Some would say that value investors have been through a ride in recent years, and rightly so. Up until very recently, growth stocks enjoyed a long streak of outperformance over value stocks which had many investors wondering if the value premium still held any validity.
The three-year period ending June 2020 was a particularly difficult time for the value premium as we saw the Russell 1000 Value Index underperform the Russell 1000 Growth Index by 17.2% annualized. However, this streak of underperformance generally tends to be the exception, not the rule, and investors that exited their value positions might be questioning their decision now.
Since June 2020, value has made a decisive comeback, beating growth by 8.1% annualized through June 2022. Empirical data series on the value premium also supports this narrative. In fact, on average, value stocks have outperformed their growth counterparts by 4.1% in all years from 1927 to 2021, as Exhibit 1 illustrates.
To stop believing in the value premium entirely due to a handful of years of poor performance is to say that one of the most fundamental tenets of investing, the valuation equation: that paying less for a set of future cash flows is associated with a higher expected return, does not hold true.
Exhibit 1: Yearly Observations of Premiums: Value minus Growth in US Markets (1927 – 2021)
In US dollars. Yearly premiums are calculated as the difference in one-year returns between the two indices described. Value minus growth: Fama/French US Value Research Index1 minus the Fama/French US Growth Research Index2. Past performance is no guarantee of future results. 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. Their performance does not reflect the expenses associated with the management of an actual portfolio.
Dimensional’s extensive research, combined with empirical data on the value premium, shows that value investing can be a reliable way for investors to increase expected returns going forward. Our research into historical data also 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. 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%.
Exhibit 2: Annual Value Premium and Following Year Value Premium, US Market (1927-20213)
3. Returns for 2021 are through the year-to-date period ending November 30, 2021. Returns less than one year are not annualized.
4. 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.
So, no there’s never a “right” or “wrong” time to enter the market and invest in value. This would amount to timing the market, which is virtually impossible to do accurately and successfully every single time. Similarly, there’s no way to know for sure if the recent outperformance of value will continue. What we do know is that the premiums show up over the long-term, and what we can control is our approach to the market.
Having a long-term investing approach, even through difficult periods, can ensure that you are there for the good times too. And as any good student of finance knows, there’s no reward until you’ve paid for the risk by sticking through the turbulent times.
Dimensional Fund Advisors
Past performance is no guarantee of future results.
1. Fama/French US Value Research Index: Provided by Fama/French from CRSP securities data. Includes the lower 30% in price-to-book of NYSE securities (plus NYSE Amex equivalents since July 1962 and Nasdaq equivalents since 1973).
2. Fama/French US Growth Research Index: Provided by Fama/French from CRSP securities data. Includes the higher 30% in price-to-book of NYSE securities (plus NYSE Amex equivalents since July 1962 and Nasdaq equivalents since 1973).
The Fama/French Indices represent academic concepts that may be used in portfolio construction and are not available for direct investment or for use as a benchmark. Index returns are not representative of actual portfolios and do not reflect costs and fees associated with an actual investment.
Results shown during periods prior to each index’s index inception date do not represent actual returns of the respective index. Other periods selected may have different results, including losses. Backtested index performance is hypothetical and is provided for informational purposes only to indicate historical performance had the index been calculated over the relevant time periods. Backtested performance results assume the reinvestment of dividends and capital gains. Profitability is measured as operating income before depreciation and amortization minus interest expense scaled by book. Eugene Fama and Ken French are members of the Board of Directors of the general partner of, and provide consulting services to, Dimensional Fund Advisors LP.