It doesn’t matter how many different ways one slices and dices the value investing universe. “One thing remains true: cheap stocks have had an unhappy decade,” declares Grantham Mayo’s John Pease, a member of the firm’s asset allocation team.

Academic theory from Fama and French, as well as long-term investing experience delivered by the likes of Benjamin Graham and Warren Buffett, has contended that those who buy cheap stocks with a margin of safety will be rewarded over the long term. And from 1981 to 2006, a period encompassing the tech stock boom of the 1990s, value stocks outperformed racier growth equities by 2.3 percent annually. Since then, however, they have outperformed in only four of the past 13 years, Pease says.

Two years ago in an extended interview, I had the opportunity to ask GMO founder Jeremy Grantham what was going on with value investing and how it was changing. He acknowledged that certain metrics like price-to-book value were no longer as relevant in an information economy where traditional brick-and-mortar assets were far less valuable than patents and other intellectual property.

In the current paper, Pease offers four possible explanations for why value has suffered:

1. Some researchers argue that “value previously earned above average returns because investors extrapolated poor fundamental growth” too far into the future, and their behavioral bias caught up to them.

2. Others claim the commoditization of “smart beta” caused factor crowding, “eroding the value premium.”

3. Something more fundamental, like “increased concentration,” made growth companies “inherently more competitive,” leaving value companies with structural disadvantages.

4. Finally, there are those who believe “the value premium is alive and well,” and value investors just need to remain patient.

These arguments offer an explanation for almost everybody, Pease writes. For example, if the value premium were a “purely behavioral” phenomenon—cheap stocks simply aren’t sexy—one would “expect it to erode” as investors figured it out.

Factor crowding represents another variant of the same logic, Pease notes. If the value premium was “a rational compensation” for certain risks associated with cheap stocks, a change in market preferences should correspondingly “change the required rates of return” for them.

Others believe something really has changed in our digital economy and 20th century companies in smokestack America face new sources of disruption on numerous fronts. Their asset-heavy financial structures makes it difficult to react to asset-light upstarts.

The final theory—nothing really has changed—is what value investors would love to hear. Given that economic and market cycles are much longer today than they were in the mid-20th Century, this perspective may have some merit. As Pease notes, “giving up on value” after an extended period of poor performance could turn out to be terrible timing.

What are Grantham Mayo’s conclusions? The good news for value investors is that “atypical undergrowth is not the culprit.” Value stocks are not performing worse than they have in the past when judged by fundamental investing metrics.

Instead, the blame should be attributed to the other three drivers of return, though not equally.

As valuations across all sectors have risen, Pease notes that “income differentials have waned” and yield have become compressed. Growth companies have enjoyed more persistent profitability and higher multiples, “leading to fewer new value opportunities.”

Are value investors in for another rough decade? Pease acknowledges that the value premium may not be as pronounced “as it has been in the past.”

But today value’s “discount is wide.” And while one can find numerous reasons “for value to trade at a greater discount today,” their current huge discount leaves these stocks positioned to deliver excess returns.

Why have they lagged so much for the last 13 years? One factor is turnover, or what GMO terms the rebalancing effect. That occurs when value investors sell stocks that have become more expensive and buy cheaper stocks. “The changes in multiples to the value cohort underestimate the true gains reaped by investors from multiple expansion,” Pease writes.

In the 1981 to 2005 period, this rebalancing effect provided almost 4 percent of returns. Over the last 13 years, this driver of returns has shrunk by 0.6 percent.

In the last decade, the biggest challenge for companies in a low-growth, low-inflation world has been generating top-line revenue growth. Has the gap in top-line growth between value and growth widened? No, according to Pease. Companies in the value universe continue to trail growth companies by about 3 percent a year.

Has the quality of their earnings deteriorated? Not at all. If anything, Pease declares the quality of value companies' profits are higher than they were in the 25-year period up to 2005.

The income arena may be where some of the asset class's current woes are located. Value businesses are expected to reward investors with higher yields in return for slower rates of growth. In the 1980s, this translated into about 2 percent addiional yield annually.

As the entire market has become more expensive however, "the yield advantage of cheap companies wanes," assuming their discounts relative to the market remains similar. That means their "yield advantage" is no longer as attractive. Therefore, income becomes a smaller driver of positive relative returns.

What about rebalancing? Pease uses the example of Jack Welch's 20-year tenure at GE, which he attempted to transform from an old-fashioned value company into a growth engine. At the helm of a conglomerate with a vast portfolio of divisions, he sold or jettisoned slow growing and underperforming businesses and reinvested in companies with growth potential.

After his first decade at GE, Welch had mesmerized Wall Street and was rewarded with a high multiple stock. At that point, he was able to go into the market and acquire lots of low-growth, cheap insurance carriers using pricey GE shares. The transactions were accretive to earnings and fueled profit growth. GE was essentially a financial and industrial conglomerate masquerading as a growth company selling at 30 times earnings and Wall Street fell for it hook, line and sinker.

Many believe that GE and others failed to realize the long tail liabilities associated with many of these insurers, particularly with long-term care insurance. Welch's management of GE (and his successor Jeffrey Immelt) has become controversial in recent years, largely because of issues relating to questionable accounting. Pease doesn't address those problems.

What he explores is the "replacement process," where a "formerly disappointing company sees its fortunes change" and its share price responds. In the last decade, Microsoft's turnaround following the replacement of CEO Steve Ballmer is another example.

Microsoft's experience aside, "rebalancing has disappointed somewhat" since 2005, Pease concludes. While portfolio turnover—or companies moving from value to growth and vice versa—has been significant, it isn't "benefitting investors as much as it did previously."

Three possible factors explain this phenomenon, Pease's view. Stocks simply are rotating less between value and growth, the valuation gap "between securities exiting and joining the value group becoming more compressed," and the correlation of rotation volume and valuation spreads are dropping.

The real question is why and Pease concedes it may be a question for another day. But among the possible answers are growth companies are enjoying more sustainable profitability, lending "credence to the fundamental shift theory," and there has been a slowdown in the number of takeovers of cheap companies.

The Carl Icahn's and Bill Ackman's of the world are now activists, not takeover artists. All other things being equal, that means they don't believe that managements of companies with low valuations are so incompetent that an outsider can easily improve results. In the 1980s, corporate raiders were confident they could increase shareholder value even if they knew little about the mechanics of the underlying businesses.