The Underperformance of Value: Is This Time Different?

In the world of finance, few strategies have been as widely celebrated as value investing. 

Pioneered by Nobel laureate Eugene Fama and his colleague Ken French in the early 1990s, the “value premium”—the compelling return advantage of value stocks over growth stocks—has been hailed for decades as a cornerstone of smart, disciplined investing. 

From Wonderful to Woeful?

Historically, value stocks have outperformed growth stocks, delivering an annualized return of 12.7% compared to growth’s 9.9%. This gap of nearly 3% per year is known as the “historical value premium.”

But in the last decade, the script has flipped. Value stocks have returned a solid 9.9%, yet growth stocks soared with 14.4% annual returns, leaving value stocks lagging by nearly 5% per year.

This has led many people to declare that value investing is dead.

Underperformance in Context: Value vs. Growth (1926–2023)

Putting Things in Perspective

While skepticism is a healthy investor trait, we believe the reports of value’s death are overblown.

Every risky asset—whether U.S. stocks, international equities, growth stocks, value stocks, or real estate—has endured periods of underperformance. Take the “Lost Decade” from 2000 to 2009, when the S&P 500 Index returned nearly -1% per year, shrinking every dollar invested to just 91 cents. Or the stretch from 1965 to 1974, when U.S. stocks trailed cash by over 4.5% per year. Should investors have abandoned stocks after such painful episodes? Not at all.

These periods of disappointment are an inherent part of investing. This is the nature of risk, and why risky asset classes have historically outperformed risk-free options like Treasury bills over the long term. 

And yet, even in this challenging period, value stocks have returned nearly 10% per year—a solid return on an absolute basis. The real challenge lies in their comparison to growth stocks, which have been propelled by exceptional performance from a handful of companies. This surge is what has fueled claims of value investing’s demise. 

The Role of Valuations 

What do recent returns for value and growth stocks mean for future expectations?

The key lies in valuations—a measure of the price paid for an asset relative to its underlying value, such as earnings, cash flow, or book value.

Take the price-to-book ratio, for example. This metric shows how much investors are willing to pay for a company’s net assets, or underlying book value. While this ratio has limited predictive power for next year’s returns, valuations do matter in the long run. Historically, lower valuations have paved the way for higher returns, while higher valuations have often led to more modest gains.

As shown in the graph below, growth stocks are currently priced well above their historical average, while value stocks are aligned with theirs. This contrast could hold clues for the years ahead.

Value vs. Growth: Lessons from History

Reasons for Optimism

Historically, some of the best periods for value investing followed years of underperformance. 

Take March 1940, for example, when the value premium was a staggering -16.8% per year over the prior three years. Just three years later, value stocks had their best three-year performance ever, outperforming growth stocks by an annualized 30%.

More recently, at the end of June 2020, the three-year value premium stood at -17% per year. By April 2023, value stocks had staged a remarkable comeback, outperforming growth stocks by 11% per year over the subsequent three years.

And it’s not just a U.S. phenomenon—the value premium has thrived globally. Over the past 30 years, value stocks have outperformed growth stocks by 4.6% per year in emerging markets and by 3.4% per year in developed international markets.

From a longer-term, global perspective, claims of value’s demise seem not only premature, but a genuine cause for optimism. With patience and a strategic mindset, value investing remains as viable as ever, ready to deliver returns for those who stay the course.