Where’s the Value?
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From 1975–2017 the value premium in Europe has had a positive annualised return of approximately 2.2%. In six of the last ten calendar years, however, the value premium in Europe has been negative. The same trend has been seen across developed markets globally.
This has prompted some investors to wonder if such an extended period of underperformance may be cause for concern. But are periods of underperformance in the value premium that unusual? We can look to history to help make sense of this question.
There are numerous empirical studies documenting the value premium using different empirical techniques on 90 years of US data as well as over 40 years of data for developed markets outside of the US that point to reliably positive premiums in the long term.
Exhibit 1 shows yearly observations of the US value premium going back to 1928. We can see the annual arithmetic average for the premium is close to 5% in USD terms, but in any given year the premium has varied widely, sometimes experiencing extreme positive or negative performance. In fact, there are only a handful of years that were within a 2% range of the annual average—most other years were farther above or below the mean. In the last 10 years alone there have been premium observations that were negative, positive, and in line with the historical average. This data helps illustrate that there is a significant amount of variability around how long it may take a positive value premium to materialise.
Exhibit 1. Yearly Observations of Premiums, Value minus Growth: US Markets, 1928–2017
In US dollars. The one-year relative price premium is computed as the one-year compound return on the Fama/French US Value Research Index minus the one-year compound return on the Fama/French US Growth Research Index. Fama/French indices provided by Ken French. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results.
But what about longer-term underperformance? While the current stretch of extended underperformance for the value premium may be disappointing, it is not unprecedented. Exhibit 2 documents 10-year annualised performance periods for the value premium within the US market, sorted from lowest to highest by end date (calendar year).
This chart shows us that the best 10-year period for the value premium was from 1941–1950 (at top), while the worst was from 1930–1939 (at bottom). In most cases, we can see that the value premium was positive over a given 10-year period. As the arrow indicates, however, the value premium for the most recent 10‑year period (ending in 2017) was negative. To put this in context, the most recent 10 years is one of 13 periods since 1937 that had a negative annualised value premium. Of these, the most recent period of underperformance has been fairly middle-of-the-road in magnitude.
Exhibit 2. Historical Observations of 10-Year Premiums, Value minus Growth: US Markets 10-Year Periods ending 1937–2017
In US dollars. The 10-year rolling relative price premium is computed as the 10-year annualised compound return on the Fama/French US Value Research Index minus the 10-year annualised compound return on the Fama/French US Growth Research Index. Fama/French indices provided by Ken French. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results.
While there is uncertainty around how long periods of underperformance may last, historically the frequency of a positive value premium has increased over longer time horizons. Exhibit 3 shows the percentage of time that the value premium was positive over different time periods going back to 1926 for the US market and 1975 for developed markets outside of the US. When the length of time measured increased, the chance of a positive value premium increased.
Exhibit 3. Historical Performance of Premiums over Rolling Periods, US Markets, July 1926–December 2017
Historical Performance of Premiums over Rolling Periods, Developed ex-US, January 1975–December 2017
In US dollars. Based on rolling annualized returns using monthly data. Rolling multiyear periods overlap and are not independent. Fama/French indices provided by Ken French. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results.
For example, we can see that the realised value premium over a one-year horizon (using overlapping periods) has been positive around 61% to 69% of the time across US and developed ex US markets. When the time period measured is lengthened to 10 years, the frequency of positive average premiums increased to 84% and above.
What does all of this mean for investors? While a positive value premium is never guaranteed, the premium has historically had a greater chance of being positive the longer the time horizon observed. Even with long-term positive results though, periods of extended underperformance can happen from time to time. Because the value premium has not historically materialised in a steady or predictable fashion, a consistent investment approach that maintains emphasis on value stocks in all market environments may allow investors to more reliably capture the premium over the long run. Additionally, keeping implementation costs low and integrating multiple dimensions of expected stock returns (such as size and profitability) can improve the consistency of expected outperformance. Finally, after this extended period of underperformance of value stocks relative to growth stocks we are now in a position with a historically large valuation gap between value and growth stocks (difference in average value of the value stocks relative to the average value of the growth stocks).
. The value premium is the return difference between stocks with low relative prices (value) and stocks with high relative prices (growth).
. Computed as the return difference between the Fama/French Europe and Scandinavian Value Research Index and the Fama/French Europe and Scandinavian Growth Research Index. Fama/French indices provided by Ken French. Index descriptions available upon request.
Source: Dimensional Fund Advisors LP.
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Eugene Fama and Ken French are members of the Board of Directors of the general partner of, and provide consulting services to an affiliate of Dimensional Fund Advisors Ltd.
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