faj.v73.n2.2

© All Rights Reserved

7 views

faj.v73.n2.2

© All Rights Reserved

- 2014 q3 International Value Webcast Final7789C3B7080A
- Upside_ Why Most Value Investors Will Burn Out
- SAR_194857
- Seth-Klarman-2.pdf
- Source All Overview En
- TAF 2011 Annual Report
- Value investing
- Getting Better_ Deliberate Practice
- The Monarch Report 4/15/2013
- Nripa Final
- Getting Started in Value Investing Chapter 2
- Project Work for Additional
- HighYield Aristocrats Wppr
- Additional Mathematics Project 4 (completed)
- Add Math My Project
- Mutual Fund Project
- BIMBSec - Sector Update - Plantaion - 20120412
- BIMBSec - MMHE Company Update - 20120628
- Assetclasses Historically
- Market Commentary 3/4/13

You are on page 1of 19

Value Investing

U-Wen Kok, CFA, Jason Ribando, CFA, and Richard Sloan

U-Wen Kok, CFA, is chief investment officer of the RS Investments developed markets team at Victory Capital Management, San Francisco.

Jason Ribando, CFA, is senior director, predictive modeling, at Arch Mortgage Insurance Company, Walnut Creek, California. Richard Sloan is the

Emile R. Niemela Professor of Accounting and International Business at the Haas School of Business, University of California, Berkeley.

V

The term value investing is increas- alue investing is one of the most popular and endur-

ingly being adopted by quantitative ing styles of investing. The idea that investors should

investment strategies that use ratios buy securities that represent good value has obvious

of common fundamental metrics appeal. Yet the term value investing is increasingly being associ-

(e.g., book value, earnings) to market ated with quantitative investment strategies that use ratios of

price. A hallmark of such strate-

common fundamental metrics (e.g., book value or earnings) to

gies is that they do not involve a

price. Proponents of these strategies claim that they provide a

comprehensive effort to determine

the intrinsic value of the underlying simple and effective way to achieve superior investment per-

securities. We document two facts formance (e.g., Lakonishok, Shleifer, and Vishny 1994; Chan and

about such strategies. First, there Lakonishok 2004).

is little compelling evidence that

these strategies deliver superior Such investment strategies sound like easy wins for investors,

investment performance for US but our analysis reveals a less favorable assessment. The value

equities. Second, instead of identify- moniker creates the impression that these strategies identify

ing undervalued securities, these temporarily underpriced securities. But the strategies do not use

strategies systematically identify a comprehensive approach to identify temporarily underpriced

companies with temporarily inflated securities and have systematically failed to do so.

accounting numbers. We argue

that these strategies should not be Our findings can be summarized as follows:

confused with value strategies that

use a comprehensive approach in 1. We found little compelling evidence that a strategy of

determining the intrinsic value of the buying US equities that seem underpriced in light of simple

underlying securities. fundamental-to-price ratios provides superior investment

performance. The evidence does indicate that small-cap

Disclosure: RS Investments, an investment stocks that seem expensive given such ratios have under-

franchise of Victory Capital Management,

provided access to resources used to performed. Such stocks, however, are relatively capacity

conduct this research. U-Wen Kok is an constrained, illiquid, and costly to borrow, so the opportu-

employee of RS Investments, and Jason

Ribando was an employee of RS Investments

nity to exploit these lower returns in practice is unclear.

during the research and writing phases of

this article. Richard Sloan has served as a

paid consultant for RS Investments. The

views and opinions expressed in this article We are grateful to RS Investments and UC Berkeley for research support and to Henry

are those of the authors and do not neces- Laurion and Annika Wang for research assistance. We thank Cliff Asness, Stephen

sarily reflect the views of Victory Capital Brown (editor), Pete Comerford, Patricia Dechow, Ilia Dichev, Luis Garcia-Feijo, CFA,

Management, Arch Mortgage Insurance CIPM, (co-editor), Tim Loughran, CFA, Allen Michel, Scott Richardson, Steve Rossi,

Company, or their affiliates or employees. CFA, Matt Scanlan, CFA, and participants at the 2016 Macquarie Global Quantitative

Conference and the 2016 Annual Conference on Financial Economics and Accounting

CE Credits: 1 for helpful feedback.

Financial Analysts Journal | A Publication of CFA Institute

2. Instead of identifying underpriced securities, factor in dealing with investment values (p. 351).

simple ratios of accounting fundamentals to They add, But these earnings per share, on which

price identify securities for which the account- the entire edifice of value has come to be built, are

ing numbers used in the ratios are temporarily not only highly fluctuating but are subject also in

inflated. extraordinary degree to arbitrary determination

a. The book-to-market ratio systematically and manipulation (p. 352).

identifies securities with overstated book Instead, Graham and Dodd (1934) recommend

values that are subsequently written moving beyond reliance on simple fundamental

down. metrics to gain a more complete understanding

b. The trailing-earnings-to-price ratio sys- of the underlying securitys intrinsic value. To that

tematically identifies securities with tem- end, they suggest that the value investor use the

porarily high earnings that subsequently following three-step process:

decline.

The value investor should identify discrepan-

c. The forward-earnings-to-price ratio sys- cies between price and intrinsic value.

tematically identifies securities for which

sell-side analysts offer relatively more The intrinsic value of a security is determined

optimistic forecasts of future earnings. by its future earnings power.

Future earnings power should be determined

We conclude that quantitative investment strate- on the basis of a careful analysis of both quan-

gies based on such ratios are not good substitutes titative and qualitative factors.

for value-investing strategies that use a comprehen-

sive approach in identifying underpriced securities. Graham and Dodd (1934) summarize their

approach as follows: In the mathematical phrase,

a satisfactory statistical exhibit is a necessary

A Brief History of Value Investing though by no means a sufficient condition for a

The history of value investing is generally traced to favorable decision by the analyst (p. 40).

Security Analysis, the classic text on the subject by

Benjamin Graham and David Dodd (1934). In this Graham and Dodds comprehensive approach to

book, Graham and Dodd advocate the purchase value investing prevailed for about the next 50

of stocks that are trading at a significant discount years. The reversion to reliance on pricing mul-

to intrinsic value. In doing so, they are careful to tiples began to gain traction in the 1980s. A key

eschew a formulaic approach to the determina- catalyst for change was the introduction of com-

tion of intrinsic value. On the issue of investing by puters and the associated development of financial

using the book-to-market ratio, they state: databases, particularly the database of the Center

for Research in Security Prices (CRSP).

Some time ago intrinsic value (in the

case of a common stock) was thought CRSP was established at the University of Chicago

to be about the same thing as book in 1960 for the purpose of introducing the first

value, i.e., it was equal to the net assets comprehensive stock market database. Academic

of the business, fairly priced. This view research based on the CRSP database initially sup-

of intrinsic value was quite definite, but ported the view that security markets are largely

it proved almost worthless as a practi- efficient (see Fama 1970). By the 1980s, however,

cal matter because neither the average a large number of anomalies had emerged.

earnings nor the average market price Prominent examples included significant relation-

evinced any tendency to be governed

ships between future stock returns and stocks

by book value. (p. 17)

market capitalizations, leverage ratios, book-to-

Similarly, on the issue of using earnings, they cau- market ratios, and earnings-to-price ratios (see

tion that we must, therefore, utter an emphatic Fama and French 1992).

warning against exclusive preoccupation with this

Facts about Formulaic Value Investing

By the 1990s, the term value investing started the selection process. These investors

to be used to describe mechanical investment buy stocks from the low price portion

strategies based on simple ratios of accounting of the market, and are sometimes called

numbers to stock prices. Lakonishok et al. (1994) value or defensive/yield managers.

is a watershed academic study. To quote the first

Haughton and Christopherson (2009) considered

two sentences of that paper:

a number of valuation ratios and fundamental

For many years, scholars and invest- variables in deciding how to construct the Russell

ment professionals have argued that Price-Driven Index, ultimately settling on the exclu-

value strategies outperform the market sive use of the book-to-market ratio. Haughton and

(Graham and Dodd 1934 and Dreman Christopherson did not claim that the Russell Price-

1977). These value strategies call for Driven Index identified underpriced securities.

buying stocks that have low prices rela- The Russell Price-Driven Index was subsequently

tive to earnings, dividends, historical renamed the Russell 1000 Value Index, and growth

prices, book assets, or other measures variables were incorporated into its construction.

of value. (p. 1541)

In the years since, other index providers have

As previously explained, Graham and Dodd (1934) developed their own value indexes using various

did not in fact advocate buying stocks solely on the combinations of fundamental-to-price ratios. The

basis of such ratios, eschewing a purely statistical fundamental variables currently used by the major

approach to value investing. Nevertheless, the label index providers to construct their value indexes are

stuck, and many academics began equating ratio- summarized in Table 1.

based investing with value investing. For example,

These value indexes initially served as bench-

Fama and French (1998) referred to stocks with

marks for investment managers using traditional

high book-to-market ratios as value stocks.

value-investing techniques. But soon, quantita-

Practitioner use of the value moniker to describe tive investment funds relying primarily on such

investment strategies based on simple ratios has ratios began adopting the value moniker. An early

closely paralleled developments in academia. Until example is the Dimensional Fund Advisors US

the 1980s, the term was generally reserved for Large Cap Value Portfolio. Begun in 1993, the

investment strategies seeking to identify discrep- fund described its investment strategy as follows

ancies between price and intrinsic value, along (see the 1994 annual report of DFA Investment

the lines suggested by Graham and Dodd (1934). Dimensions Group, p. 10):

Investors who were recognized for using a com- The portfolio seeks to capture return

prehensive approach in determining the intrinsic premiums associated with high book-

values of securities (e.g., Warren Buffett) were to-market ratios by investing in the

characterized as value investors. U.S. Large Cap Value Series of the DFA

Investment Trust Company, which in

A watershed event for practitioners of value turn invests on a market cap weighted

investing occurred in 1987, when Russell basis in companies that are approxi-

Investments introduced the first style indexes. mately $500 million or larger in market

These indexes, initially referred to as the price- cap and have book-to-market ratios

driven index and the earnings growth index, in the upper 30% of publicly traded

were designed to benchmark the performance companies.

of portfolio managers who invest in particular

Today, such products are ubiquitous. The two

subsets of the market. The initial construction

largest investment funds with value in their

of the indexes is described in Haughton and

name are Vanguards Value Index Fund, with $44

Christopherson (2009, p. 294):

billion in assets, and BlackRocks iShares Russell

Price-driven managers focus on the price 1000 Value ETF, with $31 billion in assets.1

and value characteristics of a security in The Vanguard Value Index Fund tracks the

Financial Analysts Journal | A Publication of CFA Institute

Table 1.Formulas Used by Major Index Providers to Categorize Equities as Value or Growth

Stocks

Index

Provider Value Formulas Growth Formulas

Standard & Book to price, earnings to price, Three-year change in earnings per share (EPS) over price per

Poors sales to price share, three-year sales per share (SPS) growth rate, momentum

(12-month price change in percent)

Russell Book to price I/B/E/S forecast of medium-term EPS growth (two-year), SPS

Investments historical growth (five-year)

MSCI Book to price, 12-month forward Long-term forward EPS growth rate, short-term forward EPS

earnings to price, dividend to growth rate, current internal growth rate, long-term historical

price EPS growth trend, long-term historical SPS growth trend

CRSP Book to price, forward earnings Forward long-term growth in EPS, forward short-term growth

to price, earnings to price, divi- in EPS, three-year historical growth in EPS, three-year historical

dend to price, sales to price growth in SPS, investment-to-assets ratio, return on assets

Note: Formulas are sourced from the various index providers websites.

Index, and the product summary includes the explanatory power on the cross-section

statement that these stocks may be temporarily of realized returns during the 1963

undervalued by investors. BlackRocks iShares 1995 period. Thus, book-to-market as

Russell 1000 Value ETF tracks its namesake index, such would have less importance to

money managers than the literature

and the funds fact sheet states that it provides

would have led us to believe. (p. 249)

exposure to companies that are thought to be

undervalued by the market relative to comparable More recently, Asness, Frazzini, Israel, and

companies.2 In short, the practice of value invest- Moskowitz (2015) reached a similar conclusion

ing is rapidly reverting to the preGraham and about the performance of standalone formulaic

Dodd era, with many value strategies relying on value strategies. Recent research has also shown

a few fundamental-to-price ratios rather than on that the performance of book-to-market and other

a comprehensive effort to determine the intrinsic formulaic value strategies in the United States

values of the underlying companies. has become weaker since their initial publication

(see Asness et al. 2015; McLean and Pontiff 2016;

Fama and French forthcoming 2017) and that the

The Performance of Formulaic excess returns to formulaic value strategies are

Value Investing concentrated in small, high-growth stocks with

Despite the current popularity of formulaic significant short-sales constraints (see Nagel 2005;

value-investing strategies, the evidence support- Beneish, Lee, and Nichols 2015).

ing the outperformance of formulaic value is not

In our study, we began our analysis of formulaic

very compelling. Loughran (1997) first made this

value investing by replicating and extending the

point 20 years ago, when he conducted a detailed

findings of Asness et al. (2015); Exhibit 5 in their

examination of the investment performance of the

paper examines the performance of the Fama

book-to-market ratio and concluded:

French value factor that is based on the book-

In the largest size quintile of all firms to-market ratio. We obtained our data from Ken

(accounting for 73% of the total mar- Frenchs website3 and report our results in Table

ket value of all publicly traded firms), 2. We followed Asness et al. (2015) in reporting

Facts about Formulaic Value Investing

Table 2.Annualized Alphas from Monthly Market Model Regressions for Various

Combinations of FamaFrench Size and Book-to-Market Portfolios (t-statistics in

parentheses)

Sample Period HML HML BIG SMALL HMM BIG LMM BIG SMALL SMALL

(2.73)* (1.09) (4.00)* (1.22) (0.44) (1.59) (4.71)*

(0.63) (0.06) (1.14) (0.35) (0.29) (0.59) (1.24)

(3.15)* (2.52)* (3.15)* (2.49)* (0.95) (3.01)* (2.28)*

(2.97)* (0.76) (4.61)* (0.50) (0.60) (1.34) (5.28)*

(0.22) (0.66) (1.06) (0.33) (0.64) (0.18) (1.81)

Note: BIG = large capitalization; SMALL = small capitalization; HML = high book-to-market ratio minus low book-to-market ratio;

HMM = high book-to-market ratio minus medium book-to-market ratio; LMM = low book-to-market ratio minus medium book-to-

market ratio.

aOriginal period for which a significant book-to-market premium in stock returns was first documented.

bThe primary sample period that we used for subsequent tests in our study, spanning April 2002March 2015.

*Significant at the 5% level.

results for the full 19262015 period, along with the CRSP database. The two-way sort is based on

subperiod analyses for 19261962, 19631981, and the median NYSE breakpoint for market capitaliza-

19822015.4 The 196381 period is the original tion (BIG versus SMALL), whereas the three-way

period for which the performance of the value fac- sort is based on the book-to-market ratio using the

tor was initially documented in large-sample back- 30th and 70th percentiles of NYSE stocks (LOW,

tests (see Rosenberg, Reid, and Lanstein 1985). The MEDIUM, and HIGH). Capitalization-weighted

192662 period captures the backfilled data that returns are computed for each of the six resulting

were subsequently examined in Davis, Fama, and portfolios. HML BIG measures the return on the

French (2000). The 19822015 period represents BIG/HIGH portfolio less the return on the BIG/

the experience since the performance of the value LOW portfolio; this portfolio represents the per-

factor was initially documented. We also included formance of the value factor in large-cap stocks.

the more recent 200215 period in the final row of Similarly, HML SMALL measures the return on

Table 2 because that is the period we used for our the SMALL/HIGH portfolio less the return on the

subsequent analysis of mean reversion in formulaic SMALL/LOW portfolio, representing the perfor-

value ratios.5 mance of the value factor in small-cap stocks.

HML is the simple average of HML BIG and HML

The FamaFrench value factor is based on a two- SMALL. Note that by equally weighting HML BIG

by-three sort of US common stocks available in

Financial Analysts Journal | A Publication of CFA Institute

and HML SMALL, HML assigns small-cap stocks a period, perhaps because of increased investor

much greater weighting than they would receive in awareness of the historical value premium and/or

a cap-weighted portfolio. reductions in arbitrage costs.

To aid in understanding the source of the returns In the last two columns of Table 2, the HML

to the FamaFrench value factor, we also report SMALL alpha is further decomposed into the alpha

the returns on four additional factors: HMM BIG, from going long the HIGH stocks (HMM SMALL)

LMM BIG, HMM SMALL, and LMM SMALL. HMM and short the LOW stocks (LMM SMALL). As can

BIG measures the return on the BIG/HIGH portfo- be seen, the small-cap value effect is driven pri-

lio less the return on the BIG/MEDIUM portfolio, marily by the underperformance of LMM SMALL.

whereas LMM BIG measures the return on the Outside the 196281 period for which the value

BIG/LOW portfolio less the return on the BIG/ premium was initially documented, there is no

MEDIUM portfolio. These two factors allow us to significant evidence of a value premium for high-

understand whether the returns to HML BIG arise book-to-market stocks.

from going long the HIGH stocks or going short

the LOW stocks. HMM SMALL and LMM SMALL Providing further evidence on the practical

do the same thing for small caps. significance of the value premium, Table 3 reports

summary statistics for the portfolios underlying

Table 2 reports market model alphas for the the results in Table 2. Of particular interest are

resulting portfolios. The first result to note is that the characteristics of the SMALL/LOW portfolio,

the alpha for HML is largest (6.47%/year) over which has been primarily responsible for driving

19631981, the period for which Rosenberg et al. the value premium since 1981. The first fact to

(1985) initially documented the value premium. note from Panel A of Table 3 is that this portfolio

This result is quite robust, with all portfolios averages only 3% of total stock market capitaliza-

except LMM BIG showing evidence of a statisti- tion, which seems insufficient to support claims of

cally significant value premium. Outside this a healthy value effect in US equities. The second

period, however, the evidence for a value premium fact to note is that it includes a large number of

is weak to nonexistent. There is no evidence of small-cap securities. Thus, any attempt to exploit

a significant value effect in the 192662 period. this effect at scale would have faced significant

This result may come as a surprise to many read- liquidity constraints and transaction costs.

ers because Davis et al. (2000) analyzed a similar

period and concluded that there is a reliable value Panel B of Table 3 reports the average estimated

premium in returns. The two sets of results can be loan fee for these securities, which is an estimate

reconciled by noting that Davis et al. reported the of the annual rate that the owner (short seller) of

average return to the HML portfolio, whereas we the security would receive (pay) for lending (bor-

report the average one-factor alpha for HML. It rowing) the stock. The fee is significantly larger

turns out that the HML portfolio has a beta of 0.37 for the LOW/SMALL securities that drive the

over this period (unreported), and so the average value premium, averaging 2.8% a year. This result

returns documented by Davis et al. are explained suggests that sophisticated market participants

by exposure to the market factor. There is, how- are already aware that these securities are over-

ever, evidence of a value premium in the more priced. Frictions in the lending market, however,

recent 19822015 period, with an annual alpha of prevent full arbitrage. Note that the stock return

5.21% for HML, which further inspection reveals is data from CRSP include dividend income but not

primarily attributable to HML SMALL. This find- lending income. Thus, the hypothetical returns to

ing led Asness et al. (2015, p. 45) to conclude that the HML factor reported in Table 2 would have

there is no strong stand-alone value premium been lower after incorporating lending income/

among large caps. Perhaps there never was. fees. Relatedly, an investment strategy of buy-

ing everything except the LOW/SMALL stocks

Note also that the premium to HML SMALL falls, forgoes the lending income that a passive holder

becoming insignificant in the more recent 200215 of the LOW/SMALL stocks could collect. Blocher

Facts about Formulaic Value Investing

Portfolios, 20082015 (t-statistics in parentheses)

Book-to-Market Group

Size Group Portfolio Characteristic HIGH MEDIUM LOW

BIG Percent of market capitalization 15% 30% 45%

Average number of securities 239 378 465

Average market cap (US$ millions) 11,543 14,265 16,877

SMALL Percent of market capitalization 3% 4% 3%

Average number of securities 1,533 1,175 893

Average market cap (US$ millions) 346 553 593

HIGH MEDIUM LOW HML

B. Average estimated loan feea

BIG Average estimated loan fee 0.5% 0.4% 0.5% 0.0%

(8.62)* (24.24)* (18.35)* (0.08)

SMALL Average estimated loan fee 1.8% 1.4% 2.8% 1.0%

(32.31)* (24.67)* (29.51)* (8.67)*

Notes: The sample period of 20082015 is based on the availability of data on securities lending from Markit. We sourced the data

from Factset and Wharton Research Data Services.

aWe follow Blocher and Whaley (2016) in using the estimated simple average loan fee from Markit. Fees are measured as of the

beginning of the portfolio formation period. For many securities, particularly in the early part of the sample period, Markit does

not provide a simple average loan fee but does provide a cost to borrow score that is indicative of the fee. We thus computed an

estimated loan fee by taking the average of the available loan fees for all securities that have the corresponding cost-to-borrow

score on the same date.

*Significant at the 5% level.

and Whaley (2016) provided direct evidence that formulaic value investing is to consider the per-

lending income is particularly high for small-cap formance of the value versions of the indexes

and growth ETFs. In summary, at least so far as offered by the major index providers and outlined

US equities are concerned, we see no compelling in Table 1. These indexes use a variety of different

evidence to support the claim that a strategy of ratios and weighting schemes, with each provider

investing in stocks with high book-to-market ratios having established the basic methodology some

has provided healthy outperformance. time ago, thus offering some out-of-sample evi-

dence on the performance of different approaches

Thus far, we have considered only a formulaic to multiples-based investing.

investment strategy based on size and book-to-

market ratios. What about the performance of for- Table 4 summarizes the performance of each of

mulaic strategies using other valuation ratios, such the four value indexes relative to their broad index

as the earnings-to-price ratio? Note that data- counterparts for various periods through the end

snooping biases become a concern once we open of 2015. Despite the fact that the indexes use a

the door to considering any possible combination variety of fundamentals and weighting schemes,

of multiple fundamental variables. With this con- the results are remarkably consistent. The value

sideration in mind, one convenient way to assess indexes have provided returns that are very similar

the performance of different implementations of to, and typically slightly lower than, those of their

Financial Analysts Journal | A Publication of CFA Institute

Table 4.Recent Performance of Broad vs. Value Indexes of Major US Providers, Ending

December 2015

Annualized Annualized Sharpe Annualized Annualized Sharpe Annualized Annualized Sharpe

Return Risk Ratioa Return Risk Ratioa Return Risk Ratioa

S&P 500 7.31% 15.10% 0.43 12.57% 11.70% 1.02 1.39% 13.67% 0.099

S&P 500

Value 6.08 16.26 0.32 11.55 12.19 0.90 0.56 12.85 0.046

Russell

3000 7.36 15.60 0.42 12.18 12.08 0.95 0.47 13.29 0.034

Russell

3000 Value 6.11 16.13 0.33 10.98 12.27 0.85 4.14 12.77 0.333

MSCI USA 7.32 15.13 0.43 12.42 11.76 1.00 0.84 13.58 0.060

MSCI USA

Value 6.16 15.36 0.35 11.20 11.65 0.91 1.94 13.23 0.150

CRSP US

Large Cap 7.43 15.02 0.44 12.28 11.76 0.99 1.11 13.50 0.080

CRSP US

Large Cap

Value 6.62 15.17 0.38 12.13 11.45 1.00 0.86 13.00 0.068

Note: We computed performance statistics on the basis of monthly return data from the various index providers websites.

aWe computed Sharpe ratios using excess returns relative to the four-week US Treasury bill rate.

blended counterpartsand with similar risk. As a We can answer this question by decomposing

result, the value indexes have similar Sharpe ratios. changes in these ratios.

Again, there is no compelling evidence to support

the claim of healthy outperformance of ratio- Before introducing the formal decomposition, lets

based value investing. first consider the two reasons why a relatively

high fundamental-to-price ratio could revert to the

mean.

What Does Formulaic Value Really

1. The price could increase, which is what advo-

Identify? cates of ratio-based investing have in mind

If investing on the basis of fundamental-to-price when they recommend using these ratios as a

ratios does not identify underpriced securities, what form of value investing.

does it identify? The theory behind value investing 2. The fundamental metric could decrease, which

using fundamental-to-price ratios is straightforward. is what Graham and Dodd (1934, p. 20) had

The fundamental measure in the numerator reflects in mind when they warned about accounting

the intrinsic value of the security, and the price in the artifices which it is the function of the capable

denominator tells us how much we must pay to buy analyst to detect. In such cases, the security

the security. A high ratio thus identifies a relatively was never really cheap. Instead, other inves-

cheap security. If the price reverts to the intrinsic tors had already figured out that the funda-

value, the former should rise, causing the security to mental metric was temporarily inflated and set

outperform. So, how did the theory fail in practice? the price accordingly.

Facts about Formulaic Value Investing

It is also possible that a high ratio could stay and stock prices. There is, however, some modest

high (see Beaver and Morse 1978). Depicting mean reversion that must be explained by either

what typically occurs, Figure 1 plots the aver- increasing prices or declining fundamentals.

age annual mean reversion in three common

fundamental-to-price ratios. The three funda- Panel B provides a similar plot for quintiles formed

mentals are book value (the book value of com- on the trailing-earnings-to-price ratio. It shows

mon stockholders equity at the most recent strong evidence of mean reversion for the cheap

fiscal year-end), trailing earnings (basic earnings stocks in the high quintile. The average ratio for

per share before extraordinary items and discon- this quintile falls from 0.11 to 0.04, whereas the

tinued operations for the most recent fiscal year), average for the middle ratios hovers around 0.03.

and forward earnings (the mean sell-side analyst The strong mean reversion for the high-ratio

forecast of EPS for the current fiscal year). Our stocks must be explained by sharp increases in

sample included all companies in the Russell prices and/or sharp reductions in earnings.

3000 Index on 1 April of each year from 2002 to Finally, Panel C of Figure 1 plots quintiles formed

2014. We measured each of the ratios annually on the forward-earnings-to-price ratio. It offers

as of 1 April, using the price on that date and the modest evidence of mean reversion. For the cheap

fundamental data from the last available annual stocks in the high quintile, the average forward-

report (for book value and trailing earnings) or earnings-to-price ratio falls from 0.10 to 0.08,

the latest available consensus forecast of earn- whereas the average for the middle quintiles hov-

ings for the current fiscal year (for forward earn- ers around 0.05. Again, the mean reversion for the

ings). All data were sourced from Factset, and high-ratio stocks must be explained by increases

each of the ratios was winsorized at the 1% tails. in prices and/or reductions in forecasts of future

Ratio-based investment strategies, such as the earnings.

index strategies listed in Table 1, typically rebal- Having established that each of the three funda-

ance their holdings at least annually. Figure 1 pro- mental-to-price ratios exhibits some degree of

vides evidence on the extent to which each of the mean reversion, we now introduce our procedure

ratios reverts over the subsequent year. In Figure for decomposing mean reversion into price-driven

1, all companies in the Russell 3000 are ranked on reversion and fundamental-driven reversion.

each ratio on 1 April for each year from 2002 to Denoting the fundamental variable as F and the

2014. Companies are then assigned to quintiles price as P, we can write

in each year on the basis of the resulting ranks.

Companies in the highest quintile of the ratio in a

Ft+1/Pt+1 = (Ft/Pt)(Ft+1/Ft)(Pt/Pt+1).

given year are assigned to the first quintile. This

quintile thus captures the supposedly cheap secu- Following Daniel and Titman (2006), we take

rities. For reference purposes, the average ratios natural logarithms and rearrange as follows:

for the lowest quintile of stocks (the expensive

securities) and collectively for the middle three Ending ratio

Beginning rati o Change

in fundamental

quintiles are tracked.

log ( Ft +1 / Pt +1 ) = log ( Ft / Pt ) + log ( Ft +1 / Ft )

Panel A of Figure 1 plots mean reversion for quin- Change in price

tiles formed on the book-to-market ratio. It shows log (Pt + 1 Pt ) .

that book-to-market ratios are slowly mean revert-

ing. The cheap stocks in the high quintile have This decomposition neatly separates each ratio

an average book-to-market ratio of 1.27 in the into a temporary component owing to changing

ranking year, which falls to 1.18 in the subsequent fundamentals, a temporary component owing to

year. In comparison, the average book-to-market changing prices, and a permanent component.6 As

ratio for the middle stocks climbs from 0.50 to noted by Daniel and Titman (2006), it is important

0.55. Thus, high book-to-market ratios largely to adjust both F and P to offset changes arising

reflect long-term differences between book values from such corporate events as stock splits and

Financial Analysts Journal | A Publication of CFA Institute

Figure 1.Average Annual A. Average B/M for Quinles B. Average Trailing E/P for Quinles

Mean Reversion in Three Sorted on B/M in Year 0 Sorted on Trailing E/P in Year 0

Common Fundamental-to-

1.4 0.15

Price Ratios

1.2 0.10

0.05

1.0

0

0.8

0.05

0.6

0.10

0.4

0.15

0.2 0.20

0 0.25

Year 0 Year +1 Year 0 Year +1

High B/M Quinle (t = 6.9) High Trailing E/P Quinle (t = 40.0)

Middle B/M Quinle (t = 17.1) Middle Trailing E/P Quinle (t = 12.6)

Low B/M Quinle (t = 8.6) Low Trailing E/P Quinle (t = 23.7)

Sorted on Forward E/P in Year 0

0.15

0.10

0.05

0.05

0.10

Year 0 Year +1

High Forward E/P Quinle (t = 23.0)

Middle Forward E/P Quinle (t = 6.2)

Low Forward E/P Quinle (t = 0.3)

Notes: This figure illustrates rates of mean reversion for fundamental-to-price ratios that are

commonly used to construct formulaic value strategies. Each April from 2002 to 2014, all

stocks in the Russell 3000 are sorted into quintiles on the basis of the respective ratios. The

figure plots the mean value of the ratio for various quintiles for both the sorting year (Year

0) and the subsequent year (Year + 1). The t-statistics (in parentheses) test the difference in

means between Year + 1 and Year 0. We sourced the data from Factset.

Facts about Formulaic Value Investing

dividends. As a practical matter, this adjustment ratio of high-quintile stocks minus that of middle-

is achieved by simply using the log-cum-dividend quintile stocks. The average difference in the log

stock return for log(Pt+1/Pt) and then solving for ratios falls from 0.71 to 0.46. The 0.25 reduction is

log(Ft+1/Ft) using the beginning and ending ratios: driven by a relative decline in forward earnings for

the high-quintile stocks. The relative price change

log(Pt+1/Pt) = log(1 + Rt+1) is close to zero. Once again, all the mean rever-

sion in the high forward-earnings-to-price ratio

and is driven by forecasts of falling earnings. Stocks

with high forward-earnings-to-price ratios are not

log(Ft+1/Ft) = log(Ft+1/Pt+1) log(Ft/Pt) + log(1 + Rt+1). cheap stocks; they are stocks that temporarily

have forecasts of high earnings.

Finally, to isolate the drivers of mean reversion

in the fundamental-to-price ratios of top-quintile To summarize, not one of these three popular

stocks versus those of middle-quintile stocks, we fundamental-to-price ratios has been effective in

report the difference in the mean values of each detecting temporarily underpriced stocks in our

of the three components across the two groups of sample period. Instead, they have been very effec-

stocks.7 We also report the results of a t-test for tive in identifying stocks with temporarily inflated

the difference in means between the two groups. fundamentals. The intuition underlying why these

ratios detect stocks with temporarily inflated

Panel A of Figure 2 depicts the decomposition fundamentals is straightforward. Sophisticated

of the change in the book-to-market ratio of value investors engaging in detailed fundamental

high-quintile stocks minus that of middle-quintile analysis have presumably figured out that the

stocks. The average difference in the log ratios fundamentals are temporarily inflated and have set

falls from 0.92 to 0.69. The reduction is driven by a prices accordingly.

relative decline in book values for the high-quintile

stocks of 0.28. In fact, the average price of the Figure 3 provides additional evidence on the

high-quintile stocks shows a relative decline of nature of the accounting distortions associated

0.05, which partially offsets the mean reversion in with high fundamental-to-price ratios by examin-

book value. In other words, the mean reversion for ing the subsequent financial performance of the

the high book-to-market ratio is completely driven underlying companies. The first variable examined

by falling book values. Stocks with high book-to- is unusual charges incurred over the subsequent

market ratios are not cheap stocks; they are stocks year. These charges most frequently consist of

with temporarily inflated book values. asset write-downs that are required by accounting

rules when an assets carrying value overstates its

Panel B reports the decomposition of the change fair value. For example, following a large decline in

in the trailing-earnings-to-price ratio of high- the price of oil, many oil-producing companies would

quintile stocks minus that of middle-quintile be required to write down their oil-producing assets;

stocks. The average difference in the log ratios although because of reporting lags, accounting

falls dramatically, from 1.33 to 0.45. The 0.88 rules, and managerial discretion, the timing of the

reduction is driven by a relative decline in trailing write-downs may lag the decline in the price of oil

earnings for the high-quintile stocks. The relative by a year or more.

price change is insignificantly different from zero.

Falling earnings drives all the considerable mean The second variable that we report is the reduc-

reversion in the high trailing-earnings-to-price tion in earnings in the subsequent year. This

ratio. Stocks with high trailing-earnings-to-price variable identifies situations in which earnings

ratios are not cheap stocks; they are stocks with are temporarily high in the ranking year. The third

temporarily high earnings. variable is the revision in the consensus analyst

forecast of the following years EPS. Specifically,

Finally, Panel C of Figure 2 reports the decomposi- for a ratio computed on 1 April 2014, we track

tion of the change in the forward-earnings-to-price the change in the forecast of EPS for fiscal 2015,

Financial Analysts Journal | A Publication of CFA Institute

Mean Reversion in Three

Fundamental-to-Price 1.0

Ratios 0.8

0.6

0.4

0.2

0

0.2

0.4

Beginning Spread Impact of Book Impact of Price Ending Spread

(t = 166.4) Value Changes Changes (t = 53.3)

(t = 17.9) (t = 6.1)

B. Trailing E/P

1.5

1.0

0.5

0.5

1.0

Beginning Spread Impact of Trailing Impact of Price Ending Spread

(t = 150.0) Earnings Changes Changes (t = 21.5)

(t = 36.0) (t = 1.8)

C. Forward E/P

0.8

0.6

0.4

0.2

0.2

0.4

Beginning Spread Impact of Forward Impact of Price Ending Spread

(t = 168.7) Earnings Changes Changes (t = 35.1)

(t = 14.4) (t = 0.9)

Notes: This figure identifies the drivers of mean reversion in log fundamental-to-price ratios.

Each bar shows the average spread between stocks in the highest quintile and stocks in

the middle three quintiles. The first bar shows the spread in the ratio at the time stocks are

initially selected using the ratio. The second bar shows the subsequent annual change in the

spread owing to changes in the fundamental used in the numerator of the ratio. The third

bar shows the subsequent annual change in the spread owing to changes in stock price. The

fourth bar shows the spread remaining at the end of the year. All stocks in the Russell 3000

are sorted into quintiles each April from 2002 to 2014 on the basis of the various ratios. The

t-statistics (in parentheses) are from testing the average spread against a null of zero. We

sourced the data from Factset.

Facts about Formulaic Value Investing

Fundamental Performance

Metrics for Stocks Sorted 0.02

0

on Fundamental-to-Price 0.2

Ratios 0.4

0.6

0.8

0.10

Unusual Change in Forecast Forecast GAAPStreet

Charges Earnings Revisions Error Earnings

(t = 30.7) (t = 6.0) (t = 16.9) (t = 21.9) (t = 24.9)

B. Trailing E/P

0.02

0

0.2

0.4

0.6

0.8

0.10

Unusual Change in Forecast Forecast GAAPStreet

Charges Earnings Revisions Error Earnings

(t = 12.5) (t = 29.5) (t = 13.9) (t = 11.4) (t = 6.7)

C. Forward E/P

0.02

0

0.2

0.4

0.6

0.8

0.10

Unusual Change in Forecast Forecast GAAPStreet

Charges Earnings Revisions Error Earnings

(t = 13.8) (t = 1.8) (t = 17.0) (t = 13.8) (t = 13.6)

Notes: This figure plots average fundamental performance metrics over the subsequent

year for stocks sorted on the basis of fundamental-to-price ratios. All stocks in the Russell

3000 are sorted annually into quintiles each April from 2002 to 2014 on the basis of the

respective ratios. The t-statistics (in parentheses) are from testing the difference in means

between the high quintile and the middle quintiles. We sourced the data from Factset.

Financial Analysts Journal | A Publication of CFA Institute

from 1 April 2014 through 1 April 2015. This the subsequent years earnings. Stocks with high

variable reveals any staleness present in analysts trailing-earnings-to-price ratios also have more

EPS forecasts at the date the ratios are computed. subsequent unusual charges, negative forecast

The fourth variable is the subsequent error in the revisions, and negative forecast errors.

current-year consensus EPS forecast, identifying

any systematic bias in the consensus forecast. Finally, Panel C of Figure 3 plots the forward-

earnings-to-price ratio. Stocks with high forward-

The final variable, GAAPStreet earnings, is the earnings-to-price ratios have more subsequent

difference between subsequently realized EPS for unusual charges, negative forecast revisions,

the year according to generally accepted account- and negative forecast errors. These stocks are

ing principles (GAAP) and the adjusted earnings experiencing deteriorating financial performance

numbers tracked by Wall Streets sell-side analysts that the consensus analyst forecasts are slow to

(Street). Relying largely on the guidance of manag- reflect. They also exhibit a large negative differ-

ers, sell-side analysts often omit expenses from ence between GAAP earnings and Street earn-

Street earnings forecasts, causing the difference to ings, which indicates that the earnings numbers

be negative. These omitted expenses can include analysts forecast for these stocks systematically

both nonrecurring items, such as asset write- exclude a significantly larger amount of expenses.

downs, and recurring items, such as stock-based

compensation expense and amortization expense In summary, the evidence presented in this section

(see Black and Christensen 2009). Each vari- shows that investment strategies based on simple

able is deflated by beginning price (for per-share fundamental-to-price ratios systematically identify

amounts) or market capitalization (for entity-level companies with temporarily inflated account-

amounts), and the 1% tails are winsorized. ing numbers and earnings forecasts. The results

suggest that sophisticated investors have already

Panel A of Figure 3 plots the results for the book- anticipated these accounting distortions and set

to-market ratio. Stocks in the highest quintile have prices accordingly.

much larger unusual charges over the subsequent

year. These are companies with overstated book

values, and much of the mean reversion in the The Interaction between Formulaic

book-to-market ratios is attributable to subsequent Value and Momentum

asset write-downs. These companies have only small Quantitative investment managers often use

reductions in earnings in the subsequent year. This formulaic value ratios in conjunction with other

result is perhaps surprising because the large unusual investment formulas. A popular choice is momen-

charges should depress earnings in the subsequent tum, which involves overweighting stocks that

year. It is explained by the fact that stocks with high have appreciated over the past year or so.8

book-to-market ratios tend to be distressed stocks Momentum has a negative statistical correlation

that often have low earnings and large unusual with fundamental-to-price ratios, making it a par-

charges in the ranking year. Stocks with high book- ticularly suitable companion for producing attrac-

to-market ratios also have negative subsequent tive backtest results (e.g., Asness et al. 2015).

forecast revisions and forecast errors, indicating that

analysts were slow to lower their estimates for these Our analysis aids in understanding the special

companies. Finally, GAAP earnings are subsequently interaction between formulaic value and momen-

much lower than Street earnings for these stocks, tum. We have already shown that investment

probably because unusual charges are frequently strategies based on high fundamental-to-price

excluded from Street earnings. ratios do not identify temporarily underpriced

securities. Instead, they identify securities with

Panel B provides a similar set of plots for the trailing- temporarily inflated accounting numbers. More

earnings-to-price ratio. The striking result from specifically, these strategies frequently identify

this panel is that stocks with high trailing-earnings- securities that have recently experienced nega-

to-price ratios experience sharp reductions in tive news that is incorporated into the stock price

Facts about Formulaic Value Investing

but not yet reflected in the accounting numbers. we focus on the book-to-market ratio. We begin

Conditioning on the past years stock returns is a by regressing future-year log stock returns on the

crude way to weed out such stocks. rank of the current-year book-to-market ratio.

To facilitate the interpretation of the regression

Figure 4 illustrates this effect. It replicates the coefficients, we rank stocks into deciles within

plots in Figure 2 after splitting the highest quintile each year and then score the deciles from 0

of fundamental-to-price-ratio stocks into two (lowest book-to-market ratio) to 1 (highest book-

groups on the basis of whether the underlying to-market ratio) in increments of 1/9. The resulting

stocks have experienced positive momentum regression coefficients can be interpreted as the

(greater than median stock return over the past 12 estimated hedge portfolio returns to going long

months) or negative momentum (less than median the highest decile and short the lowest decile.

stock return over the past 12 months). The t-test Following Fama and MacBeth (1973), we estimate

on each component tests for the difference in a separate regression for each year and report

means between the positive-momentum group the means and t-statistics of the annual regres-

and the negative-momentum group. For all three sion coefficients. Results for the regressions of

of the ratios, we see that the positive-momentum future annual stock returns on the book-to-market

group experiences significantly less mean rever- ranks are reported in the first row of Table 5. The

sion. The lower mean reversion for the positive- estimated hedge portfolio return on the book-to-

momentum stocks is attributable to smaller market ranks is an insignificant 4.1% a year.

reductions in the underlying fundamentals. For

the forward-earnings-to-price ratio with positive We next regress future-year log stock return

momentum (Panel C), we even see some weak evi- on the rank of future-year change in log book

dence of mean reversion owing to price increases. value. We use the same decile-ranking procedure

To summarize, by conditioning on both a high described in the previous paragraph, and thus

fundamental-to-price ratio and positive momen- the coefficient on the change in log book value

tum, we can weed out some of the stocks whose represents the estimated hedge portfolio return to

fundamentals are temporarily inflated because of a going long the top decile of change in book value

delayed accounting response to deteriorating busi- and shorting the bottom decile of change in book

ness conditions. This finding marginally improves value. Note that this approach is essentially an

our ability to identify underpriced securities. investment strategy that assumes perfect fore-

sight of the change in book value and is thus not

implementable in real time. The results are shown

Quantifying the Benefits of a More in the second row of Table 5. Not surprisingly,

Detailed Fundamental Analysis the strategy yields a healthy 36.1% annual hedge

Our results thus far indicate that simple fundamental- portfolio return.

to-price ratios primarily identify securities with The 36.1% return is not the maximum attainable

temporarily distorted fundamentals. The results return from perfect foresight of changes in book

also suggest that sophisticated investors have value. If one did have perfect foresight of such

already anticipated these temporary distortions and changes, one would base a trading strategy on

priced the stocks accordingly. Can a value-investing only the unexpected component of the changes,

strategy that attempts to adjust for these predict- which is where the book-to-market ratio can help.

able distortions yield superior returns? We answer Recall that a high book-to-market ratio indicates

this question by using multiple regression analysis that the market is anticipating a decrease in book

to control for the correlation between funda- value. By including the book-to-market rank in

mental-to-price ratios and subsequent changes in the regression, we can control for the expected

fundamentals. change in book value, thus estimating the return

Our regression analysis uses the sample and to investing on the unexpected component

variables described earlier. To keep things simple, of the change in book value. The correspond-

ing estimated regression coefficient on the

Financial Analysts Journal | A Publication of CFA Institute

Mean Reversion in Three

Fundamental-to-Price 1.0

0.8

Ratios for Stocks with

0.6

Positive and Negative

0.4

Momentum 0.2

0

0.2

0.4

Beginning Spread Impact of Book Impact of Price Ending Spread

(t = 18.6) Value Changes Changes (t = 1.8)

(t = 12.4) (t = 6.2)

B. Trailing E/P

1.5

1.0

0.5

0

0.5

1.0

1.5

Beginning Spread Impact of Trailing Impact of Price Ending Spread

(t = 7.2) Earnings Changes Changes (t = 18.3)

(t = 18.8) (t = 6.6)

C. Forward E/P

0.8

0.6

0.4

0.2

0

0.2

0.4

0.6

Beginning Spread Impact of Forward Impact of Price Ending Spread

(t = 8.6) Earnings Changes Changes (t = 14.0)

(t = 14.5) (t = 5.8)

Notes: This figure identifies the drivers of mean reversion in log fundamental-to-price ratios

for stocks with positive and negative momentum. Each bar shows the average spread

between stocks in the highest quintile (with either positive or negative momentum) and

stocks in the middle three quintiles (as a combined group). The first bar shows the spread

at the time stocks are initially selected on the basis of the ratio. The second bar shows the

subsequent annual reduction in the spread owing to changes in the fundamental used in the

numerator of the ratio. The third bar shows the subsequent annual changes in the spread

owing to changes in stock price. The fourth bar shows the spread remaining at the end of

the year. All stocks in the Russell 3000 are sorted into quintiles each April from 2002 to

2014 on the basis of the respective ratios. The t-statistics (in parentheses) are from testing

the difference in means between the high-quintile stocks with positive momentum and the

high-quintile stocks with negative momentum. We sourced the data from Factset.

Facts about Formulaic Value Investing

Book-to-Market Ranking and Future Change in Log Book

Value Ranking, 20022014 (t-statistics in parentheses)

Intercept Ranking Book Value Ranking R2

(0.332) (1.006)

(1.720) (5.298)*

(3.091)* (3.658)* (6.066)*

Notes: We transformed book-to-market ratios and future changes in log book values into decile ranks,

scaled to range from 0 to 1 so the coefficients could be interpreted as the estimated hedge portfolio

returns from going long an equal-weighted portfolio of the top-decile observations and short an equal-

weighted portfolio of the bottom-decile observations. We sourced the data from Factset.

*Significant at the 5% level.

book-to-market rank reflects the return to invest- of 17.8%. Thus, book-to-market ratios contain

ing on the book-to-market rank after controlling significant information about future stock returns

for the expected component of the change in book that should be obtainable by sophisticated funda-

value. In other words, the coefficient on the book- mental analysts who can back out the predictable

to-market rank in this multiple regression provides changes in book value that are already priced into

an estimate of the hedge portfolio return that a the ratio.

sophisticated fundamental analyst could have

obtained by adjusting the book-to-market ratio for

expected changes in book value. Conclusion

Our main contribution in this article is to demon-

The results from regressing future stock returns strate that formulaic value-investing strategies

on both the rank of the current book-to-market primarily identify stocks with temporarily inflated

ratio and the rank of the future change in book accounting numbers. These are precisely the

value are shown in the third row of Table 5. The accounting distortions that Graham and Dodd

coefficient on the book-to-market ratio is a highly (1934, p. 20) deem the function of a capable

significant 17.8%, whereas the coefficient on the analyst to detect. Quantitative approaches to

change in book value increases from 36.1% to detecting these distortionssuch as combining

42.6%. The key takeaway from this regression is formulaic value with momentum, quality, and

that a sophisticated fundamental analyst could profitability measurescan help in avoiding these

have dramatically increased the return to the value traps. A capable analyst, however, should

book-to-market strategy by adjusting for expected be able to significantly enhance quantitative

changes in book value. The simple book-to-market approaches with Graham and Doddstyle secu-

formula yields an insignificant annualized hedge rity analysis.

portfolio return of 4.1%, whereas using book-

to-market ratios adjusted for expected changes More generally, our results show that major

in book value yields a highly significant return securities markets are highly competitive. Over

Financial Analysts Journal | A Publication of CFA Institute

80 years ago, Graham and Dodd (1934) argued to conclude that such strategies can deliver

that trading strategies based on simple valuation healthy outperformance in the future.

ratios were unlikely to generate superior invest-

ment performance. The advent of computers and

financial databases has generated new interest Editors Note

in such strategies, thousands of which have been This article was reviewed via our double-blind peer-review

backtested. It is not surprising that some strate- process. When the article was accepted for publication, the

gies have worked in some markets over some authors thanked the reviewers in their acknowledgments.

Tim Loughran, CFA, and Allen Michel were the reviewers

periods. It is also not surprising that some strate- for this article.

gies have produced impressive backtest results

Submitted 17 May 2016

in illiquid stocks with significant impediments to

Accepted 19 October 2016 by Stephen J. Brown

arbitrage. We caution against using this evidence

Notes

1. We restricted our analysis to investment funds registered 5. In our subsequent analysis, we used annual return cumula-

under the Investment Company Act of 1940. The amounts tion periods that begin in April 2002 and end in March

of assets under management were retrieved from the two 2015. Thus, we conducted this associated analysis using

funds websites on 14 November 2016. returns from April 2002 to March 2015.

2. The information about the investment strategies of both 6. Note that we cannot use this decomposition for securities

the Vanguard Value Index Fund and the iShares Russell with negative fundamentals. Negative fundamentals often

1000 Value ETF was retrieved from the two funds web- occur for low-quintile stocks. This analysis is thus restricted

sites on 14 November 2016. to stocks in the top and middle quintiles. For the relatively

small number of cases in which a middle-quintile stock has a

3. See http://mba.tuck.dartmouth.edu/pages/faculty/ken. negative ratio, we assign a value of 7 to the logged ratio.

french/data_library.html.

7. The 1% tails of each component are winsorized to mitigate

4. Our data extend through October 2015, whereas the data the effect of outliers.

in Asness et al. (2015) end in July 2014. Thus, our results

differ slightly from those reported in Asness et al. 8. Other common measures include measures of quality and

profitability (e.g., Asness et al. 2015).

References

Asness, C., A. Frazzini, R. Israel, and T. Moskowitz. 2015. Fact, Daniel, K., and S. Titman. 2006. Market Reactions to Tangible

Fiction and Value Investing. Journal of Portfolio Management, and Intangible Information. Journal of Finance, vol. 61, no. 4

vol. 42, no. 3 (Fall): 3452. (August): 16051643.

Beaver, W., and D. Morse. 1978. What Determines Price- Davis, J.L., E.F. Fama, and K.R. French. 2000. Characteristics,

Earnings Ratios? Financial Analysts Journal, vol. 34, no. 4 (July/ Covariances, and Average Returns: 1929 to 1997. Journal of

August): 6576. Finance, vol. 55, no. 1 (February): 389406.

Beneish, M.D., C.M.C. Lee, and D.C. Nichols. 2015. In DFA Investment Dimensions Group. 1995. Annual Report,

Short Supply: Short Sellers and Stock Returns. Journal of Year Ended November 30, 1994. Dimensional Investment

Accounting and Economics, vol. 60, no. 23 (November Group.

December): 3357.

Dreman, D. 1977. Psychology and the Stock Market: Why the

Black, D.E., and T.E. Christensen. 2009. US Managers Use of Pros Go Wrong and How to Profit. New York: Warner Books.

Pro Forma Adjustments to Meet Strategic Earnings Targets.

Journal of Business Finance & Accounting, vol. 36, no. 34 Fama, E. 1970. Efficient Capital Markets: A Review of Theory

(April/May): 297326. and Empirical Work. Journal of Finance, vol. 25, no. 2 (May):

383417.

Blocher, J., and R.E. Whaley. 2016. Two-Sided Markets in

Asset Management: Exchange-Traded Funds and Securities Fama, E., and K. French. 1992. The CrossSection of Expected

Lending. Working paper, Vanderbilt University (May). Stock Returns. Journal of Finance, vol. 47, no. 2 (June):

427465.

Chan, K.C., and J. Lakonishok. 2004. Value and Growth

Investing: Review and Update. Financial Analysts Journal, vol. . 1998. Value versus Growth: The International Evidence.

60, no. 1 (January/February): 7186. Journal of Finance, vol. 53, no. 6 (December): 19751999.

Facts about Formulaic Value Investing

. Forthcoming 2017. International Tests of a Five- Loughran, T. 1997. Book-to-Market across Firm Size,

Factor Asset Pricing Model. Journal of Financial Economics. Exchange, and Seasonality: Is There an Effect? Journal of

Financial and Quantitative Analysis, vol. 32, no. 3 (September):

Fama, E., and J.D. MacBeth. 1973. Risk, Return, and 249268.

Equilibrium: Empirical Tests. Journal of Political Economy, vol.

81, no. 3 (MayJune): 607636. McLean, R.D., and J. Pontiff. 2016. Does Academic Research

Destroy Stock Return Predictability? Journal of Finance, vol.

Graham, B., and D.L. Dodd. 1934. Security Analysis. New York: 71, no. 1 (February): 532.

McGraw-Hill.

Nagel, Stefan. 2005. Short Sales, Institutional Investors

Haughton, K., and J. Christopherson. 2009. Equity Style and the Cross-Section of Stock Returns. Journal of Financial

Indexes: Tools for Better Performance Evaluation and Plan Economics, vol. 78, no. 2: 277309.

Management. In Portfolio Performance Measurement and

Benchmarking. Edited by J.A. Christopherson, D.R. Cario, and Rosenberg, B., K. Reid, and R. Lanstein. 1985. Persuasive

W.E. Ferson. New York: McGraw-Hill Professional. Evidence of Market Inefficiency. Journal of Portfolio

Management, vol. 11, no. 3 (Spring): 916.

Lakonishok, J., A. Shleifer, and R. Vishny. 1994. Contrarian

Investment, Extrapolation, and Risk. Journal of Finance, vol.

49, no. 5 (December): 15411578.

FACTOR INVESTING

AND ASSET ALLOCATION

A BUSINESS CYCLE PERSPECTIVE

Andrew Nowobilski, Sbastien Page, CFA,

and Niels Pedersen

thought patterns to identify multi-asset

alpha opportunities.

www.cfapubs.org/doi/pdf/10.2470/rf.v2016.n4.1.

2017 CFA Institute. All rights reserved.

- 2014 q3 International Value Webcast Final7789C3B7080AUploaded byValueWalk
- Upside_ Why Most Value Investors Will Burn OutUploaded bydpbasic
- SAR_194857Uploaded byWilliam Harris
- Seth-Klarman-2.pdfUploaded byRohitash Agnihotri
- Source All Overview EnUploaded byFarid
- TAF 2011 Annual ReportUploaded byVALUEWALK LLC
- Value investingUploaded byAshutosh Gupta
- Getting Better_ Deliberate PracticeUploaded byBRubin2
- The Monarch Report 4/15/2013Uploaded bymonarchadvisorygroup
- Nripa FinalUploaded byAmit Singh
- Getting Started in Value Investing Chapter 2Uploaded byMichael Pullman
- Project Work for AdditionalUploaded byAufa Anshin
- HighYield Aristocrats WpprUploaded byg4nz0
- Additional Mathematics Project 4 (completed)Uploaded byRaje Azlan
- Add Math My ProjectUploaded byDeshaleney Loganathan
- Mutual Fund ProjectUploaded byfed0122
- BIMBSec - Sector Update - Plantaion - 20120412Uploaded byBimb Sec
- BIMBSec - MMHE Company Update - 20120628Uploaded byBimb Sec
- Assetclasses HistoricallyUploaded byHector T Villalona-tDs
- Market Commentary 3/4/13Uploaded byCLORIS4
- BIMBSec - Hartalega Company Update - 20120416Uploaded byBimb Sec
- Vanguard Investment Performance 2015Uploaded byMustaqimYusof
- ValueResearchFundcard-ICICIPrudentialTop100-2012Feb02Uploaded byAhmed Ahmed Ali
- Vanguard Long-Term Government Bond ETF 10+Uploaded byRoberto Perez
- april week 2 macrooverviewUploaded byapi-278033882
- Minutes of Extraordinary General ShareholderUploaded byMPXE_RI
- Project Work for Add Math 2012 (NIK)Uploaded byNik Mohamad Adil
- Sensex CalulationUploaded byNil Mukherjee
- Beta EstimationUploaded byShachi Rai
- ROTX_RULES_E_BVB_Dec2007Uploaded byDavid Daniel

- Li Lu ArticlesUploaded bymaxprogram
- AE December 2017 16 Mec A1Uploaded byMatt Ebrahimi
- 0-IN0498_0Uploaded byMatt Ebrahimi
- GtaUploaded byMatt Ebrahimi
- Intro to Data ScienceUploaded byJohn
- (89078226)_(2)_Compensation Committee Charter v. 2Uploaded byMatt Ebrahimi
- PythonUploaded byitprova
- 10B Olstein AnniversaryUploaded byMatt Ebrahimi
- Insurance GrahamUploaded byMatt Ebrahimi
- Shipping Cycles Day 2 0910 Martin Stopford - Marine Money NYC June 2017Uploaded byMatt Ebrahimi
- May 1217Uploaded byMatt Ebrahimi
- Why-19252.pdfUploaded byMatt Ebrahimi
- VL Options Guide UpdatedUploaded byMatt Ebrahimi
- Slaying-Goliath.pdfUploaded byMatt Ebrahimi
- 233526669-Value-Oriented-Equity-Investment-Ideas-for-Sophisticated-Investors.pdfUploaded byMatt Ebrahimi
- 266018428-Patient-Capital-A-Study-On-The-Outperformance-Of-Infrequent-Traders.pdfUploaded byMatt Ebrahimi
- Assessing Buybacks From All Angles MauboussinUploaded byMatt Ebrahimi
- Frank Toronto TranscriptUploaded byMatt Ebrahimi
- How Not to Be a Thanksgiving TurkeyUploaded byMatt Ebrahimi
- 2014 Master Limited PartnershipsUploaded byMatt Ebrahimi
- 00Velan Job SpecificationUploaded byMatt Ebrahimi
- 67C-67CSeriesUploaded byMatt Ebrahimi
- pub097-006-00_1115Uploaded byMatt Ebrahimi
- l_040117Uploaded byMatt Ebrahimi
- Hedge FundsUploaded byMatt Ebrahimi
- Wacc Usa CompaniesUploaded bySergio Olarte
- IIR Bluebook March 2017 v2 1 (1)Uploaded byMatt Ebrahimi
- f401ieUploaded byMatt Ebrahimi

- Jessop From Thatcherism to New LabourUploaded byDat Nguyen
- The Peak Valley StrategyUploaded byThe Children of the Journey Sangha
- Heidenreich (1998) - Karl William KappUploaded byFabiano Escher
- Advance Accounts 498AUploaded byअंजनी श्रीवास्तव
- NescafeUploaded byMaira Hassan
- ProQuestDocumentsUploaded byArun Prasaath
- Cyworld QuestionsUploaded bymanoj_yadav735
- Chapter 10Uploaded byHari Prasad
- Building Customer RelationshipsUploaded byvikikull
- Mathsoft Group 1 BBMUploaded byBrandon Dean
- STP in marketingUploaded byAbhijeet Agarwal
- edu-2017-07-mfe-syllabusUploaded bybello
- Ncdex Weakly Report 8 JunUploaded byexcellentmoney
- Managerial EconomicsUploaded byKashif Raheem
- keown8_ch17Uploaded bysamir249
- Marketing Report on Idea Cellular Ltd.Uploaded byamin pattani
- DundeeUploaded byHugh Trerice
- ECB haiructUploaded byFrancisco Pinheiro Catalão
- gold fundUploaded byNachiket Kesarkar
- Chapter 1 - The History of Economic Thought and DevelopmentUploaded byancaye1962
- Proses bisnis SCMUploaded byArfi Maulana
- customerrelationshipmanagementcrminstarbucks1-12787759885727-phpapp01Uploaded byVipula Rawte
- The Geometry of Stock Market ProfitsUploaded byDave Marrison
- (2) Compliance With Basel II[1]Uploaded bysecondtonone
- LawDepot - Business PlanUploaded byJecoub Samarita
- Chapter 6 - Analyzing Business MarketsUploaded byArman
- Foreign Exchange RiskUploaded byG. M. Yousuf Bhuiyan
- Honda(A)Uploaded byAnkur Rao Bisen
- MBA 2015-17Uploaded byaditya0376
- IDI QuestionsUploaded byDon Pablo