Value portfolios formed on price-to-earnings are underperforming glamour for the longest time *EVER* going back to 1951 — 9 years

Tobias CarlisleStock ScreenerLeave a Comment

The chart below shows the relative performance (blue, left-hand side) and underperformance from the nearest peak (orange, right-hand side) of equal-weighted decile portfolios formed on price-to-earnings from 1951 to April 2019.

This is a backtest. The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index.

The blue line (left-hand side) is the cumulative value premium-the outperformance of value over glamour. The blue line is relative performance, which means it shows the performance of the portfolios in the value decile–the lowest ratio of price-to-earnings–divided by the performance of the portfolios in the glamour decile–the highest ratio of price-to-earnings.

The orange line (right-hand side) shows the underperformance of the value decile relative to the nearest peak of outperformance when compared to the growth decile. For example, the second-worst period in the data was in the early 2000s run-up to the Dot Com peak, when value trailed glamour by 44 percent between May 1998 and February 2000.

This is a backtest. The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index.

The blue line here shows the number of months since value outperformed glamour. That line topped out January 2006 (with a tiny new high in February 2010). If we count from the 2010 high–and we’re currently below it–we’re 9 years deep. If we count from the 2006 high, we’re now more than 13 years and 3 months into value’s underperformance. Ugh.

Over the full data set, portfolios in the value decile have returned 18.6 percent on a compounded yearly basis. Glamour portfolios have returned 9.5 percent compounded, which means the value decile has typically outperformed the glamour decile by an average of 9 percent per year. Since the January 2006 high, value has underperformed glamour by 17 percent.

The last time value underperformed by a very wide margin–the 22 percent from August 1998 to February 2000–the catch-up was very rapid. By November 2000–9 months later–value was square with glamour–and went on to return about 3.4 times the return of glamour over the following 10 years to April 2010–the last peak. (Despite the recent underperformance, value is still 2.8 times ahead of glamour since February 2000 nadir.)

At April 2019, the average market cap of stocks in the P/E glamour portfolio was $16.6 billion versus $6.8 billion for the value portfolios. Further, the value portfolios comprised 184 firms and the glamour portfolios held 240 firms.

Check out a similar analysis of the price-to-free cash flow metric in the market cap-weight portfolios.

French Data: http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html#Research

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