Is value dead? Research Affiliates’ Vitali Kalesnik answered

Article written by Niina Arkko, CFA Society Finland Board Member

Niina Arkko, CFA with Vitali Kalesnik from Research Affiliates

Value investing is not dead! The value engine is actually quite healthy, according to Research Affiliates’ publication ”Reports of Value’s Death May Be Greatly Exaggerated”.

Antti Raappana, CFA, welcomed everyone to the event.

CFA Society Finland kicked off the new year by hosting one of the authors, Vitali Kalesnik, presenting the key findings of the research paper at a morning seminar in Helsinki. The event was fully booked well before the registration deadline date. (Note to our members and candidates: Please remember to register in time to ensure your seat at our upcoming events!)

Value investing has underperformed relative to growth investing over the last 12 years. Since July 1963, when the authors’ data sample begins, the current value drawdown has been by far the longest and also the second-largest, which is not far from the deepest, the Tech Bubble bursting a couple of decades ago.

The research paper examines the popular narratives, which include technological revolution, crowded trade, low interest rates, intangibles, and growth of private markets, that claim value’s poor relative performance may be the new normal, and value investing style no longer viable. None of these arguments are supported by sufficient evidence to declare a structural break.

Instead, the researchers demonstrate that the primary driver of value’s underperformance has been growth stocks getting more expensive relative to value stocks — a process that is called revaluation, accounting for 70% of growth’s outperformance over the past 12 years.

Vitali and his colleagues also explored whether value has been mismeasured and whether book value is the right denominator for value. In today’s economy, intangible investments play a crucial role. Yet when internally created, they are ignored in book value calculations. A measure of value calculated with capitalized intangibles outperforms the traditional price-to-book measure according to the research.

Matti Ilmanen, CFA (left) with Research Affiliates’ Joe Steidl.

With today’s valuation gap at an extreme, the stage is set for outperformance of value relative to growth over the coming decade. Although the analysis is based on historical data and one should always remember returns are noisy — expected returns are indeed elevated when relative valuations are in the extreme tail of a distribution.

Thank you Vitali for visiting and educating us. We at CFA Society Finland are excited to get more and more great speakers to Helsinki, please follow our website for further information on our upcoming events. See you on board!

Vitali Kalesnik, PhD in economics from the University of California, is a partner and senior member of the investment team at Research Affiliates. He leads research and business strategy in the European region. Vitali has co-authored a publication “What Is quality?” which just won the Graham and Dodd Award in the beginning of this year. He has also co-authored other articles that have been recognized with two Graham and Dodd Scroll Awards, a Financial Analysts Journal Readers’ Choice Award, a William F. Sharpe Indexing Achievement Award, and a Bernstein Fabozzi/Jacobs Levy Award.