![]() ![]() Value has continued to outperform glamour since 1999, beating it by 8.7 percent compound, and 6.2 percent in the average year. The reason for lower returns recently may be due to the popularization of simple value strategies, but I think it’s more because the market is still working off the massive overvaluation of the late 1990s Dot Com boom.Īs I noted last week, market capitalization-weighted returns are useful for demonstrating that the outperformance of value over glamour is not due to the value portfolios containing smaller stocks. If we examine just the period since 1999, we find that, though the return is lower than the long term average, value has continued to be the better bet. Recent Performance (Market Capitalization Weight)Īs we saw last week, value’s outperformance over glamour is not a historical artifact. ![]() The rolling average has been higher, but it’s rarely been lower.): The “average” I’ve quoted is for the full period. The reason for value’s outperformance is simply due to the fact that the value portfolios generated more cashflow per dollar invested 27.2 percent versus 4.3 percent for the glamour portfolio. Cashflow Yield (Market Capitalization Weight) These returns are practically identical to the returns found for the price-to-earnings ratio in last week’s post ( Investing Using the Price-to-Earnings Ratio and Earnings Yield (Backtests 1951 to 2013)). Here we can see that the value decile has comprehensively outperformed the glamour decile, returning 16.7 percent compound (18.6 percent in the average year) over the full period versus 9.3 percent for the glamour decile (11.5 percent in the average year). In this backtest, the two portfolios are weighted by market capitalization, which means that bigger firms contribute more to the performance of the portfolio, and smaller firms contribute less. Annual and Compound Returns (Portfolio Constituents Weighted by Market Capitalization) Portfolios are formed on June 30 and rebalanced annually. Stocks with negative cashflow were excluded. For context, the 2,526th company has a market capitalization today of $272 million, which is much smaller than the average, but still investable for most investors). (Note that the average is heavily skewed up by the biggest companies. The average size of the glamour stocks is $4.74 billion and the value stocks $4.80 billion. The value decile contained the 269 stocks with the highest earnings yield, and the glamour decile contained the 311 stocks with the lowest earnings yield. ![]() As at December 2013, there were 2,526 firms in the sample. Set out below are the results of two Fama and French backtests of the cashflow yield (the inverse of the PCF ratio) data from 1951 to 2013. Many believe that using cashflow, rather than accounting earnings, delivers a truer picture of a company’s business performance, which in turn leads to better investment performance. The price-to-cashflow ratio (PCF) is a popular metric among value investors. ![]()
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