Reports of Value’s Death May Be Greatly Exaggerated

Abstract

Value investing, as defined by the Fama–French HML factor, has underperformed growth investing since 2007, producing a drawdown of 55% as of mid-2020. The underperformance leads many to argue that value is dead. Our analysis attributes value’s recent underperformance to two sources: the HML book-value-to-price definition fails to capture the increasingly important intangible assets, and valuations of value stocks relative to growth stocks have tumbled. Both arguments are inconsistent with value’s death arguments. We capitalize intangibles and show that this measure of value outperforms the traditional measure by a wide margin. We also perform 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. Financial Analysts Journal, 2021, 77(1): 44–67. Data for our iHML factor can be downloaded here. First posted to SSRN: November 17, 2019.