Quant Giant Rebuts Popular Theory on How to Save Value Investing

(Bloomberg) — Value investing has trailed growth for a decade, and one popular theory why is that it fails to capture things like patents or brand reputation when deciding a company’s worth. The latest research by quant house Dimensional Fund Advisors pours cold water on this explanation.

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Items like the importance of a brand or a proprietary design — for instance, for a microchip — are so-called intangibles that are harder to appraise than physical assets like factories.

On one view, value investing fails to get a handle on what firms are worth because it stumbles over intangibles, leaving it struggling to achieve the goal of identifying cheap shares set to rally. Adjusting for intangibles can improve the factor’s performance, so the argument goes.

Dimensional, which manages about $514 billion, analyzed intangibles that U.S. companies developed internally as well as those they acquired. It concluded that value investors should refrain from trying to adjust for them as doing so doesn’t deliver a consistent boost for returns.

“Adjusting for intangibles would not have tangible benefits for investors based on our historical research,” Savina Rizova, head of research, said in an interview. Such an approach fails to deliver a “consistent performance benefit” for value investors, she said.

© Bloomberg Growth stocks surged ahead of value counterparts in past decade

Over about five decades, the so-called average value premium adjusted for internally developed intangibles and controlling for sectors is 3.6%, versus 3.2% without, according to Dimensional’s analysis. The value premium is the degree to which value stocks outpace growth counterparts. The paper argues the difference identified by the research isn’t a reliable one.

The Russell 1000 Value Index of firms with lower price-to-book ratios has doubled in the past decade, lagging the 317% surge in its growth counterpart. The debate about whether value investing’s foundations are solid continues to rage, with some analysts predicting a revival for beaten-down stocks as economies recover from the pandemic.

Dimensional plans to do more work on the topic of intangibles by covering more countries. A preliminary analysis suggests the takeaways are fairly similar, Rizova said.

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