Source: Morningstar Direct 2016, DFA Returns 2.0 2016; US Value Premium is defined as the return on the US Value Asset Class minus the return on the US Growth Asset Class. The US Value Asset Class is the Fama/French US Large Value Index (ex utilities) Index from 1/1/1972 – 12/31/1978 and the Russell 1000 Value TR USD from 1/1/1979-12/31/2015. The US Growth Asset Class is the Fama/French US Large Growth Index (ex utilities) Index from 1/1/1972 – 12/31/1978 and the Russell 1000 Growth TR USD from 1/1/1979-12/31/2015

Source: Morningstar Direct 2016, DFA Returns 2.0 2016; US Value Premium is defined as the return on the US Value Asset Class minus the return on the US Growth Asset Class. The US Value Asset Class is the Fama/French US Large Value Index (ex utilities) Index from 1/1/1972 – 12/31/1978 and the Russell 1000 Value TR USD from 1/1/1979-12/31/2015. The US Growth Asset Class is the Fama/French US Large Growth Index (ex utilities) Index from 1/1/1972 – 12/31/1978 and the Russell 1000 Growth TR USD from 1/1/1979-12/31/2015

This blog is the fourth in a four-part series on factors of return.

A review of the historical results of the value premium may help provide you better understanding of the long term effects of value exposure within your portfolio. (The value premium is the incremental return of stocks of companies with low relative price over the return of stocks of companies with high relative price.)

Over short periods we’ve observed a volatile U.S. value premium. The standard deviation of the U.S. value premium over one-year periods, rolling one month from December 1972 to December 2015, is 12.01%. The graph above helps illustrate the volatility of the value premium over time.

There have been 235 one-year rolling time periods with a negative premium since 1972; however, a positive US value premium occurred 54.55% of the time.

We see similar volatility with the international value premium. The standard deviation of the international value premium over one-year periods, rolling one month from December 1972 to December 2015, is 7.85%. The graph below helps illustrate the volatility of the international value premium over time.

Source: Morningstar Direct 2016, DFA Returns 2.0 2016; International Value Premium is defined as the return on the International Value Asset Class minus the return on the International Growth Asset Class. The International Value Asset Class is the MSCI World ex USA Value Index (net div.) from 1/1/1975 – 12/31/2015. The International Growth Asset Class is the MSCI World ex USA Growth Index (net div.) from 1/1/1975 – 12/31/2015.

Source: Morningstar Direct 2016, DFA Returns 2.0 2016; International Value Premium is defined as the return on the International Value Asset Class minus the return on the International Growth Asset Class. The International Value Asset Class is the MSCI World ex USA Value Index (net div.) from 1/1/1975 – 12/31/2015. The International Growth Asset Class is the MSCI World ex USA Growth Index (net div.) from 1/1/1975 – 12/31/2015.

There have been 164 one-year rolling time periods with a negative international value premium since 1972; however, a positive international value premium occurred 65.90% of the time.

We see a less volatile value premium as we extend the rolling periods. The standard deviation of the U.S. value premium decreased to 2.67% over 10-year periods, rolling one month from December 1985 to December 2015. The standard deviation for the international value premium also declined, down to 1.73% over the same time period. The chart below illustrates the decreased volatility of the premium as we extend the time frame.

There have been 164 one-year rolling time periods with a negative international value premium since 1972; however, a positive international value premium occurred 65.90% of the time. We see a less volatile value premium as we extend the rolling periods. The standard deviation of the U.S. value premium decreased to 2.67% over 10-year periods, rolling one month from December 1985 to December 2015. The standard deviation for the international value premium also declined, down to 1.73% over the same time period. The chart below illustrates the decreased volatility of the premium as we extend the time frame.

There have been 164 one-year rolling time periods with a negative international value premium since 1972; however, a positive international value premium occurred 65.90% of the time.
We see a less volatile value premium as we extend the rolling periods. The standard deviation of the U.S. value premium decreased to 2.67% over 10-year periods, rolling one month from December 1985 to December 2015. The standard deviation for the international value premium also declined, down to 1.73% over the same time period. The chart below illustrates the decreased volatility of the premium as we extend the time frame.

Positive 10-year value premiums occurred 72.92% of the time in the U.S. and 94.37% internationally. The longest period of sustained negative U.S. 10-year rolling value premiums lasted for 35 months from January 1998 to November 2000. The longest period of sustained negative international 10-year rolling value premiums has lasted from May 2014 to present.

As with the market premium and the small premium, it is important to maintain a long-term perspective when analyzing performance given the volatility in year-to-year premium performance and the long-term performance of the U.S. and international value premiums.

 

Jerrod Foster
Past performance does not guarantee future results.

Indexes are unmanaged baskets of securities in which investors cannot directly invest; they do not reflect the payment of advisory fees or other expenses associated with specific investments or the management of an actual portfolio.

All investments involve risk, including the loss of principal and cannot be guaranteed against loss by a bank, custodian, or any other financial institution.

The risks associated with investing in stocks and overweighting small company and value stocks potentially include increased volatility (up and down movement in the value of your assets) and loss of principal. International markets involve additional risks, including, but not limited to, currency fluctuation, political instability, foreign taxes, and different methods of accounting and financial reporting. As a result, they may not be suitable investment options for everyone.