Read some interesting research recently from Brandes Institute who are a well know US Value Manager. They have produced research on the performance of the well known value factor and the graphic above comes from a write up about this which appeared recently on Value Walk which I find to be a useful website.
They extended previous US based research to cover global markets and found the same positive results for Value versus glamour stocks. They did however point out that there can be extended period when value underperforms such as in the late 1990's tech boom, but overall it outperforms more often than not. Interestingly from the graphic above it seems that non- US developed market value stocks seem to perform slightly better than US ones and suffer fewer periods of under performance. If this is of interest to you then you can read more by clicking the image above or download the original Brandes report below.
Another interesting research document I cam across recently looked at a Consumption-Based Explanation of Expected Stock Returns. I cam across this thanks to the awesome Wes Gray, one of the the authors of Quantitative Value, at his website. In this recent post he looked at significant and robust out performing factors such as Value and momentum and these were matched by the aforementioned Consumption based model as researched by Motohiro Yogo.
It is quite a technical paper with lots of stats to wade through and I'm not sure how applicable it is to everyday investing other than as a guide to think about how you might allocated between value, growth, large and small cap given where you are in the economic / stock market cycle. The author's conclusions were as follows:
Regardless of whether one believes in the representative household model, this paper has
uncovered some intriguing facts about stock returns and the business cycle, which should
guide future research.
1. Small stocks and value stocks have higher non durable and durable consumption betas
than big stocks and growth stocks. The returns on small stocks and value stocks are
more pro-cyclical than those on big stocks and growth stocks.
2. The expected stock return is high (low) when non durable consumption growth is high
(low) relative to durable consumption growth. The equity premium is strongly counter-
3. The conditional covariance of stock returns with durable consumption growth is high
(low) when non durable consumption growth is high (low) relative to durable consumption growth.
Stock returns tend to be unexpectedly low (high) during recessions (booms).
The bottom line quite obviously is that stocks do well in booms and badly in busts, but intriguingly small cap and value stocks seem to be geared into this cycle which I guess makes intuitive sense. Any way as I say not sure how one can apply this other than maybe making sure that you are up to speed with how the economy is shaping up and if a recession looks like it is on the way then obviously invest accordingly. I guess one could track durable v non-durable consumption from economic data releases and maybe use this as a signal. You can get a copy of the whole 62 page paper from within Wes Gray's post above if that is of interest to you.
Next up if you are still with me is an oldie but goodie from Tweedy Browne, another well known US Value manger called
The High Dividend Yield Return Advantage.
I'll let that speak for itself if you haven't seen it before then I would highly recommend it. While on a similar track I attach below some interesting research on Dividends: A review of Historic Returns - which also makes interesting reading in my opinion.
Compound Income Scores Research
Finally, if you are still with me, hopefully I have saved the best until last. Please find attached below a short e-book I have written explaining the background to and the research underpinning the Compound Income Scores, enjoy and have a great weekend.