hypotheses as to why growth stocks have done so well. Some have speculated that value is a victim of its own popularity. Its

This article was written by

Louis Kokernak, CFA profile picture
I have been a fee only financial advisor since 2002 and am a Chartered Financial Analyst and Certified Financial Planner. The cornerstone of the life savings strategy at Haven Financial Advisors is the investment in multiple asset classes with low cost and low turnover.The investment process is transparent.There are no "black box" funds or sudden swings in risk taking.

Analyst’s Disclosure: I am/we are long SPY, VTI, DFLVX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Special Thanks to Dr. Gulseren Mutlu for her editorial input.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (4)

Dr. Gulseren Mutlu profile picture
If a portfolio manager reduced the value tilt, then where should s/he invest more?
Louis Kokernak, CFA profile picture
The natural place to go would be a market cap weighted index fund that corresponds in terms of market cap and geography. As an example, if an investor sold out of an emerging market large cap value fund, the proceeds could be invested in VWO - a market cap index for emerging markets. More practically, value funds could be sold to raise cash for distributions. No reinvestment necessary.
Michu profile picture
BTW other analysts think that the value premium has temporarly vanished because growth stocks are in a bubble.

"we believe Growth stocks have entered a bubble similar to the one in 2000... We believe the outlook for Value is exceedingly bright from here, particularly in a long/short framework, which can profit from Value’s outperformance in both rising and falling markets."

It is probably even a good idea to short some growth stocks. This would actually be the opposite of the position in the article above.

see here: www.gmo.com/...
Michu profile picture
Price / book is outdated and has lost predictability power. It should be replaced by price / retained earnings ratio. see here:



"They find that the retained earnings-to-market ratio powerfully predicted future pricing, statistically significant up to 10 years into the future. In contrast, the ratio of contributed capital to market value exhibited a statistically insignificant relation to future pricing across all prediction horizons."

The researchers did observe “a marked drop in the correlation between book-to-market and retained earnings-to-market” starting after 1980. They further observed, “book-to-market predicted the cross section of average returns in the first half of our sample because book-to-market and retained earnings-to-market were highly correlated. In the second half of our sample period, book-to-market lost its predictive power because the change in the composition of public firms substantially reduced book-to-market’s correlation with retained earnings-to-market.”
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