The Objective Relationship Between Value Factors and Valuation Principles - Digital Cryptocurrency Exchange Platform

Value factors are one of the main factors discovered by economists,

In the long term,

these factors tend to generate above-average returns.

They are essentially classifications of stocks based on certain characteristics,

such as size,

and the health of the company’s balance sheet.

Over the past 20 years,

the computer-driven,

algorithm-driven quantitative investment industry has developed rapidly,

and systematically uncovering factors is at the core of this industry.

This is what we often refer to as the Factor Zoo or Factor War.

Data from: Bloomberg

Among the $1.9 trillion factor strategies,

BlackRock divides the industry into proprietary factors ($1 trillion),

enhanced factors (found in hedge funds, $209 billion),

and $729 billion in Smart Beta:

Data from: BlackRock

At the same time,

poor performance of value factors has been frequently observed recently.

It’s unclear how many strategies based on value factors are still struggling.

Similarly,

for some quantitative analysts,

this is enough to make them question themselves.

Data from: TCI

The title of a recent controversial report by Bernstein’s head of quantitative strategy, Inigo Fraser-Jenkins, is “Why I No Longer Consider Myself a Quant.”

He believes,

the original sin of quants like him is that,

they mine historical data,

searching for long-term effective clues,

but they hide the facts of market mechanisms.

This could mean that methods effective in the past may fail in the future.

The core of quantitative investing is applying backtests to future investment decisions.

But,

if the rules change,

what does that mean for quantitative research and backtesting?

In short,

Fraser-Jenkins believes,

the core idea of mean reversion is: market patterns will eventually self-correct,

finding a new position,

but they may have already disappeared under this new system.

Value-oriented quantitative hedge fund AJO Partners recently closed its hedge fund AJO,

Founder Ted Aronson said: “This approach can last for years,

even decades,

until that invisible hand slaps you,

saying: ‘This approach worked in the past,

but it doesn’t anymore! It’s not working! Never again!’.”

Let’s talk about AJO Partners!

AJO Partners was founded in 1984,

and managed over $30 billion at its peak in 2007.

Currently,

AJO Partners, managing $10 billion, announced recently that

it plans to close by the end of this year,

and return the funds to clients.

As of the end of September,

AJO Partners’ AJO declined by 15.5%,

lagging behind the benchmark.

AJO’s largest fund,

with assets of about $5.1 billion,

was cited by Aronson as a main reason for poor performance of value funds.

His exact words were: “The drought in value — the longest on record — is at the heart of our challenge. The length and the severity of the headwinds have led to lingering viability concerns among clients, consultants, and employees.”

Data from: Brewin Dolphin

The Russell 1000 Value Index has fallen 10% this year,

by contrast,

the Russell Growth Index rose nearly 30% in 2020:

Data from: Bloomberg

Data from: Refinitiv

Over the past 10 years,

U.S. growth stocks have increased by over 300%,

three times the return of value stocks.

Data from: Bank of America

Andrew Lapthorne, head of quantitative research at Société Générale, states: We must be clear,

the performance of value strategies is the worst in 100 years.

But more importantly,

we need to understand where the problem lies.

Lapthorne says,

the fundamental reason is: cheap stocks are currently undervalued or becoming even cheaper,

because they tend to appear in more economically sensitive sectors,

and overall,

since the 2008 financial crisis,

global economic growth has been sluggish.

Meanwhile,

the continuously falling bond yields are forcing investors to invest in expensive, fast-growing stocks in sectors like technology.

Some also criticize that traditional methods of measuring stock value are outdated.

Historically,

the main approach has been comparing stock prices to a company’s book value,

which is the total assets on the company’s balance sheet minus depreciation,

wear and tear, and amortization,

and the difference between total assets and total liabilities.

However,

this metric does not include intangible assets like brands and intellectual property.

Today,

the proportion of intangible assets in a company’s value often exceeds tangible assets.

A paper by research firm Research Affiliates points out: Given the increasing importance of intangible assets in a company’s total capital,

adding intangible assets to calculations can provide a more comprehensive measure of a company’s capital.

Just like homebuyers consider attached school districts,

investors should also consider some transient but important factors.

However,

Savina Rizova, head of research at Dimensional Fund Advisors, found the opposite: intangible assets are difficult to value precisely,

and the noise they introduce is actually unhelpful!

Meanwhile,

AQR also questions various explanations.

For example, the long bull market of tech stocks,

the emergence of intangible assets, or a few dominant “mega-assets,”

even when considering these factors,

poor value performance remains extremely severe historically.

The main reason is simple,

investors pay higher prices for stocks they like,

while unprecedentedly avoiding stocks they dislike.

Another question is: can value make a comeback?

Peter Oppenheimer, Chief Global Equity Strategist at Goldman Sachs, believes: at least a temporary relief will arrive soon,

especially if the COVID-19 vaccine development can boost bond yields.

Abhay Deshpande of Centerstone Investors believes: a sustained revival is somewhat inevitable.

History shows,

the more pain value investors endure,

the stronger the recovery.

Quantitative strategies are also not easy!

Overall,

the situation for quantitative analysts is not particularly good.

According to data from Bank of America,

as of the end of September (nearly a year),

the average return of U.S. equity quantitative mutual funds was only 3.3%,

compared to an average of 8.3% for stock pickers,

and an average return of 6.4% for the Russell 1000 Index.

Data from: Nomura ( ) #走进百创#

According to Aurum’s data,

as of the end of August (nearly a year, weighted by assets),

quantitative hedge funds averaged a loss of 5.7%,

while hedge funds averaged a profit of 5.2%.

In fact,

Aurum states,

the three-month rolling performance of the most popular quantitative strategies is as bad as the Quant Quake of August 2007 and the subsequent financial crisis,

even worse.