In investing, value premium refers to the greater risk-adjusted return of value stocks over growth stocks. Eugene Fama and Kenneth French first identified the premium in 1992, using a measure they called HML (high book-to-market ratio minus low book-to-market ratio) to measure equity returns based on valuation. In effect, they found that stocks with low price-to-book-value ratios performed better than stocks with high price-to-book-value ratios, in the long run).
Others, including John Bogle, founder of Vanguard and proponent of passive index investing, have argued that no value premium exists, claiming that Fama and French’s research is period dependent.
The performance of value-oriented strategies over the last 10 years has led some to question whether the value premium still exists. Looking at the S&P 500, MidCap 400 and SmallCap 600 indexes, growth has outperformed value over the last year, three years, five years and 10 years on an annualized basis. The S&P SmallCap 600 Value index has stormed back with a 20.97% price gain over the last year, lagging only the S&P SmallCap 600 Growth index’s 24.4% gain over the period.
AAII Weekly Survey Question
With so much debate over whether the value premium still exists, last weeks’ AAII reader survey asked:
Do you think the value premium still exists when it comes to investing in stocks?
Here are the results:
In all, 1,130 readers participated.
I was surprised to find that only 50% of readers believe the value premium still exists. This could have a significant impact on value-oriented strategies, such as AAII’s Model Shadow Stock Portfolio and mutual funds and exchange-traded funds (ETFs) that invest in “value” stocks. If investors pull money out of such funds and portfolios, this could have a negative impact on performance. However, this could also pose a buying opportunity for those who stick with a value mindset and the market comes back to value investing.
Weekly Special Question
To get an idea of how our readers define their personal investment approach, last week’s special survey question asked:
How would you describe your investment philosophy? Growth, value, momentum, income/dividend, etc.
In all, 276 readers participated.
Perhaps reflecting the recent trends in the market, roughly one-quarter (27%) of readers explicitly define their investment approach as growth-oriented. This was the largest single response group. Around one-fifth of respondents (20%) say they are value investors. Another 19% of readers say that they are income/dividend investors, which tends to be more value oriented.
Everybody has an opinion! Why not give us yours? Participate in our weekly member poll, updated every Monday, and see the results online at www.aaii.com/memberquestion.