Value is an asset class, not an investment strategy. Identifying low relative price stocks is only one step toward designing and managing a value strategy; differences in managers’ implementation skill can lead to a wide range of outcomes experienced by value investors. Investors can evaluate these outcomes by assessing whether managers delivered what they said they would deliver. In the case of systematic value strategies, strong performance during periods when value stocks outperform signals an ability to capture value premiums when they appear.
A Difference of Opinion
If 80% of success is just showing up, it follows that exposure to value stocks is a helpful start to capturing the value premium. However, even within a value category, exposure to low relative price stocks varies substantially across funds. For example, the 200-plus funds in the large cap value Morningstar category over the 10-year period ending March 31, 2022 had average price-to-book ratios ranging from 1.3 to over 6.6. That variation means not all funds in the category shared the same experience when the value premium appeared. In months when the Russell 1000 Value Index outperformed the Russell 1000 Growth Index, the average monthly net return for these funds ranged from 0.41% to 2.44%. A cursory inspection of the returns plotted against price-to-book ratios in Exhibit 1 reveals a negative relation for these months; all else equal, the greater the value exposure, the better the performance.
Exhibit 1
Categorical Imperative
Performance vs. price-to-book for large cap value funds in months when value outperforms growth, April 2012–March 2022
Performance includes reinvestment of dividends and other earnings. Performance data shown represents past performance and is no guarantee of future results. Current performance may be higher or lower than the performance shown. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost.
Data provided by Morningstar. Sample includes funds available throughout the period with at least one data observation in every year of the sample period and listed in the US Large Value Morningstar category as of the sample start date. Data for fund share classes are aggregated to the fund level. Each data point in the chart is based on time series averages for a single fund. Months when value outperforms growth is based on the return difference between the Russell 1000 Value Index and the Russell 1000 Growth Index.
Testing Grounds
Dimensional’s value strategies seek to maintain a consistent focus on value stocks, day in and day out. We do this because we expect a positive value premium every day. While realized premiums can be negative, there is no evidence investors can reliably predict such occurrences.1 On the other hand, there is ample evidence the value premium can show up in bunches.2 A process that stays the course in its pursuit of value can therefore boost the odds of harvesting the premium when value stocks outperform.
A consistent focus on value stocks means that when the value premium materializes, Dimensional’s value strategies are in position to deliver the premium. Exhibit 2 shows the benefits of consistent focus on the value premium. The results show pervasive outperformance across market segments and geographical regions. When evaluated this way, Dimensional’s value funds delivered on their goal of capturing value premiums when they appeared.
Exhibit 2
Delivering the Goods
Average monthly performance relative to Morningstar category peer average, April 1, 2012- March 31, 2022
Performance for the portfolios is reported net of all advisory fees and includes reinvestment of dividends and other earnings. Performance data shown represents past performance and is no guarantee of future results. Current performance may be higher or lower than the performance shown. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. To obtain the most current month-end performance data, visit us.dimensional.com.
Morningstar category peer average returns are sourced from Morningstar. Sample period is 4/1/2012–3/31/2022. US Large Cap Value Portfolio compared to peers in US Large Value Morningstar category, US Small Cap Value Portfolio compared to peers in US Small Value Morningstar category, International Value Portfolio compared to peers in Foreign Large Value Morningstar category, International Small Cap Value Portfolio compared to peers in Foreign Small/Mid Value Morningstar category, and Emerging Markets Value Portfolio compared to peers in Diversified Emerging Markets Morningstar category.
Months When Value Was Positive defined as months when the return of the Russell 1000 Value Index is greater than the Russell 1000 Growth Index for the DFA US Large Cap Value Portfolio, as months when the return of the Russell 2000 Value Index is greater than the Russell 2000 Growth Index for the DFA US Small Cap Value Portfolio, as months when the return of the MSCI World ex USA Value Index (net div.) is greater than the return of the MSCI World ex USA Growth Index (net div.) for the DFA International Value Portfolio, as months when the return of the MSCI World ex USA Small Value Index (net div.) is greater than the return of the MSCI World ex USA Small Growth Index (net div.) for the DFA International Small Cap Value Portfolio, and as months when the return of the MSCI Emerging Markets Value Index (net div.) is greater than the return of the MSCI Emerging Markets Growth Index (net div.) for the DFA Emerging Markets Value Portfolio. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. MSCI data © MSCI 2022, all rights reserved. See Exhibit A for additional important information and “Standardized Performance Data and Disclosures” to learn how to obtain complete information on performance, investment objectives, risks, advisory fees, and expenses of Dimensional’s funds.
Buyer Being Aware
Delivering on expectations helps investors pursue their goals by keeping the asset allocation decisions in their hands, not the manager’s. After all, uncertainty over what you’re going to get should be reserved for boxes of chocolates, not investment strategies.
Appendix
Annualized Performance
Performance for the portfolios is reported net of all advisory fees and includes reinvestment of dividends and other earnings. Performance data shown represents past performance and is no guarantee of future results. Current performance may be higher or lower than the performance shown. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. To obtain the most current month-end performance data, visit us.dimensional.com.
The sample period for the analysis is July 1, 2012 to June 30, 2022. Total number of months for the sample period is 120.
Performance in different environments may differ and may include losses. Premiums can be defined and measured differently from what is used here. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio.
FOOTNOTES
1 Wei Dai, “Premium Timing with Valuation Ratios” (white paper, Dimensional Fund Advisors, March 2016).
2 “An Exceptional Value Premium,” Insights (blog), Dimensional Fund Advisors, October 2020.
3 Performance information as of 6/30/22.
4 Fee and expense information as of the prospectus dated 02/28/22.
DISCLOSURES
Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission.
Consider the investment objectives, risks, and charges and expenses of the Dimensional funds carefully before investing. For this and other information about the Dimensional funds, please read the prospectus carefully before investing. Prospectuses are available by calling Dimensional Fund Advisors collect at (512) 306-7400 or at us.dimensional.com. Dimensional funds are distributed by DFA Securities LLC.
This information is not meant to constitute investment advice, a recommendation of any securities product or investment strategy (including account type), or an offer of any services or products for sale, nor is it intended to provide a sufficient basis on which to make an investment decision. Investors should consult with a financial professional regarding their individual circumstances before making investment decisions.
Risks include loss of principal and fluctuating value. Investment value will fluctuate, and shares, when redeemed, may be worth more or less than original cost. Small and micro cap securities are subject to greater volatility than those in other asset categories. Value investing is subject to risk which may cause underperformance compared to other equity investment strategies. International and emerging markets investing involves special risks, such as currency fluctuation and political instability. Investing in emerging markets may accentuate these risks. The fund prospectuses contain more information about investment risks.
ETFs trade like stocks, fluctuate in market value and may trade either at a premium or discount to their net asset value. ETF shares trade at market price and are not individually redeemable with the issuing fund, other than in large share amounts called creation units. ETFs are subject to risk similar to those of stocks, including those regarding short-selling and margin account maintenance. Brokerage commissions and expenses will reduce returns.
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