Rich Pzena: The True Performance Of Value Investing Should Be Measured Over A Variety Of Endpoints

Johnny HopkinsRichard PzenaLeave a Comment

In his latest Q2 2020 Market Commentary Rich Pzena urges investors to consider the performance of value investing over a variety of endpoints, rather than just the recent past, as a better representation of the strategy’s efficacy. Here’s some excerpts from his commentary:

The extreme volatility in the first quarter led to one of the largest quarterly underperformances for value on record, raising age-old questions: Is value investing broken? If value’s supposed to protect on the downside, why does it appear to be more volatile?

Given these questions, we begin this paper with the following hypotheses:

  1. Whereas recent extreme volatility has made value investing look bad today, looking at volatility over a longer period is what should concern long-term investors.
  2. Value investing looks bad today because the endpoint is so distorted. Looking at long-term performance over a variety of endpoints is a better representation of a strategy’s efficacy.

As practitioners of deep-value investing, we observe that the valuation dispersion remains extremely wide partially because of these two arguments. In addition, the concept that something has changed that makes value investing different than the past doesn’t make sense. The practice of value investing is simply to take advantage of deep undervaluation created by investors’ emotional overreaction to recent events. We believe there are opportunities to exploit these valuation anomalies without taking excessive risk.

Our analysis of the data leads us to the following conclusions:

  1. Higher short-term volatility in value strategies versus the market does not lead to less stable long-term results. Over the past 60 years, value strategies have exhibited stability in their long-term return pattern with volatility that is in-line with the broader market. In fact, our strategy has achieved more stable long-term returns over our 25-year history than the broad market.
  2. While a strategy’s long-term track record is commonly used to measure manager capability, it has notable flaws. Return numbers are highly influenced by their starting and ending points. Once a manager has run a constant investment process for many years, we can look at the average experience over time periods and remove the vagaries of starting and ending points.


Fifteen months ago, our Focused Value strategy posted the best 10-year performance record in its history, and — after last month’s unprecedented market volatility — it posted close to its worst. Which one actually represents our “true” investment skill after 25 years of deep-value investing?

We suggest that the average 10-year return strikes a balance and presents the best representation of investor experience. But how risky are those returns? The Sharpe ratio would compare these 10-year figures with the standard deviation of monthly returns, but mismatching a long-term return horizon with short-term volatility seems odd to us. We believe looking at the standard deviation of 10-year returns is a more appropriate measure of risk.

You can read the entire Q2 2020 Market Commentary here:

Rich Pzena Q2 2020 Market Commentary.

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