The tilt within value: dynamic value factor weighting conditional on the value spread
The “value” of value has been much discussed recently. Value stocks have sharply underperformed growth over the last three years, with the spread in valuations between the most expensive and least expensive stocks widening to record levels following the COVID-19 shock of 2020. We believe this phenomenon isn’t a long-term or structural trend, with plenty of value available in value equities. The key to capturing the payoff for value is finding the right measure of value at the right time. To do this, we look at value factors dynamically, rather than statically, to determine how to best participate in value opportunities.
The Value Spread
Can value spreads predict how value stocks will perform in the future? We believe that there are insights to be gained from the spread, depending on the measures of value used. Our research finds that some measures of value perform better than others in different market environments. One group of measures that we label “expansive-value factors” performs better when the value spread between cheap and expensive stocks is typical. Another group of measures that we term “deep-value factors” performs better when the value spread is very wide. Our research further suggests that shifting the emphasis between the two groups as the value spread changes may best inform the return opportunity and capture the payoff for value