Investors should not give up on value investing yet, according to a study of value-based strategies’ underperformance over the last decade in comparison to the history and theory supporting them. Recent underperformance has led some to question whether systematic value strategies are now broken.

The poor performance for value strategies has led some to revisit the original evidence in support of the price-to-book ratio, which was popularized as a fundamental indicator of underpriced stocks by Eugene Fama and Kenneth French.

However, investors who want to see returns from value investing should not focus their strategy on just one measurement. Book value is not the only fundamental indicator of price. A value approach should use a multitude of factors, including both historical and near-term forecasts of book equity, sales, earnings and cash flow.

A limitation of all valuation approaches is the quality of a stock’s underlying data. Book value may be limited by accounting that misses intangible assets or variations in business structures by industry, but this can be moderated by comparing stocks within the same industry. The authors of the study expect the financial reporting system to develop as needed to provide investors with indicative measures of intrinsic value.

The study found that value strategies have not suffered because of being “too well known” to investors. Awareness of a measure does not mean that it is no longer an effective measure of expected returns. Awareness and increased participation of investors may reduce the return benefits from errors in expectations but that does not mean the risk premium disappears.

Value strategies have suffered over the last decade due to a lower relevance of stock fundamentals to returns, conclude the authors of the study. Fundamentals matter to stock returns, but there are periods where stock prices become tenuously linked to fundamental data, their analysis shows.

Value strategies incorporated with other well-known factors, such as momentum or quality, add beneficial diversification.

Source: “Is (Systematic) Value Investing Dead?” by Ronen Israel, Kristoffer Laursen and Scott Richardson; SSRN, March 2020.