Author Details

Saurabh Katiyar

Saurabh Katiyar
Executive Director, Equity Solutions Research

Ashish Lodh

Ashish Lodh
Vice President, Equity Solutions Research

Vishad Bhalodia

Vishad Bhalodia
Associate, MSCI Research

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Did Value-Factor Exposure Deliver for Value Funds?

  • Global and global-ex-U.S. value funds underperformed their respective MSCI regional indexes from October 2012 through April 2020, on an average basis.
  • There was a significant dispersion in the factor exposures and performance characteristics of value funds with top- and bottom-quartile exposure to value during that period.
  • While the value factor contributed positively to fund performance, exposure to other factors such as momentum contributed significantly to underperformance for the average and top-quartile-exposure funds.

Recent MSCI blog posts documented the nuanced performance of the value factor globally over the last 10 years, as well as the impact of sectors and other style factors on the value factor’s performance. In this blog, we inspect the factor exposures of active value mutual funds using MSCI FaCSTM and examine which factors drove their performance. MSCI FaCS is a standard factor classification framework that can be used to analyze and compare factor exposures.1 It groups factors used in the MCSI Global Equity Model for Long-Term Investors (GEMLT) according to a common intuitive theme. For instance, book-to-price ratio, earnings yield and long-term reversal constitute the value-factor group.

We focused on diversified global and global-ex-U.S. equity mutual funds from May 2012 through April 2020. Using MSCI’s Peer Analytics dataset, we selected funds with at least 75% (but not more than 105%) of net assets in equities, assets under management (AUM) greater than USD 10 million (but less than USD 500 billion), the keyword “value” in their name and a reported benchmark. We also excluded funds with the words “index,” “ETF” or “indexed” in their names to screen out index-linked funds. On average, our sample included 49 global value funds and 41 global-ex-U.S. value funds over the nine-year study period.

We then selected the top and bottom quartile of value funds in each region based on the average active value exposure versus their respective benchmarks over the prior six months. We equal-weighted the funds in each group to compute average active factor exposures and returns for all value funds (“full sample”), the top 25% (“top-quartile exposure”) and the bottom 25% (“bottom-quartile exposure”). The fund selection process was repeated for every six-month period.

We then compared these equal-weighted baskets of the funds’ performance with respective regional market-cap indexes as a benchmark. For example, for global-ex-U.S. value funds, we used the MSCI World ex US Index. The value funds’ factor exposures and performance have been compared with the MSCI Enhanced Value Index on the respective relevant region for reference purpose in the exhibits below.

 

Value Funds Underperformed, Especially in the Recent Period

The last decade has seen a nuanced performance of the value factor across regions. While the value factor in the U.S. performed poorly, its performance outside the U.S. was positive.

Value funds with a global focus found it especially challenging to outperform the respective MSCI market-cap benchmark between October 2012 and April 2020. Overall, the level of underperformance was more significant for global value funds as compared to global-ex-U.S. value funds, as shown in the exhibits below. In both regions, the bottom-quartile-exposure value funds outperformed the top-quartile-exposure funds.

 

Relative Performance of Value Funds and the MSCI Enhanced Value Index

Gross USD performance from October 2012 to April 2020. Source: MSCI Peer Analytics

 

Even Top-Quartile-Exposure Funds Had Low Relative Value Exposure

FaCS analysis showed remarkable deviation in the factor exposures of the top- and bottom-quartile-exposure value funds, especially the global-ex-U.S. ones.

Unsurprisingly, the top-quartile-exposure funds exhibited high active exposure to the value factor, but the bottom-quartile-exposure global funds showed a small negative active value exposure. There was a more significant negative active value exposure for the global-ex-U.S. funds.

However, even the top-quartile-exposure value funds in both regions delivered lower value exposure compared to the respective MSCI Enhanced Value Indexes and picked up significant exposure to the low-size factor. Bottom-quartile-exposure global-ex-U.S. value managers also picked up a small exposure to quality.

 

Average Active Factor Exposures of Value Funds and the MSCI Enhanced Value Index

Data from October 2012 to April 2020.

 

Momentum Swings Between Top- and Bottom-Quartile Exposures

Momentum exposure was negative for the average- and top-quartile-exposure value funds across both regions, and, as of April 2020, was at its lowest level since the beginning of the analysis period. This observation was in line with previously reported negative correlations between the value and momentum factors.

As the exhibit below shows, however, the story was quite different for the global-ex-U.S. bottom-quartile-exposure value managers. They had a positive momentum exposure on an average basis.

 

Active Momentum Exposures of Value Funds and the MSCI Enhanced Value Index

Data from October 2012 to April 2020.

 

Both Value and Residual Factor Exposures Contributed to Performance

We performed performance attribution using the GEMLT risk model. The top-quartile-exposure global value funds benefited from their value-factor exposure, but exposure to other factors also played an important role across the three groups of value funds and both regions.

For example, negative exposure to momentum detracted from performance, especially for the average- and top-quartile-exposure global value funds; conversely, bottom-quartile-exposure global-ex-U.S. value funds benefited from positive exposure to momentum. Quality was another negative contributor to the performance of average- and top-quartile-exposure value funds, but contributed positively to the performance of bottom-quartile-exposure funds across both regions.

 

Style-Factor Contribution of Value Funds and the MSCI Enhanced Value Index

Data from October 2012 to April 2020.

This blog underscores the importance of looking under the hood and gaining transparency on the factor exposures of active funds. It highlights significant dispersion in characteristics of top-quartile- and bottom-quartile-exposure value funds in terms of overall factor exposures and performance attribution. By analyzing and comparing funds based on factor exposures, institutional investors can better understand the drivers of fund performance and potential mismatches between fund investment styles and the sources of performance.

 

 

1For more details, refer to: Bonne, G., Roisenberg, L., Subramanian, R., and Melas, D. 2018. “Introducing MSCI FaCS: A New Factor Classification Standard for Equity Portfolios.” MSCI Research Insight.

 

 

Further Reading

Value investing is down. But is it out?

Factors behind value’s underperformance

Anatomy of active portfolios

Finding Value: Understanding Factor Investing

Factors separated fact from fiction

The FaCS report

Regulation