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The Agony of Value Investing

02/24/2019 By FactorBeta

Long suffering value investors have endured one of the worst stretches for value in well over 10 years. Just how bad? Consider the two graphs below:

The first chart illustrates the historical 10-year value premium using the Russell 1000 Value and Russell 1000 Growth indices (calendar year data). The 10-year premium ending 12/31/18 is the second worst premium in 40 years. The worst premium of -4.7% occurred on December 1999, which is not terribly surprising.

When examining the five worst premiums, three occurred over the last five years.

Looking at longer-term data using the Fama/French indices, a similar pattern emerges.
The 10-year premium ending 12/31/18 is the second worst premium in 82 years. The worst premium of -6.2% occurred 79 years ago on December 1939.

Similar to the Russell index data above, three of the worst periods for value materialized over the last five years.

Assuming historical return patterns repeat, value stocks generate higher returns vs. growth stocks at least 60% or more on rolling 10-year time periods (depending on the data series). There is no reason to believe the value premium will not return although the timing is uncertain.

Long-term data shows value investors must endure challenging periods where value stocks do not deliver excess returns. However, if periods such as these did not exist, there would be no risk or risk premium available for investors to exploit, which is a similar characteristic of most if not all risky investments. Those investors with enough fortitude and discipline, could once again reap the rewards of value stocks, even though it can be a lonely and challenging road to travel.

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