Value investing, the strategy of buying undervalued stocks and selling overvalued ones, has been a cornerstone of finance since Benjamin Graham and David Dodd laid its foundations. Yet, over the past decade, skeptics have questioned whether value investing still works—especially in its systematic, factor-based form. Cliff Asness and his team at AQR Capital Management have been at the forefront of this debate, defending systematic value investing while acknowledging its recent struggles. In this article, I dissect whether systematic value investing is truly dead or just undergoing a cyclical downturn.
Table of Contents
The Origins of Systematic Value Investing
Systematic value investing differs from traditional stock picking. Instead of analyzing individual companies, it relies on quantitative factors such as price-to-book (P/B), price-to-earnings (P/E), and other valuation metrics to rank stocks. The idea is simple: buy cheap stocks and avoid expensive ones. The academic foundation comes from Eugene Fama and Kenneth French’s three-factor model, which includes:
R_i - R_f = \alpha_i + \beta_i (R_m - R_f) + s_i SMB + h_i HML + \epsilon_iHere, HML (High Minus Low) represents the value factor—the excess return of high book-to-market (value) stocks over low book-to-market (growth) stocks. For decades, this factor delivered strong risk-adjusted returns.
The Recent Underperformance of Value
Since the Global Financial Crisis (GFC), value investing has struggled. Growth stocks, particularly in the tech sector, have dominated. The rise of FAANG (Facebook, Apple, Amazon, Netflix, Google) and later mega-cap tech firms like Tesla and NVIDIA has made value strategies look outdated. Consider the performance of the Russell 1000 Growth vs. Value indices:
| Period | Russell 1000 Growth (Annualized Return) | Russell 1000 Value (Annualized Return) |
|---|---|---|
| 2010-2020 | 16.3% | 11.2% |
| 2020-2023 | 19.1% | 8.7% |
This underperformance has led many to declare value investing dead. But is it really?
AQR’s Defense of Value Investing
Cliff Asness and AQR argue that value’s struggles are cyclical, not structural. They point to three key reasons:
- Interest Rates and the Discount Rate Effect
Growth stocks thrive in low-rate environments because their cash flows are back-loaded. The discounted cash flow (DCF) model shows why:
When r (the discount rate) falls, distant cash flows become more valuable, benefiting growth stocks. The post-GFC era saw historically low rates, fueling growth’s outperformance.
The Rise of Intangibles
Traditional value metrics like P/B struggle with modern firms that derive value from intangible assets (software, patents, brand value). AQR suggests adjusting value factors to include intangible capital.
Behavioral Persistence
Investors consistently overpay for growth and underestimate mean reversion. AQR’s research shows that extreme valuation spreads between growth and value tend to revert, suggesting a future rebound.
Is Value Really Dead? The Data Says No
Looking at historical drawdowns, value has faced prolonged slumps before—only to recover. The dot-com bubble is a prime example. From 1995 to 2000, growth stocks soared while value lagged. But from 2000 to 2006, value dramatically outperformed.
\text{Value Return}{2000-2006} \approx 12\% \text{ vs. Growth Return}{2000-2006} \approx -5\%AQR’s analysis suggests that current valuation spreads are near historical extremes, implying a strong potential reversal.
Modern Adaptations of Value Investing
To survive, systematic value must evolve. Some adaptations include:
- Alternative Value Metrics
Using enterprise multiples (EV/EBITDA) or free cash flow yield instead of P/B. - Combining with Momentum
AQR’s “Value and Momentum Everywhere” strategy shows that blending factors improves robustness. - International and Multi-Asset Value
Applying value principles beyond equities (e.g., currencies, bonds).
Conclusion: Systematic Value Isn’t Dead—It’s Evolving
While value investing has faced a brutal decade, declaring it dead is premature. History shows that factors go through cycles, and extreme underperformance often precedes a rebound. AQR’s research reinforces that systematic value, when adapted to modern markets, still holds merit. For patient investors, the current dislocation may present an opportunity rather than a failure.
