Value is an asset class, not an investment strategy. Identifying low relative price stocks is only one step toward designing and managing a value strategy; differences in managers’ implementation skill can lead to a wide range of outcomes experienced by value investors. Investors can evaluate these outcomes by assessing whether managers delivered what they said they would deliver. In the case of systematic value strategies, strong performance during periods when value stocks outperform signals an ability to capture value premiums when they appear.
If 80% of success is just showing up, it follows that exposure to value stocks is a helpful start to capturing the value premium. However, even within a value category, exposure to low relative price stocks varies substantially across funds. For example, the 200-plus funds in the large cap value Morningstar category over the 10-year period ending March 31 had average price-to-book ratios ranging from 1.2 to nearly 4.5.
That variation means not all funds in the category shared the same experience when the value premium appeared. In months when the Russell 1000 Value Index outperformed the Russell 1000 Growth Index, the average monthly net return for these funds ranged from 0.97% to 2.64%. A cursory inspection of the returns plotted against price-to-book ratios in Exhibit 1 reveals a negative relation for these months; all else equal, the greater the value exposure, the better the performance.
Dimensional’s value strategies seek to maintain a consistent focus on value stocks, day in and day out. We do this because we expect a positive value premium every day. While realized premiums can be negative, there is no evidence investors can reliably predict such occurrences.1 On the other hand, there is ample evidence the value premium can show up in bunches.2 A process that stays the course in its pursuit of value can therefore boost the odds of harvesting the premium when value stocks outperform.
Strong recent returns of value stocks provide an opportunity to highlight the benefits of this approach through the lens of performance in periods of positive premiums. Exhibit 2 reports net returns for Dimensional value strategies in excess of benchmarks over both the first quarter of 2021 (when value stocks notably outperformed) and the 12 months ending March 31 (one year out from the 2020 equity market downturn). The results show pervasive outperformance across market segments and geographical regions. When evaluated this way, Dimensional’s value funds delivered on their goal of capturing value premiums when they appeared.
Even a period as short as one quarter can provide compelling evidence of whether managers delivered what they said they would deliver. And delivering on expectations helps investors pursue their goals by keeping the asset allocation decisions in their hands, not the manager’s. After all, uncertainty over what you’re going to get should be reserved for boxes of chocolates, not investment strategies.