As a risk factor, Value is very much alive.
Confusing the risk side and return side of factors creates the misconceived question of whether the value factor is dead.
Something that is dead, does not move. A dead factor is a flat horizontal line with random noise. By contrast, value has been moving violently down, which is not how death looks like. It is how a crash looks like.
Like other risk factors that are computed using prices, the value risk factor is very unlikely to die. It seems to me that in the risk domain, factors that include some version of price in their definition, like beta, sectors, size, momentum, vol, reversals, and value - will remain alive because they are connected to the ways that investors behave. Price enables these factors to capture return co-movement - the essential ingredient of a risk factor - which for the practical purposes we define as something that improves the co-variance estimates and not as a theoretical concept that requires a risk premium.
In what looks like a one risk factor world, value is a clear second candidate. If the primary factor (with the most co-variance explanatory power) is “long equity and short treasuries”, then the second candidate can easily be the “long value and short growth”.
The long-term evidence suggests that, as a risk factor, value is likely to mean-revert. So if you managed to hold on so far, then don’t give up on it now.
Changing strategies during drawdowns and chasing diversifiers is the number one cost to investing. Sometimes it must be done, but at Two Centuries we try to help investors avoid this cost.
Setting more realistic long-run expectations and developing effective scorecards for success are some of the tools to help stay invested.
However, after the risk side of value mean reverts, the question will remain about the level of value’s long-run mean going forward. It is in this first moment dimension that “factor death” can show up.
I believe the antidote to “factor death” is innovation. It can save the value factor and all factor investing (as well as the active asset management industry and our economy).
Innovation is not just about inventing new factors using alternative data, ML or quantamental thinking. It’s also about enhancing the existing approaches like value.
For example, focusing on intangible assets can help improve valuation analysis. And it’s not just about improving the Price-to-Book ratio as the common criticism of intangibles would suggest. Intangible assets help evaluate the moat which often translates into higher and longer cashflow growth. Just like quants prefer to use Cashflow-to-Price instead of Book-to-Price factor, using intangibles adjusted valuation could further improve enterprise value analysis. This is one of the approaches we take in Two Centuries Focused Quality strategy.
In sum: (1) separate factor risk from return (2) use the longest history to set expectations, especially about crash risk (3) allocate significant organization resources to innovation.