Abstract
Recent value factor underperformance has called into question whether the value factor payoff is cyclically low, or if there are more structural challenges. We use a new approach to explore a link between the well-known macroeconomic exposures of traditional asset classes and those of value premia in a multi-asset context, focusing on country equities, bonds, and currencies in developed markets. Taking advantage of the cross-country inflation and growth expectations implicit in every value portfolio, we derive the net inflation and real growth characteristics embedded in each asset class carry portfolio at each point in time. Our analysis provides several insights: (1) Multi-asset value payoff is only weakly related to the global business cycle. (2) However, we find that the payoff to value portfolios is strongly linked to relative growth and inflation expectations across countries. (3) Over the last decade, we find that cheaper assets have had much lower net relative macro exposures compared to earlier time periods. This characteristic coincides with the period of unconventional central bank policies designed to lift global growth after the Global Financial Crisis (GFC).
Highlights
Value portfolios have delivered lackluster results over the last decade
While our value factor portfolios are constructed from a USD investor perspective, we find only a small correlation (0.17) with the US dollar index (DXY)
Because of concerns over low rates and slow global growth after the Global Financial Crisis (GFC), investors became willing to pay for scarce growth, while cheaper assets from countries with lower growth prospects have not been rewarded by markets over the recent decade
Summary
Value portfolios have delivered lackluster results over the last decade. On average, a diversified multi-asset value portfolio in developed markets generated about 0.60% annualized return per unit of risk from 1990–2009. The return of the same portfolio since 2010 was negative. Investors have not been compensated for their exposure to value for a full decade. Recent performance difficulties within value have left many investors wondering how to make sense of these results. The debate centers around several conflicting explanations: 1. Less robust value factor returns than expected, as a result of data mining, crowding, unrealistic trading costs, and “bad luck” (Arnott et al 2019; Baltussen et al 2019; Ilmanen et al 2019) The debate centers around several conflicting explanations: 1. Less robust value factor returns than expected, as a result of data mining, crowding, unrealistic trading costs, and “bad luck” (Arnott et al 2019; Baltussen et al 2019; Ilmanen et al 2019)
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