Here’s a great new paper by the team at GMO which discusses the factors that have caused the underperformance of value investing in the past decade, stating:
The performance of U.S. value over the last decade has led many to wonder whether the value premium has been completely eroded. We analyze this question by decomposing the relative returns of cheap stocks in order to understand what has driven this change in performance. Our return decomposition suggests value stocks’ performance erosion can be evenly attributed to a reduction in the value premium and a widening of the value spread. Though value might deserve to trade at a greater discount today due to the market’s current dynamics, we believe that cheap stocks are still likely to deliver a premium and are therefore well-positioned to outperform the broad market.
You can download the fullwhite-paper here – GMO: Risk and Premium, A Tale of Value (pdf).
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