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Leon Roisenberg

Leon Roisenberg
Executive Director, Equity Core Research

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Factors behind value’s underperformance

  • Over the last 10 years, the historically consistent positive relationship between exposures and subsequent returns for U.S. value factors deteriorated drastically. In contrast, U.S. momentum’s quantile return patterns improved over the same period.
  • Over the same period, the negative correlation of momentum and value returns did not break down; it generally strengthened.
  • The latest valuation spread scores from the MSCI Integrated Crowding Model indicated that value was the cheapest it’s been since the technology bubble of the late 1990s.

A recent MSCI blog post documented what drove the value factor’s poor performance in the U.S. over the last 10 years. Here we expand on that analysis and examine if there were structural changes in the relationship between value and momentum and quantify the contributions of other style factors to value’s performance.


Value decile return patterns changed drastically over the last decade

The exhibits below illustrate the changes in factor decile portfolio returns over the last two decades and compare them to the growth- and momentum-driven markets of the late 1990s. They show equal-weighted average excess-of-market annual returns of decile portfolios based on individual stock factor exposures in the MSCI’s Barra U.S. Total Market Equity Model (USTMM).1 The monotonic positive relationship between value exposures and subsequent returns, which was present from January 2000 through December 2009, deteriorated and, in some cases, reversed over the decade that followed.

At the same time, the decile-return patterns improved for price momentum with the negative momentum returns of the two deciles with the lowest exposure becoming more negative and the returns of the decile with the highest exposure changing from negative to positive. The distributions of decile returns over the last decade are in many respects qualitatively similar to the ones in the late 1990s.


Factor returns for value and momentum by exposure decile


Value-momentum return correlations became more negative

The opposite trends in the efficacy of value and momentum metrics over the last 10 years were mirrored by generally negative and declining correlations of the USTMM’s value and momentum factor returns. Correlation of momentum and book-to-price increased, somewhat, after reaching its lowest-ever levels in 2015, but remained negative, and correlation of momentum and earnings yield was at the low end of its historical range over the last several years.

It is notable that the exposure correlations for earnings yield stayed near zero, even as the factor-return correlations became more negative over the last decade. Thus, not only did the negative relationship between value and momentum not break down;  it strengthened.


Value-momentum correlations

Rolling six-month correlations of daily factor returns from January 1996 to September 2019. Source: MSCI’s Barra U.S. Total Market Equity Model


Impact of other style exposures on value

Last, we examined to what extent incidental exposures to other style factors affected value returns. We compared the USTMM’s value-factor returns, which zero out exposure to all non-target style and industry factors (“all styles”) to “single style” factor returns, which zero out exposure to industry factors, but include potential exposures to non-target style factors.

While a “single style” earnings yield factor outperformed its “all styles” counterpart from 2000 to September 2019, benefiting from exposures to other factors, its negative exposure to momentum was the largest detractor from performance during both decades (as seen in the bottom part of the exhibit below). The magnitude of this performance drag was smaller from January 2010 to September 2019, both in absolute terms and as a fraction of performance difference.


Value factor’s performance and return contributions 

                   US earnings yield cumulative percentage returns                                       US book-to-price cumulative percentage returns

On the other hand, a “single style” book-to-price factor underperformed its “all styles” counterpart for the 10 years since January 2010, the opposite of the prior 10 years. While the “single style” factor’s negative exposure to momentum benefited performance during the 2000s, it was the largest detractor from performance during the last decade, due to momentum’s strong performance.


Historically wide valuation spreads

While value factors struggled over the last decade, they have experienced similar prolonged periods of underperformance in the past. Value struggled during weakening economic environments, as well as growth-/momentum-driven markets, such as the technology bubble of late 1990s. The silver lining may be that, historically, value factors performed better after periods of poor performance. Current valuation spread scores from the MSCI Integrated Crowding Model indicate that value factors are out of favor, while momentum continues to be very popular with investors. The magnitudes of these scores have only been exceeded during the technology bubble.



1Approximately 2,500 stocks in the model’s estimation universe.



Further Reading

Value investing is down. But is it out?

Finding Value: Understanding Factor Investing

Growth’s recent outperformance was and wasn’t an anomaly

Factors separated fact from fiction

The FaCS Report