Abstract

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

Disclosure: Research Affiliates, LLC, has a commercial interest in the subject matter.

Editor’s Note:

Submitted 3 June 2020
Accepted 21 October 2020 by Stephen J. Brown.

This article was externally reviewed using our double-blind peer-review process. When the article was accepted for publication, the authors thanked the reviewers in their acknowledgments. Andrew L. Berkin and one anonymous reviewer were the reviewers for this article.



An investment strategy, style, or factor can suffer a period of underperformance for many reasons.

  • The style may have been a product of data mining and worked during its backtest only because of overfitting.

  • The trade may get crowded, which distorts asset prices and leads to low or negative expected returns.

  • Structural changes in the market may render the factor newly irrelevant.

  • Structural changes in the economy may make a particular accounting-based expression ineffective in capturing the factor premium.

  • Recent performance may disappoint because the style or factor is becoming cheaper as the factor reaches new lows in relative valuation.

  • Finally, flagging performance may be a result of a left-tail outlier or simple bad luck.

The first three reasons (among others) might imply the style no longer works, but the last three reasons have no such implications.

Many investors are reexamining their exposure to value investing because of the extraordinary span of underperformance—from 2007 to mid-2020, and counting—relative to growth investing. In that period, the standard high book-to-market minus low book-to-market (HML) factor based on the book-to-price ratio (B/P) of Fama and French (1993) experienced a drawdown of –55%. As of June 2020, the current drawdown is the largest drawdown observed since June 1963.1 Given the long historical record of value investing and its solid economic foundations (dating back to the 1930s and, less formally, dating back centuries), the strong performance up to 2007 is unlikely to have been a result of overfitting.

Our analysis suggests that the last three reasons have contributed the most to value’s travails. Specifically, we observe that B/P, in the standard value definition, tends to misclassify stocks as value and growth by failing to capture a company’s investments in intangible assets. Furthermore, in the last 13½ years, the relative valuation of value stocks in relation to growth stocks has become cheaper than ever before in history.2 Just as a stock may become cheap relative to its fundamentals, so may an investment style, strategy, or factor. As it becomes cheaper, its performance is poor, but that weak performance has nothing to do with future performance; indeed, if any mean reversion occurs in valuations, the poor performance may presage excellent future results. Because the relative valuation for the value factor has reached the lowest levels of the last 57 years, eclipsing even the depth of the tech bubble in 2000, this revaluation is by far the largest contributor to value’s underperformance. Finally, part of the underperformance cannot be distinguished from an extreme left-tail event.