Is 2022 a Good Year To Invest in Value?

One of the biggest stories in 2021 was the positive performance of the value premium. As of December 31, 2021, small-value stocks outperformed small-growth stocks by 22.6% and large-growth stocks by 5.5%¹ in the US. In international markets, small-value outperformed small-growth by 6.3%², and in emerging markets, small-value outperformed small-growth by 12.9%³. 

However, what does this tell us about the performance of the value premium in 2022? 

Historical data tells us that value stocks have outperformed growth stocks in US, developed ex US, and emerging markets as far as we have data available, as illustrated in Exhibit 1. However, short-term results will vary. For example, the three years leading up to 2020 were a disappointing period for value-focused investors due to value underperformance, and the impact of the global pandemic.

Exhibit 1: Value Stocks Outperforming Growth Stocks in US Market (1927–2021)

_{Past performance is no guarantee of future results. Actual returns may be lower. In USD. Indices are not available for direct investment. Index returns are not representative of actual portfolios and do not reflect costs and fees associated with an actual investment. US Value minus Growth: Fama/French US Value Research Index minus the Fama/French US Growth Research Index. Developed ex US Market Value minus Growth: Fama/French International Value Index minus the Fama/French International Growth Index. Emerging Markets Value minus Growth: Fama/French Emerging Markets Value Index minus Fama/French Emerging Markets Growth Index. All rights reserved. See below for descriptions of Dimensional and Fama/French index data.}  

Nonetheless, the economic intuition backing the value premium has held strong. Financial science tells us that value stocks are expected to outperform growth stocks every day, because a lower relative price is typically associated with a higher expected return. 

Additionally, historical data suggests a positive value premium regardless of its performance in the prior year. Exhibit 2 illustrates this phenomenon. To evaluate the value premium’s performance from one year to the next, we arranged years based on annual value premium, and then looked at the next year’s performance.  

Exhibit 2: Annual Value Premium and Following Year Value Premium, US Market (1927-2021⁴)

The top quartile years – those with the strongest value premium performance – were followed by an average annual value premium of 4.74%. The bottom quartile – or the weakest years for the value premium – were followed by an average annual value premium of 4.35%. 

The moral of the story is that it’s not too late to build a portfolio with exposure to value, and investors haven’t missed out on the “value-investing boat”. History tells us that there isn’t a reliable way to predict when value stocks will outperform. Instead of trying to predict value outperformance, we believe the best way to capture the value premium is by staying consistently invested in value to capture expected gains in the long term.

SOURCE: Dimensional Fund Advisors

_{1. Market Returns are computed from Russell 3000 Index published security weights, Dimensional computed security returns and Dimensional classification of securities based on size, value, and profitability parameters. Within the US, Large Cap is defined as approximately the largest 90% of market capitalization in each country or region; Small Cap is approximately the smallest 10%. Designations between value and growth are based on price to book ratios. Value is defined as the 50% of market cap with the lowest price to book ratios by size category and growth is the highest 50%. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes.}

_{2. Market Returns are computed from MSCI World ex USA IMI Index published security weights, Dimensional computed security returns and Dimensional classification of securities based on size, value, and profitability parameters. Within the non-US developed markets, Large Cap is defined as approximately the largest 87.5% of market capitalization in each country or region; Small Cap is approximately the smallest 12.5%. Designations between value and growth are based on price to book ratios. Value is defined as the 50% of market cap with the lowest price to book ratios by size category and growth is the highest 50%. Countries not in the Dimensional investable universe are excluded from the analysis. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. MSCI data © MSCI 2022, all rights reserved.}

_{3. Market Returns are computed from MSCI Emerging Markets IMI Index published security weights, Dimensional computed security returns and Dimensional classification of securities based on size, value, and profitability parameters. Within emerging markets, Large Cap is defined as approximately the largest 85% of market capitalization in each country or region; Small Cap is approximately the smallest 15%. Designations between value and growth are based on price to book ratios. Value is defined as the 50% of market cap with the lowest price to book ratios by size category and growth is the highest 50%. Countries not in the Dimensional investable universe are excluded from the analysis. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. MSCI data © MSCI 2022, all rights reserved.}

_{4. Returns for 2021 are through the year-to-date period ending November 30, 2021. Returns less than one year are not annualized.}

_{5. Yearly premiums in top chart are arranged from low to high rather than chronologically, covering 1927-2021. Premiums in bottom chart are arranged in the order of the top chart, but one year later in each instance, to show next-year performance.}

_{Past performance is not a guarantee of future results. Actual returns may be lower. Investing risks include loss of principal and fluctuating value. There is no guarantee an investment strategy will be successful. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. In USD. Annual value premium is the return difference between the Fama/French US Value Research Index and the Fama/French US Growth Research Index.} 

_{Source: CRSP and Compustat data calculated by Dimensional. Fama/French data provided by Fama/French. This information is intended for educational purposes and should not be considered a recommendation to buy or sell a particular security. See below for descriptions of Dimensional and Fama/French index data.}