Why Value Investors Shouldn’t Expect a ‘Massive’ Comeback
A skeptical case from the Man Group’s top quant.
Despite a “chorus singing the virtues of value” investing during this a long period of underperformance, at least one investment chief has doubts.
“While there is no debate over the recent difficulties of value, and it is true that historically value has recovered strongly following periods of poor performance, that is a fairly weak intellectual argument,” argued Daniel Taylor of Man Numeric — the Man Group’s quantitative investment unit — in a paper set for release today by the firm’s research unit.
He doesn’t believe value investing strategies are permanently broken. But Man Numeric is “not quite as bullish” about value as some of its peers, Taylor said in an interview with Institutional Investor.
“My base case for value is that it can and should start working again,” Taylor said. “It just may not be at levels that are historically normal.”
Many of the arguments for a value comeback are “coming from a possibly biased portion of the buy-side community, namely those that rely on value (either systematically or fundamentally),” he noted in the paper.
In the hopes of providing an “intellectually honest and balanced view,” Taylor analyzed several of the potential indicators that other investors, analysts, and academics have used to determine the opportunity set for value investors. Some indicators, such as the “wider-than-average” gap between the cheapest and most expensive stocks, make for a compelling argument, the chief investment officer wrote.
But the size of that gap depends on how it is measured, Taylor said. The classic Fama-French definition of the value factor — the book-to-price ratio — makes the dispersion look extraordinarily wide. Other value metrics, however, make the global opportunity set seem average, even if the U.S. and emerging markets remain “moderately attractive.”
“Looking at the totality of the evidence, the outlook for value may not be quite as rosy as many investors expect,” he wrote.
Speaking to II, Taylor said that a “massive value snapback” in line with the aftermath of the tech bubble would require a significant rebound in interest rates. Lower interest rates, economic growth, and inflation have contributed to value’s underperformance, in his view, and he expects them to stay low.
“I think the environment going forward will be much friendlier,” he said. “What I can’t have a lot of personal conviction in is there will be this violent snapback.”