Is the Value Premium Disappearing?

MJG

Hi Guys,

I don't believe that Ted posted this reference yet, but It just might impact the manner in which you do portfolo asset allocation.

Here is the Link to a recent article in a Wealth of CommonSense::

http://awealthofcommonsense.com/2016/09/is-the-value-premium-disappearing/

The article questions the sustainability of the value premium discovered decades ago by Fama and French. Over the last 10 years, it has not delivered the expected returns in the US marketplace. The author asks if it just a perturbation or a permanent sea change. He comes down on the perturbation side.

So do I. Trend deviations occur, even over a fairly long term period. Unless the investment world has dramatically changed, history demonstrates that a regression-to-the-mean is the most likely long term projection. Extrapolation into the future is always hazardous duty, but that's the name of the game when investing. Value products are still and will remain a portion of my portfolio. Regression reliably happens.

Best Regards.

VintageFreak

Many things have gravitated me toward all cap and when possible go anywhere funds. Value premium or not, when I saw Legg Mason Value Trust, I saw no value nor trust.

I decided better if one can find a manager that does not make excuses about growth not performing well or value not performing well for his performance. So if value premium is disappearing, hopefully that's not an excuse for my fund managers.

I do have a question. Isn't "regression to the mean" perceived by some as "value"? It has gone down for a long time so it is "value".

davidrmoran

>> You buy stocks for less than their fundamental value, wait until that value is recognized by the market, profit, then rinse and repeat until you’re rich.

The CAPE algorithms seem to be bearing out the value premium, if I am understanding either side correctly.

JoJo26

The value premium will persist, IMO. We, as humans, tend to overreact to information, specifically to negative information. We extrapolate any negative event way too far into the future. For this reason, when things turn awry we, we unfairly punish companies with great long-term prospects, creating the "value" opportunity. While there will undoubtedly by periods when value is out of favor, longer-term I don't see human nature changing so over full market cycles, the strategy should add some value.

gmarceau

Looking at the returns so far this year for two of the most value concentrated funds- TDVFX and AVALX- the premium is probably still there, but in the short term, not so much.

The smart beta funds don't even come close since they do some sort of 'value light'. I'm not too sure though that one is really better than the other unless you can stick to the strategy and with Towle and Aegis, you likely need to do some form of market timing to really get the benefits.

Charles

Thanks MJG. Been thinking about this very situation. Lots of "value" managers under-performing vs SP500 last 5-7 years. Hard to know exactly why. Some of them blame ZIRP. Others acknowledging that the value premium is something you can only count on over the long run, the length of which is also hard to specify. Ten years certainly seems like "the long run" ... indeed it is compared to holding time of most individual and even institutional investors! But, not so sure it is for any one strategy or another. Some value managers are actually pointing to the under-performance as evidence that they are on the right track! And, it's hard to knock them. And I've heard others say that some value metrics have actually performed OK. In any case, like JoJo26, I too believe the value premium will ultimately persistent. If a manager is consistently executing a startegy, and you agree with that stratetgy, I say investors should try to stick with it ... as hard as that may be to do. Hope all is well. c

golub1

I say investors should try to stick with it ... as hard as that may be to do. " I think as a former dedicated value investor that it is just too hard. Buying what is performing doing well and switching when its not is probably a better strategy for most investors. the difficult of sticking with value funds which have under performed like in the last 5-7 years is just too difficult for most investors. They wind up selling out before the trends change and most the rebound.

davidrmoran

>> Buying what is performing doing well and switching when its not is probably a better strategy for most investors.

All studies of this show that it guarantees lesser, aka investor, returns.

JoJo26

Chase chase chase => Lose lose lose