Global Investment Management

1
Global Investment Management

• Value Investing Strategies

Geoff Allbutt Radoslav Djordjevic Andreas
Kyriazis Kevin Lester
2
Agenda

• Background
• Definitions
• Relevant Academic Research
• Research Objectives
• Data and Methodology
• Results and Interpretation
• Conclusions

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Definitions

• Value Strategies
• Investing in stocks that have low prices relative
  to earnings, book value, dividends, or other
  measures of value.
• Introduced by Graham and Dodd, Security
  Analysis, 1934
• PBV ratio
• Expected Growth Opportunities, ROE
• Valuation
• Low PBV Value
• High PBV Growth

4
Relevant Research

• Fama French 1992, 1996
• Value stocks generate higher average returns
• Reflects compensation for additional risk
• Lakonishok et al 1994
• Little evidence of higher risk for value stocks
• Value stocks underpriced due to behavioral
  factors
• Arshanapalli et al 1998
• Superior performance in 18 international markets
• Higher absolute and risk-adjusted returns
• Kothari et al 1995
• Attribute superior performance to research design
• Survivorship and look-ahead bias, data mining

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Research Objectives

• Questions
• Do value strategies outperform the market?
• Are value strategies riskier than growth
  strategies?
• How do value strategies perform under different
  states of the market?

6
Methodology

• US Market
• Sample period June 1990 to June 1999
• Random sample of 90 stocks from SP 500
• Formation of 5-quintile portfolios (18 stocks)
  sorted based on price-to-book ratios where P1 is
  the low P/B (value) portfolio and P5 is the high
  P/B (growth) portfolio
• Annual rebalancing (June), assumed no transaction
  costs
• Holding Period Returns
  (price change
  plus dividends)
• Equally Weighted
• 12 months July-June
• Benchmark SP 500 Index

7
Results - Performance

• Value Portfolio Outperformed
• 21.6 vs. 18.4 for SP
• Beat SP by 3.1, Growth by 1.9
• Results better in 1990-95
• Beat SP by 11, Growth by 8.5
• Recession effects?
• Growth beat SP by 1.3

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Annual Results
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Results - Risk

• Risk-adjusted returns not so good
• 0.36 for value, 0.38 for growth (9 yrs)
• 0.36 for value, 0.295 for growth (5 yrs)
• Standard deviation for value stocks larger
• 4.9 vs. 4.3
• Betas are smaller (0.81 vs. 1.01)
• Value stocks subject to different risks

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Results Changing Betas

• Up-market vs. Down-market Betas
• Value stocks Larger beta in down markets.
• Growth stocks Larger beta in up markets.
• Reflection of changing expected returns
• Value stocks expected to outperform in down
  markets, visa-versa for growth

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Conclusions

• Value stocks do outperform!
• SP500, by 3.1 per year
• Growth stocks, by 1.9 per year
• This outperformance seems to be due to risk
• Not market risk
• Not true for 1990-95, bubble influence?
• Up/Down market betas reflect changing expected
  returns.