Value Investing Not Dead?

Based on the conventional definition of the value premium, value underperforms growth over last 13.5 years with maximum drawdown of a long value-short growth portfolio -55%. Is value investing dead? In the August 2020 update of their paper entitled “Reports of Value’s Death May Be Greatly Exaggerated”, Robert Arnott, Campbell Harvey, Vitali Kalesnik and Juhani Linnainmaa examine arguments that value investing is dead. They first employ bootstrapping to estimate the likelihood of the recent deep value premium drawdown by resampling 6-month value factor returns 1,000,000 times using the historical sample up to December 2006. They then examine the historical context of recent behaviors of each of three components of the value premium:

1. Migration rates of value (growth) stocks toward growth (value) due to mean reversion of the underpinning valuation ratio.
2. Relative profitability of value stocks versus growth stocks.
3. Relative valuation (average price-to-book value ratio) of value stocks versus growth stocks.

They assess statistically whether these recent behaviors signal temporary deviations or permanent changes in components of the value premium. Using value premium data for July 1963 through June 2020, they find that:

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