Does Value Still Work?

Everyone knows about value investing now, and everyone is tilting towards value, so its going to stop working. Everyone is saying this to me lately–sometimes as a question, sometimes as a statement of fact. 

Yogi Berra famously said, “no one goes to that restaurant anymore, its too popular.” Is the same thing happening to value?

The most common definition of value, courtesy of Fama/French, is book/price. But book/price has many limitations. It is not as effective as a combination of other factors which work better in large cap (B/P works best in illiquid small/micro cap). We prefer a composite factor (equally weighted calculation using s/p, e/p, ebitda/ev, fcf/ev and shareholder yield).

Here are the rolling 10-year excess returns (versus an equally weighted benchmark) for two value factors: book/price and the value composite. You can see that 1) the composite is vastly superior to B/P alone and 2) the very simple trend lines are moving in opposite directions. 

I don’t read a ton into the declining B/P trend line. I think that value works because it exploits behavioral issues in the market and because so few investors can stick with it. Case in point, a book to price value investor has underperformed for the last 10 years.  I still think even B/P will work in the future. But the data from the value composite debunks this idea that value is dead.