Using data from the Fama–French online library to examine the ubiquitous HML series (long high book-to-market stocks and short low book-to-market stocks),2 we can illustrate just how long the value “winter” weather has been. But first let’s look at the value “climate.” The mean one-year rolling return since inception of the series in 1926 is nearly 5% and—to be conservative in the face of several extreme realizations to the upside (!)—the median of the series is still an impressive 3.7%. Furthermore, of the 1,063 monthly values for one-year rolling returns, 660 were positive (a “batting average” of more than 60%) despite streaks of negative prints as long as 29 consecutive months.3 In other words, value as defined by HML has been a reliable long-term winner, despite significant short-term disappointment along the way.

Over the shorter 1979–2015 period (1979 marking the launch of the Russell 1000 Value Index), “plain vanilla” capitalization-weighted value has faced massive headwinds, but in the same environment, fundamentally weighted, value-tilted strategies, such as the RAFI™  Fundamental Index™ series, have withstood the headwinds to generate long-term excess returns. Table 1 compares the performance of the FTSE RAFI™ US 1000 Index and the Russell 1000 Value to the cap-weighted Russell 1000 Index over the 1979–2015 period. FTSE RAFI earned an excess return of 1.87% for the period compared to the 0.31% excess return produced by the Russell 1000 Value.



Let us look more closely at the “seasonality” of a U.S. equity value strategy. In order for a value strategy to generate excess returns, mean reversion in valuations must take place. Simply put, enough “expensive” stocks must get relatively cheaper and enough relatively “cheap” stocks must get at least a little less cheap. But the requirement is not that this happens uniformly and concurrently for every security, just for a sufficient fraction of the market; that said, the last two years or so have been characterised by somewhat extraordinary circumstances in which value has been punished across virtually all sectors on a global scale. In others words, it’s been winter everywhere for the value-oriented investor.

As Figure 3 shows, over the past two years as RAFI-based strategies began to experience significant performance challenges, in nearly every sector of the developed equity market expensive stocks—the top decile by price-to-book (P/B) ratio—beat cheap stocks—the bottom decile. The sole exceptions were the healthcare and telecommunications sectors.



In response to the recurring underperformance of value stocks over the last several years, RAFI-based strategies, relying on a disciplined rebalancing approach, have increased their active weight to the two worst performing developed-market sectors—energy and basic materials—the only two sectors to post negative returns. In 2013, after rebalancing, the active weight to these two sectors for the FTSE RAFI Developed 1000 Index was 2.29%, in 2014 the active weight rose to 3.60%, and in 2015 to 5.59%.

What Winter Looks Like
As if there is doubt in anyone’s mind, let us state unambiguously that we are writing this particular missive from the depths of a very painful winter in value-land. Table 1 shows this clearly. On a 1-, 3-, 5-, and 10-year trailing basis, Russell 1000 Value generated solidly negative excess returns, −4.74%, −1.93%, −1.17%, and −1.25%, respectively. In a parallel, though much milder manner, FTSE RAFI US 1000 posted negative excess returns on a 1-, 3-, and 5-year trailing basis. Last year’s performance was very painful indeed at −3.42%, which dragged down the trailing 3- and 5-year excess returns to near zero.