Value vs. Glamour: A Global Phenomenon via Brandes
H/T Wendl Financial
In previous versions of our Value vs. Glamour study we have explored the historical performance of stocks based on their fundamental characteristics and quantified a value premium. Results have shown that over the long term, unpopular “value” stocks, those that are associated with companies experiencing hard times, operating in mature industries or facing adverse circumstances have outperformed their more popular “glamour” counterparts—fast-growing companies, oft en from dynamic industries with a relatively high profile. Expanding on the work of noted academics, we extended the scope of their research to determine if the value premium was consistent across global markets. In this update from our 2010 work, we expand our study through 2012 to include the recent worldwide economic downturn in developed markets and examine if value investing has worked in emerging markets over the long term.
Value vs. Glamour: Focus and Key Findings
Th is paper does not attempt to resolve why the value premium is evident, or explain its persistence. Instead, it seeks to quantify the value premium and gauge its prevalence. By examining returns for U.S. stocks from 1968-2012 and stocks outside of the U.S. from 1980-2012, this study reveals a consistent value premium across:
- valuation metrics
- market capitalizations
Exhibit 1 shows, over the long term, there remains strong evidence of a global value premium. However, returns for all stocks dropped on average since 2007, those in the value deciles fell more than those in the glamour deciles. Exhibit 1 shows that value decile 10 had an annualized average return of 15.7% through 2007 and 14.2% over the entire period, a difference of 1.5%. Th e disparity between the two periods in decile 1 was only 0.8%; reflecting the difficult environment for value stocks over the past few years.
A closer examination of the recent underperformance of U.S. value stocks off ers some evidence of what may be weighing on global results. Exhibit 2 shows a comparison between long-term results for U.S. value stocks compared to the results of the past fi ve and two year rolling periods. Th e long-term results for the overall study show evidence of a clear value premium, with the low-price-to-book (P/B) value decile 10 averaging an annualized 12.8% return, while returns for the high-P/B glamour decile 1 averaged 4.3%. Th e shorter-term results are less clear. Th e average returns for the last fi ve 5-year rolling periods appear fl at across the value/glamour spectrum, while the last two rolling periods show that glamour has outperformed value recently in the United States. In this short time frame, decile 1 stocks posted an average gain of 2.3%, while decile 10 stocks registered a -6.9% return.
As seen in Exhibit 3, while value stocks in the United States underperformed glamour stocks in the past two periods, non-U.S. value stocks (lift ed by small caps) continued to outperform glamour.
Th is trend continues when looking at emerging markets. Exhibit 4 shows the notable outperformance of value stocks in emerging markets, both in relation to glamour stocks and to U.S. and non-U.S. value stocks. While the recent underperformance of value stocks is noteworthy, the long-term results confirm a historically persistent value premium measurable across global equity markets.
In 1934’s Security Analysis, Benjamin Graham and David Dodd argued that out-of-favor stocks are sometimes underpriced in the marketplace, and that investors cognizant of this phenomenon could capture strong returns. Conversely, the duo theorized, prices for widely popular stocks oft en are buttressed by high expectations and could be vulnerable if these expectations prove too enthusiastic.
The philosophy espoused by Graham and Dodd is now widely known as value investing, and the unpopular value stocks they advocated oft en are associated with companies experiencing hard times, operating in mature industries or facing similarly adverse circumstances. Alternatively, typically fast-growing glamour companies frequently function in dynamic industries with a relatively high profi le. Th is stark contrast in attributes leads to a natural question: which stocks have performed better, value or glamour?
While this is not a simple inquiry, we believe historical analysis may shed light on the relative performance of value stocks and glamour stocks—largely because their divergent traits often manifest in their respective valuation metrics.