Is (Systematic) Value Investing Dead?

This is a dedicated piece about value investing in equity markets. The efficacy of value investing has been shown across many markets (e.g., Asness, Moskowitz, and Pedersen 2013), including stocks, bonds, currencies, and commodities, but our focus here is the equity market. Why? First, the performance of value strategies in equity markets has been poor for the last decade. Second, the equity market is where academics originally documented the existence of a return premium associated with value. The question we aim to address is whether value investing is now dead. Is a decade of underperformance for some well-known value strategies enough to throw in the towel (see, e.g., Fama and French 2020)? Is it the case that the strategy no longer works because (1) everyone knows about it or (2) times are different after the financial crisis (e.g., lower interest rates or changing business models in the new economy)?

What we have to say about value investing is not limited to systematic implementations of value portfolios (i.e., portfolios of stocks sorted on measures like book-to-price [B/P] and earnings-to-price [E/P]). We speak to the continued importance of fundamental information, and expectations thereof, for the determination of stock prices. Fundamental information related to firms’ business models should be at the heart of every investor’s toolkit. Value investors challenge the expectations of discounted cash flows implicit in price with their own view of the firm’s potential to generate cash flows (i.e., intrinsic value), with an expectation that price will revert to their view of intrinsic value. Where does such an “intrinsic” view come from? It comes from a deep understanding of the value creation potential of that firm, encompassing an understanding of the goods and services a company provides, the competitive landscape in which that firm operates, the potential for growth in the current (and future) mix of goods and services, and the associated changes in margins, required capital, and financing choices to deliver on that growth.

We start our piece with a short refresher on equity valuation models (discounted dividends and residual income valuation approaches), the purpose of which is a simple reminder of what you get when you buy a share: You are purchasing the right to participate in the dissemination of future free cash flows....