– Strategies with the most value exposure tend to outperform when value is strong. But many investment managers who target value fail to fully capture the premium.
– We expect value stocks to outperform every day, so we seek to maintain a consistent focus on value stocks.
– Investors can put this information to use when evaluating whether value-focused strategies deliver on expectations.
Value is an asset class, not an investment strategy.
Identifying low relative price stocks is only one step toward designing and managing a value strategy; differences in implementation skill can lead to a wide range of outcomes experienced by value investors.
Investors can evaluate these outcomes by assessing whether the manager delivered what they said they would deliver.
In the case of systematic value strategies, strong performance during periods when value stocks outperform signals an ability to capture value premiums when they appear.
“Our value strategies seek to maintain a consistent focus on value stocks, day in and day out, because we expect a positive value premium every day.”
A Difference of Opinion
If 80% of success is just showing up, it follows that exposure to value stocks is a helpful start to capturing the value premium.
However, even within a value category, exposure to low relative price stocks varies substantially across funds. For example, the world large cap value Morningstar category over the 10-year period ending 31 December 2022, had average price-to-book ratios ranging from 1.3 to nearly 2.3.
That variation means not all funds in the category shared the same experience when the value premium manifested.
In months when the MSCI World ex Australia Value Index outperformed the MSCI World ex Australia Growth Index, the average monthly net return for these funds ranged from 0.78% to 1.74%.
A cursory inspection of the returns plotted against price-to-book ratios for these months in Exhibit 1 reveals a negative relation between the two; all else equal, the greater the value exposure, the better the performance.
EXHIBIT 1
Categorical Imperative
Performance vs. price-to-book for large cap value funds in months when value outperforms growth, January 2013–December 2022
Testing Grounds
TRAC’s value strategies seek to maintain a consistent focus on value stocks, day in and day out. We do this because we expect a positive value premium every day.
While realised premiums can be negative, there is no evidence investors can reliably predict such occurrences.1
On the other hand, there is ample evidence the value premium can show up in bunches.2
A process that stays the course in its pursuit of value can therefore boost the odds of harvesting the premium when value stocks outperform.
Strong recent returns of value stocks provide an opportunity to highlight the benefits of this approach through the lens of performance in periods of positive premiums.
Exhibit 2 reports net returns for Dimensional’s Global Value Trust, Emerging Markets Trust, and Australian Value Trust in excess of reference indices over both all months and in months when value stocks outperformed growth stocks over the past decade.
The results show outperformance across market segments and geographical regions. Through this lens, Dimensional’s value trusts delivered on their goal of capturing value premiums when they appeared.
EXHIBIT 2
Delivering the Goods
Average monthly returns in excess of reference indices for Dimensional value trusts, 1 January 2013–31 December 2022
Past performance is no guarantee of future results.
Buyer Being Aware
Even a period as short as one quarter can provide compelling evidence of whether managers delivered what they said they would deliver.
And delivering on expectations helps investors pursue goals by keeping the asset allocation decisions in their hands, not the manager’s.
After all, uncertainty over what you’re going to get should be reserved for boxes of chocolates, not investment strategies. Give us a call on 1300 78 55 77 if you’d like to talk to us about your investment strategies.
Glossary
Asset class: A group of securities that exhibit similar characteristics and are subject to similar laws and regulations, such as equities (stocks), fixed interest (bonds) and cash equivalents (money market instruments).
Premium: A return difference between two assets or portfolios.
Price-to-book ratio: The ratio of a firm’s market value to its book value, where market value is computed as price multiplied by shares outstanding and book value is the value of a stockholder’s equity as reported on a company’s balance sheet.
Relative price: A company’s price, or the market value of its equity, in relation to another measure of economic value, such as book value.
Value premium: The return difference between stocks with low relative prices (value) and stocks with high relative prices (growth).
Value stocks: A stock trading at a low price relative to measures of economic value, such as book value or earnings.
Footnotes
1 Warwick Schneller and Alexander Lennon, “Premium Timing with Valuation Ratios in the Australian Market”(research paper, Dimensional Fund Advisors, August 2019).
2“An Exceptional Value Premium,” Insights (blog), Dimensional Fund Advisors, October 2020.
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Risks
Investments involve risks. The investment return and principal value of an investment may fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original value. Past performance is not a guarantee of future results. There is no guarantee strategies will be successful.
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