Value Investing

Asness C, Frazzini A, Israel R, Moskowitz T. Fact, Fiction, and Value Investing. Journal of Portfolio Management. 2015;42(1):34-52.

"Value investing has been a part of the investment lexicon for the better part of a century, with the diversified systematic value factor (or value effect) studied extensively since at least the 1980s. The authors aim to clarify the many remaining areas of confusion about value investing, focusing on the diversified systematic value strategy, but also exploring how this strategy relates to its more concentrated implementation. They highlight many points about value investing and attempt to prove or disprove each of them, referencing an extensive academic literature and performing simple, yet powerful, tests based on easily accessible, industry-standard public data. "

Bunn, Oliver and Shiller, Robert J., Changing Times, Changing Values: A Historical Analysis of Sectors within the US Stock Market 1872-2013 (June 2014). Cowles Foundation Discussion Paper No. 1950.

"We construct a price, dividend, and earnings series for the Industrials sector, the Utilities sector, and the Railroads sector from the beginning of the 1870s until the beginning of the year 2013 from primary sources. To infer about mispricings in the sector markets over more than a century, we investigate the forecasting power of the Cyclically Adjusted Price-Earnings (CAPE) ratio for these sectors. With regard to the CAPE ratio, which has originally been devised and employed by Campbell and Shiller (1988, 1998, 2001) as well as Shiller (2005), we define a methodological improvement to this ratio to not only be robust to inflationary changes, but also to changes in corporate payout policy. We then update the original evidence from Campbell and Shiller (1998, 2001) of the return predictability of the CAPE ratio for the overall stock market and furthermore extend this evidence to the three aforementioned sectors individually. Whereas this part of our analysis focuses on each sector of the US economy in isolation, we subsequently construct an indicator from the CAPE ratio that enables us to perform valuation comparisons across sectors. In addition to establishing the prediction of subsequent return differences based on differences in the CAPE-based valuation indicator, we also suggest a hypothetical, historical, and simple value investment strategy that rotates between the three sectors based on the valuation signals derived from the CAPE-based indicator, generating slightly more than 1:09% annualized, inflation-adjusted excess total return over the market benchmark during a period of nearly 110 years."

Fama, Eugene F. and French, Kenneth R., Value Versus Growth: The International Evidence (August 1997)

"Value stocks have higher returns than growth stocks in markets around the world. For 1975-95, the difference between the average returns on global portfolios of high and low book-to-market stocks is 7.60% per year, and value stocks outperform growth stocks in 12 of 13 major markets. An international CAPM cannot explain the value premium, but a two-factor model that includes a risk factor for relative distress captures the value premium in international returns."

Asness, Cliff S. and Liew, John M. and Pedersen, Lasse Heje and Thapar, Ashwin K, Deep Value (December 1, 2017).

"We define “deep value” as episodes where the valuation spread between cheap and expensive securities is wide relative to its history. Examining deep value across global individual equities, equity index futures, currencies, and global bonds provides new evidence on competing theories for the value premium. Following these episodes, the value strategy has: (1) high average returns; (2) low market betas, but high betas to a global value factor; (3) deteriorating fundamentals; (4) negative news sentiment; (5) selling pressure; (6) increased limits to arbitrage; and (7) increased arbitrage activity. Lastly, we find that deep value episodes tend to cluster and a deep value trading strategy generates excess returns not explained by traditional risk factors."

Asness, Cliff S. and Moskowitz, Tobias J. and Pedersen, Lasse Heje, Value and Momentum Everywhere (June 1, 2012). Chicago Booth Research Paper No. 12-53; Fama-Miller Working Paper.

"We study the returns to value and momentum strategies jointly across eight diverse markets and asset classes. Finding consistent value and momentum premia in every asset class, we further find strong common factor structure among their returns. Value and momentum are more positively correlated across asset classes than passive exposures to the asset classes themselves. However, value and momentum are negatively correlated both within and across asset classes. Our results indicate the presence of common global risks that we characterize with a three factor model. Global funding liquidity risk is a partial source of these patterns, which are identifiable only when examining value and momentum simultaneously across markets. Our findings present a challenge to existing behavioral, institutional, and rational asset pricing theories that largely focus on U.S. equities."

Lobão, J., & Azeredo, M. (2018). Momentum meets value investing in a small European market. Portuguese Economic Journal, 17(1), 45–58.

"In this paper, we investigate two prominent market anomalies documented in the finance literature – the momentum effect and value-growth effect. We conduct an out-of-sample test to the link between these two anomalies recurring to a sample of Portuguese stocks during the period 1988–2015. We find that the momentum of value and growth stocks is significantly different: growth stocks exhibit a much larger momentum than value stocks. A combined value and momentum strategy can generate statistically significant excess annual returns of 10.8%. These findings persist across several holding periods up to a year. Moreover, we show that macroeconomic variables fail to explain value and momentum of individual and combined returns. Collectively, our results contradict market efficiency at the weak form and pose a challenge to existing asset pricing theories."

Sarwar, G., Mateus, C., & Todorovic, N. (2017). A tale of two states: asymmetries in the UK small, value and momentum premiums. Applied Economics, 49(5), 456–476.

"This article performs comparative analysis of the asymmetries in size, value and momentum premium and their macroeconomic determinants over the UK economic cycles, using Markov switching approach. We associate Markov switching regime 1 with economic upturn and regime 2 with economic downturn. We find clear evidence of cyclical variations in the three premiums, most notable being that in the size premium, which changes from positive in expansions to negative in recessions. Macroeconomic indicators prompting such cyclicality the most are variables that proxy credit market conditions, namely the interest rates, term structure and credit spread. Overall, macro factors tend to have more significant impact on the three premiums during economic downturns. The results are robust to the choice of information variable used in modelling transition probabilities of the two-stage Markov switching model. We show that exploiting cyclicality in premiums proves particularly profitable for portfolios featuring small cap stocks in recessions at a feasible level of transaction costs."

Al-Mwalla, M. (2012). Can Book-to-Market, Size and Momentum be Extra Risk Factors that Explain the Stocks Rate Of Return?: Evidence from Emerging Market. Journal of Finance, Accounting & Management, 3(2), 42–57.

"The main objective of this study is to test the ability of different asset pricing models Fama & French three factor model and the augmented Fama & French Four Factor model, to explain the variation in stocks rate of return over the period from June 1999 to June 2010. The study also investigates the existence of the size and value Momentum effects in ASE. The study found a strong size and strong positive value effects in ASE. The study results indicate that the Fama & French three factor model provide better explanation to the variation in stocks rates of return for some portfolios and is better than the augmented Fama - French Four -Factor model."

Blitz, David and van Vliet, Pim, Global Tactical Cross-Asset Allocation: Applying Value and Momentum Across Asset Classes (2008). Journal of Portfolio Management, pp. 23-28, Fall 2008

"In this paper we examine global tactical asset allocation (GTAA) strategies across a broad range of asset classes. Contrary to market timing for single asset classes and tactical allocation across similar assets, this topic has received little attention in the existing literature. Our main finding is that momentum and value strategies applied to GTAA across twelve asset classes deliver statistically and economically significant abnormal returns. For a long top-quartile and short bottom-quartile portfolio based on a combination of momentum and value signals we find a return exceeding 9% per annum over the 1986-2007 period. Performance is stable over time, also present in an out-of-sample period and sufficiently high to overcome transaction costs in practice. The return cannot be explained by implicit beta exposures or the Fama French and Carhart hedge factors. We argue that financial markets may be macro inefficient due to insufficient 'smart money' being available to arbitrage mispricing effects away."

Pätäri, E., Leivo, T., & Honkapuro, S. (2012). Enhancement of equity portfolio performance using data envelopment analysis. European Journal of Operational Research, 220(3), 786–797.

"This paper examines the applicability of data envelopment analysis (DEA) as a basis of selection criteria for equity portfolios. It is the first DEA application for constructing a combined equity investment strategy that aims to integrate the benefits of both value investing and momentum investing. The 3-quantile portfolios are composed of a comprehensive sample of Finnish non-financial stocks based on their DEA efficiency scores that are calculated using three variants of DEA models (the constant returns-to-scale, the super-efficiency, and the cross-efficiency models). The performance of portfolios is evaluated on the basis of the average return and several risk-adjusted performance metrics throughout the 1994–2010 sample period. The results show the capability of the DEA approach to add value to equity portfolio selection. The outperformance of the top 3-quantile DEA portfolios in contrast to both the comparable bottom portfolio and the stock market average is statistically significant on the basis of all performance measures employed. The outperformance is slightly more significant when the stock price momentum is included in the DEA variables. The methodology employed offers an interesting alternative for detecting the outperforming stocks of the future by capturing both the price momentum and several dimensions of relative value simultaneously. DEA is particularly useful as a multicriteria methodology in cases in which the number of stocks in the sample is large. It therefore also has useful implications to practical portfolio management."