Today, the long anticipated Antti Ilmanen’s second book on investing comes out “Investing Amid Low Expected Returns: Making the Most When Markets Offer the Least”
I had the privilege of reading an early draft of this wonderful sequel to the Antti’s first book “Expected Returns” - which most professional investors consider a must read.
Two years ago, in May of 2020, I wrote a piece about the historic crash of the value factor. Antti graciously decided to include some of my research in his chapter on style premia. Here is the powerful chart from Antti’s latest book showing two hundred years of the value spread.
“Investing Amid Low Expected Returns: Making the Most When Markets Offer the Least” by Antti Ilmanen (2022)
As I constructed the extended history of value’s returns, it was apparent the 2020’s crash was the worst in value’s history. And although by then value was the least popular factor among investors, it felt ‘safe’ to predict its future rebound. So I ended the blog with something I don’t do often: a prediction: “if history is to continue repeating itself, then value should do pretty well going forward”.
Overall, my timing was lucky, and value reached its worst moment a few months later in August 2020. Since the blog’s publication, the value factor has rebounded nicely, returning +27.3% long-short return.
However, my prediction was based purely on the logic of short-term mean-reversion. If something gets stretched far in one direction, it seems reasonable to expect it to snap back. Such short-term mean reversion based prediction is one thing, but it is entirely another thing to expect a positive unconditional long-run return from the value factor.
Antti’s latest book does exactly that. It argues that Value (and Momentum), are still reliable long run sources of return that can (and should) be used to enhance portfolio returns during the current environment of low expected returns.
“In a low expected return world where so many assets are expensive, the case for any cheap opportunities is even stronger” (pg. 117)
The enormous evidence well summarized in Antti’s book in favor of value and momentum across histories, geographies and asset classes, does make it challenging to deny their importance. Antti also suggests that using composite scores (not just Price to Book), and industry neutral versions improves value’s performance.
However, there is also an argument that can be made that these factors have become too popular and hence their forward looking long run returns are now much lower. As we noted in our recent post, at least the simpler versions of factors have experienced a noticeable deterioration over the past 20 years.
I was glad to see Antti’s coverage of the growing importance of intangibles assets - a topic that we pay close attention to at our firm.
“One recently popular idea is to correct the book / price ratio for intangibles. There has been a multi-decade-long structural change where intangible investments have become more important than tangible investments for US firms.” (pg. 112)
Antti confirms evidence that including intangibles like R&D expenses can improve not just the traditional factor returns but also defensive strategies as well, albeit according to the author, not as noticeably once factors are industry adjusted.
Overall, with author’s characteristic clarity and insightfulness, his book is filled with many new and updated concepts and mesmerizing charts beyond value and momentum. I highly recommend that you order a copy.
And as for the value factor, congratulations to those who managed to hold on to it through its drought.
Seems appropriate close with another quote from Antti -
“Wise man have said, ‘no pain, no premium’ - it is precisely the painful times that will sustain the premium and prevent it from being arbitraged away”