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Value in Listed Equities: It’s Just a Story

Gerald T. Garvey
The Journal of Portfolio Management September 2020, 46 (8) 86-97; DOI: https://doi.org/10.3905/jpm.2020.1.165
Gerald T. Garvey
is a managing director in the Systematic Active Equities Division at BlackRock in San Francisco, CA
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Abstract

This article analyzes and rejects the two main responses to value’s sustained underperformance. First, although it is true that value is currently relatively cheap in the sense that percentage value spreads are wide, historically this indicates higher risk much more than it does higher return. The simple difference of the valuations for cheap versus expensive stocks is a more reliable predictor of returns than the percentage spread, but this metric is not particularly elevated at present. Both perspectives suggest that the allocation to value should be reduced in the current environment. Second, the author provides both theory and evidence against enhanced value. It is far preferable to treat new data and ideas as stand-alone alpha sources rather than as fixes to value.

TOPICS: Performance measurement, risk management

Key Findings

  • • Elevated percentage value spreads predict higher risk, not higher returns.

  • • Simple value spreads are better at predicting returns, but this spread is modest in the current environment; again, the outlook for value contains more risk than return.

  • • Quantitative researchers and portfolio managers should emphasize new differentiated sources of alpha rather than trying to fix value.

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The Journal of Portfolio Management: 46 (8)
The Journal of Portfolio Management
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September 2020
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Value in Listed Equities: It’s Just a Story
Gerald T. Garvey
The Journal of Portfolio Management Aug 2020, 46 (8) 86-97; DOI: 10.3905/jpm.2020.1.165

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Value in Listed Equities: It’s Just a Story
Gerald T. Garvey
The Journal of Portfolio Management Aug 2020, 46 (8) 86-97; DOI: 10.3905/jpm.2020.1.165
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  • Article
    • Abstract
    • VALUE SPREADS
    • ADVICE FOR QUANTS: DON’T WASTE TIME FIXING VALUE
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