Value Premium

Are value and momentum anomalies reliably present across international asset classes? If so, can investors exploit them to generate abnormal returns? In the December 2007 version of their paper entitled “Global Tactical Cross-Asset Allocation: Applying Value and Momentum Across Asset Classes”, David Blitz and Pim van Vliet examine global tactical asset allocation strategies across a broad range of asset classes based on both value (asset yield or earnings yield) and momentum (both short-term and long-term). These strategies weight asset classes according to volatility, with higher (lower) weights assigned to classes with lower (higher) volatilities. Using price and yield data for 12 international asset classes spanning January 1985 through September 2007, they conclude that: Keep Reading

A reader inquires: “Ken Fisher did a statistical study in his book, The Only Three Questions That Count: Investing by Knowing What Others Don’t, which states that growth (value) is in favor when the yield curve flattens (steepens). Any truth to this?” To test this hypothesis, we compare the performances of paired growth and value indexes/funds as the spread between the yields on the 10-year Treasury Note (T-note) and the 90-day Treasury Bill (T-bill) varies. Using monthly and quarterly adjusted (for dividends) return data for a pair of growth-value indexes and a pair of growth-value mutual funds, along with contemporaneous T-note and T-bill yield data, we find that: Keep Reading

Are anomalies observed with varying and changing levels of confidence among U.S. stocks, such as the size effect and the value premium, evident among stocks of other countries? In their recent paper entitled “Anomalies and Stock Returns: Australian Evidence”, Philip Gharghori, Ronald Lee and Madhu Veeraraghavan test for the existence among Australian stocks of a size effect, book-to-market effect, earnings-to-price (E/P) effect, cash flow-to-price (C/P) effect, leverage (debt-to-equity) effect and liquidity (share turnover) effect. Using stock price data for 1/92-12/05 and associated accounting data for 1/92-12/04, they conclude that: Keep Reading

Are multi-year runs of bad (good) performance by individual stocks indicative of future returns? In other words, does the long-run behavior of stocks on average persist, reverse or fade to random? In their October 2006 paper entitled “Return Reversal in UK Shares”, Glen Arnold and Rose Baker examine the magnitude, persistence and source of reversals for UK stock returns. Using monthly total return and associated fundamentals data for stocks listed on the London Stock Exchange over the prior five calendar years during 1975-2002 (48 years), they find that: Keep Reading

Investors ought to reward a company that employs capital productively. One measure of firm productivity is return on invested capital (ROIC), the ratio of operating income to invested capital (debt plus equity minus cash from the balance sheet). Do stocks of high-ROIC firms outperform those of low-ROIC firms? In their June 2007 paper entitled “The Productivity Premium in Equity Returns”, David Brown and Bradford Rowe examine the relationship between ROIC and stock returns for both value stocks and growth stocks. They define value (growth) companies as those with high (low) CTEV, the ratio of invested capital (book value of equity plus debt minus cash) to enterprise value (market value of equity plus debt minus cash). Using monthly stock price data and contemporaneously available accounting fundamentals for the 1,000 largest U.S. companies during 1970-2005, they conclude that: Keep Reading

Does value beat growth among the stocks of large European firms? In their May 2007 paper entitled “Style Migration in the European Markets”, Antti Pirjetä and Vesa Puttonen compare the performances of simple value and growth styles against MSCI Europe as a benchmark index. They employ a market value-book value ratio (P/BV) to define four style portfolios formed at the end of 2001 and held for five years: (1) median value, consisting of companies with P/BV below the median; (2) median growth, consisting of companies with P/BV above the median; (3) 30-70 value, consisting of companies with P/BV in the bottom 30%; and, (4) 30-70 growth, consisting of companies with P/BV in the top 30%. Using stock return and accounting data for more than 500 of the largest European firms over the period 2001-2006, they conclude that: Keep Reading

Is the value premium so fundamental that its exists generally among stock markets? In their recent paper entitled “Value versus Growth: Australian Evidence”, Philip Gharghori, Sebastian Stryjkowski and Madhu Veeraraghavan test the abilities of indicators based on several alternative definitions of “value” to explain the cross-sectional variation in stock returns in Australia. Specifically, they test book-to-market value ratio (B/M), sales-to-price ratio (S/P), cash flow-to-price ratio (C/P) and earnings-to-price ratio (E/P). They also compare the predictive powers of these value indicators to those of size and debt-to-equity ratio (D/E). Using firm financial data for 1/92-12/04 and associated monthly stock prices for 1/93-12/04 (a total of 137,139 firm-month observations), they find that: Keep Reading

Do stocks that are difficult to trade (have low liquidity) offer abnormal returns as compensation for the risk of getting out of them? Or, is this reward-for-risk intuition unsound? In their recent paper entitled “Cross-Sectional Stock Returns in the UK Market: the Role of Liquidity Risk”, Soosung Hwang and Chensheng Lu investigate the relationship between liquidity and return for individual stocks, with focus on the link between liquidity and the value premium. They introduce a new measure of liquidity based on the absolute change in stock price per unit of turnover, with turnover calculated as the fraction of firm market capitalization traded. Using price, trading volume, capitalization and fundamentals data for UK stocks over the period 1987-2004, they conclude that: Keep Reading

How much of a long-term total return advantage do investors perceive for high book-to-market (value) stocks over low book-to-market (growth) stocks? Is this perceived premium stable over time? In their April 2007 paper entitled “The Expected Value Premium”, Long Chen, Ralitsa Petkova and Lu Zhang measure investor expectations for the value premium based on economic fundamentals rather than noisy historical returns. They assume that dividend growth rate equals capital gain rate over long periods, and that the top (bottom) 20% represents a high (low) the book-to-market ratio. Using monthly data for the period 1945-2005, they find that: Keep Reading

Reader Richard Beddard, editor of Interactive Investor, flagged a series of three studies by Keith Anderson and Chris Brooks on approaches to enhancing the value premium via empirical analysis of the price-earnings ratio (P/E) calculated with lagged earnings. One study seeks to optimize value indication based on the extent and weighting of historical earnings used in the P/E calculation. The second study seeks to concentrate the value premium by decomposing P/E into components related to market, firm size, industry and company-specific factors. The third study combines the findings of the first two and examines the returns for the extreme tails of the enhanced P/E distribution. All three studies use earnings and stock return data for a broad range of UK companies (excluding the smallest) for the period 1975-2004. Summaries of the three studies follow. Keep Reading