Value Badly Lagging Glamour: The Value Premium Is Now A Discount

By: greenbackd

Two interesting charts from The Brandes Institute’s annual Value versus Glamour update for 2013. The first exhibit (2) shows the disappearance of the value premium over the last five years, and its inversion over the last two years. The yellow dotted line shows the average returns to the ten decile portfolios of stocks ranked by price-to-book value from 1968 to 2012. It demonstrates that, historically, the higher the price-to-book value, the lower the returns. The differential between the returns to the stocks in decile 10 (the “value” portfolio) and decile 1 (the “glamour” portfolio) is the value premium. That relationship seems to have broken down since 2007 (shown in blue), and inverted since 2010 (shown in red). The value premium is now a value discount!

value premium

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The second exhibit (3) shows the rolling five-year annualized relative performance of value over glamour. In the last two rolling five-year periods, value stocks in the U.S.–marked in yellow–have delivered their worst relative performance in the 32 years of data from 1980. The Non-U.S. value stocks have continued to outperform.

Rolling Five-Year Value versus Glamour

As the second exhibit demonstrates, it’s unusual for value to underperform glamour by so much and for so long. The last period of underperformance occurred in 2000, and it wasn’t as deep or prolonged. One possible explanation is that low p/b value strategies are now so well known and low p/b value stocks are so picked over that value investors have to do something special to outperform. More likely is that this is a brief period of underperformance at the tail end of a bull market and the relative performance of value over subsequent periods will compensate.

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My name is Tobias Carlisle. I am the founder and managing member of Eyquem Investment Management LLC, and portfolio manager of Eyquem Fund LP. Eyquem Fund LP pursues a deep value, contrarian, Grahamite investment strategy based on the research featured in Quantitative Value: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors (hardcover, 288 pages, Wiley Finance, December 26, 2012), and discussed on Greenbackd. I have extensive experience in activist investment, company valuation, public company corporate governance, and mergers and acquisitions law. Prior to founding Eyquem, I was an analyst at an activist hedge fund, general counsel of a company listed on the Australian Stock Exchange, and a corporate advisory lawyer. As a lawyer specializing in mergers and acquisitions I have advised on transactions across a variety of industries in the United States, the United Kingdom, China, Australia, Singapore, Bermuda, Papua New Guinea, New Zealand, and Guam, ranging in value from $50 million to $2.5 billion. I am a graduate of the University of Queensland in Australia with degrees in law and business (management). Contact me I can be contacted at greenbackd [at] gmail [dot] com. I welcome all feedback. Connect on LinkedIn, where we’re Friends.