The quants at $609 billion Dimensional Fund Advisors are here to set the record straight: Value investing isn’t broken.
Sure, the strategy of buying apparently cheap stocks just tumbled to a fresh two-decade low versus one of chasing growth shares. Rivals are exploring fixes for the brand of systematic trading that dissects stocks by factors like how depressed their valuations look and how fast they’ve risen.
Even the finance legends who helped birth the investing style -- Eugene Fama and Kenneth French -- are harboring doubts about whether it’s still got juice.
But for all that, the quant giant of Texas is unbowed.
“Certainly the last 10 to 15 years have been a very painful experience for being exposed to or pursuing the value premium,” Savina Rizova, Dimensional’s research chief said in an interview in London. “Premiums can turn around quickly.”
To the Austin-based firm, even an epic stretch of underperformance is no reason to doubt what their academic research still shows: As long as there are material differences in market valuation, cheaper stocks will eventually win out.
The money manager -- one of the largest of its kind -- helped bring rules-based value to the investing masses and continues to pitch the style across its huge network of financial advisers.
Its unwavering belief in tried-and-tested academic models feels increasingly old school, as billions flee this corner of quantland and competitors toy with artificial intelligence and alternative data.
Traditional factors have delivered diminishing returns in the post-crisis era. Dimensional’s $30 billion U.S. core equity fund, which invests based on the value, size and profitability factors, has lagged its capitalization-weighted benchmark, the Russell 3000, on a one-, three-, five- and 10-year basis.
It’s not clear what the fix is, or if any is needed at all. Rizova pours cold water on a popular new approach to revamp value. Research Affiliates has found that capitalizing intangible assets on company balance sheets would have nearly doubled the strategy’s annual return from the 1990s onward. The argument is that ignoring research and development makes stocks look pricier than they really are.