It's Time to Add Capital to Your Value Fund

By: John Alberg and Michael Seckler

We recently saw an analysis from StarCapital that provided context for how this market environment resembles the late 1990s and other periods when value strategies underperformed.

As we found their slide to be interesting, we decided to do our own analysis using the same source data to better understand and expand on their results.   

The chart above plots the trailing five-year annualized return of a hypothetical portfolio (the Value vs. Growth portfolio) that goes up when value stocks are outperforming growth stocks and down when growth is outperforming value. The returns of the Value vs. Growth portfolio were constructed using data that can be found at Kenneth R. French’s website, where a value stock is defined as one having high Book Equity to Market Equity. In this case, we are looking at the relative performance of the 20% least expensive (VALUE) companies in relation to the 20% most expensive (GROWTH) companies. All returns are compounded monthly.

The chart also shows that value outperforms growth across most five-year periods and does so by roughly 5% annualized over time. However, since World War II, there have been six distinct periods when growth outperformed value on a trailing five-year compounded return basis. We are currently in one of these periods; the last time this happened was during the dot-com era.

As shown in the above chart, during the previous five periods when growth outperformed value, value subsequently delivered very strong results over the subsequent 5+ years. In the current cycle, the value rebound has not yet occurred.

In addition to the logic of buying shares in companies at inexpensive prices, we believe this data supports a decision to move capital away from growth-oriented strategies and into value-focused investments.

Would you like to reproduce these results in the R programming language and from the source data website? Click here to get the code that generates the first chart and here for the second chart.  


Historical results represented herein are for illustrative purposes only and are not based on actual performance results. The hypothetical portfolio and the associated returns do not reflect the effect of transaction costs, bid/ask spreads, slippage, or management fees. Historical results are not indicative of future performance.

All results and the analysis described in the above post exclusively used data obtained from Kenneth R. French’s research data library hosted at http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html.

To construct the hypothetical set of returns representing the outperformance of value over growth, we used the particular data file at http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/ftp/25_Portfolios_5x5_CSV.zip. This dataset contains the returns of 25 portfolios. The portfolios, which are constructed at the end of each June, represent the intersections of five portfolios formed on size (market equity, ME) and five portfolios formed on the ratio of book equity to market equity (BE/ME). 

In our analysis we constructed a hypothetical portfolio (the Value vs. Growth portfolio) that goes up when value stocks are outperforming growth stocks and goes down when growth stocks are outperforming value stocks. We calculated the monthly returns for the value vs. growth portfolio to be equal to the average of the five high BE/ME portfolios minus the average of the five low BE/ME portfolios in the dataset referenced above. All returns in our analysis are compounded monthly.

Differences between this analysis and the referenced similar analysis by StarCapital result from slight differences in methodology (e.g., the files in the data library the portfolio returns are constructed from and whether simple or compound returns were used to calculate trailing 5-year rolling returns, annualized returns, and cumulative returns). In our case, we used compound returns throughout.