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Performance of Value During Market Drawdowns (June 1951 to December 2013)

Performance of Value During Market Drawdowns (June 1951 to December 2013) by GreenBackD

As we’ve seen over the last few weeks, value has comprehensively outperformed glamor stocks since 1951. Value also outperforms the market. Whether we examine the simple fundamental metrics like the price-to-earnings (PE) ratio, the price-to-book value (PB) ratio, and the price-to-cashflow (PCF) ratio, the dividend yield or a compound model of all excluding the dividend yield, all outperform.

Set out below are the results of Fama and French backtests of the equal weight portfolios of each metric’s value decile using data from June 1951 to December 2013 and the market. As at December 2013, there were 2,406 firms in the sample. Stocks with negative earnings, cashflow, or book value were excluded. Portfolios are formed on June 30 and rebalanced annually.

The “market” here is an equal weight, and total return average of all deciles, and includes stocks with negative earnings, cashflow, or book value.

Value Deciles and Market Compound Returns (June 1951 to December 2013)

Value Deciles and Market Drawdowns (June 1951 to December 2013)

Most of this outperformance is to the upside. When the market turns down, value tends to drawdown along with the market. The following chart shows the drawdowns to each of the value deciles and the market.

Value Deciles Market Drawdowns

The chart really shows the enormity of the 2007 to 2009 credit crisis. Outside the 1929 crash, which I’ll examine at a later date, every other drawdown pales beside the credit crisis.

Value Decile Drawdowns Relative to the Market (Portfolio Constituents Equally Weighted) June 1951 to December 2013

This chart shows the performance in a drawdown of each of the value deciles relative to the market. Market drawdowns greater than 10 percent are indicated by the grey bars on the chart. Where the lines for each value metric are below the 0 percent midline, the value metric has drawn down further than the market, and where the lines are above the 0 percent midline, value has outperformed in the drawdown.Value Deciles Market Drawdowns


We can see in the chart that, when the market is in a drawdown, the value deciles tend to drawdown faster, and further, and then recover earlier. We can observe this in the  late 1990s-from 1998 until 2000–when value struggled, and then from the early 2000s when value outperformed. We can also see it in the last big drawdown from 2007 to late 2008 when value fell further than the market, and then recovered faster from early 2009.

In a drawdown, value is below the line about twice as often as it is above the line.

Value has comprehensively outperformed the market over a very long period of time. Most of this outperformance seems to the upside. Despite the received wisdom that value has protected portfolios in a drawdown, it seems that value has fallen along with the market. When it does enter a drawdown, value stocks seem to fall first, and at a faster rate than the market, but they also tend to recover earlier, and faster.

Volatility and drawdowns are part and parcel of investing. To generate the extraordinary returns of the value deciles, it was necessary to remain fully invested in those value stocks through thick and thin. My firm, Eyquem, offers low cost, fee-only managed accounts that implement a systematic deep value investment strategy. Please contact me by email at [email protected] or call me by telephone on (646) 535 8629 to learn more.

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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.