Global Investment Management Value Investing Strategies Geoff Allbutt

Global Investment Management Value Investing Strategies Geoff Allbutt Radoslav Djordjevic Andreas Kyriazis Kevin Lester

Agenda • Background – Definitions – Relevant Academic Research • Research Objectives • Data and Methodology • Results and Interpretation • Conclusions

Definitions • Value Strategies – Investing in stocks that have low prices relative to earnings, book value, dividends, or other measures of value. – Introduced by Graham and Dodd, ‘Security Analysis’, 1934 • PBV ratio – – Expected Growth Opportunities, ROE Valuation Low PBV: ‘Value’ High PBV: ‘Growth’

Relevant Research • Fama & French [1992, 1996] – Value stocks generate higher average returns – Reflects compensation for additional risk • Lakonishok et al [1994] – Little evidence of higher risk for value stocks – Value stocks underpriced due to behavioral factors • Arshanapalli et al [1998] – Superior performance in 18 international markets – Higher absolute and risk-adjusted returns • Kothari et al [1995] – Attribute superior performance to research design – Survivorship and look-ahead bias, data mining

Research Objectives Questions: 1. Do value strategies outperform the market? 2. Are value strategies riskier than growth strategies? 3. How do value strategies perform under different states of the market?

Methodology • • US Market Sample period – June 1990 to June 1999 Random sample of 90 stocks from S&P 500 Formation of 5 -quintile portfolios (18 stocks) sorted based on price-to-book ratios where P 1 is the low P/B (value) portfolio and P 5 is the high P/B (growth) portfolio • Annual rebalancing (June), assumed no transaction costs • Holding Period Returns (price change plus dividends) – Equally Weighted – 12 months: July-June • Benchmark – S&P 500 Index

Results - Performance • Value Portfolio Outperformed – 21. 6% vs. 18. 4% for S&P – Beat S&P by 3. 1%, Growth by 1. 9% • Results better in 1990 -95 – Beat S&P by 11%, Growth by 8. 5% – Recession effects? • Growth beat S&P by 1. 3%

Annual Results

Results - Risk • Risk-adjusted returns not so good – 0. 36 for value, 0. 38 for growth (9 yrs) – 0. 36 for value, 0. 295 for growth (5 yrs) • Standard deviation for value stocks larger – 4. 9% vs. 4. 3% – Betas are smaller (0. 81 vs. 1. 01) – Value stocks subject to different risks

Results – Changing Betas • Up-market vs. Down-market Betas – Value stocks: Larger beta in down markets. – Growth stocks: Larger beta in up markets. • Reflection of changing expected returns – Value stocks expected to outperform in down markets, visa-versa for growth

Conclusions • Value stocks do outperform! – S&P 500, by 3. 1% per year – Growth stocks, by 1. 9% per year • This outperformance seems to be due to risk – Not market risk – Not true for 1990 -95, bubble influence? • Up/Down market betas reflect changing expected returns.