focus: value - mscifactsheets+value.pdf · 2017-05-03 · factor focus: value defining value at the...

FOCUS: VALUE

Factor Investing

msci.com

2 | MSCI.COM

FACTOR INVESTING

The foundation of value investing is the notion that cheaply priced stocks outperform pricier stocks in the long term. Value is categorized as a “pro-cyclical” factor, meaning it has tended to benefit during periods of economic expansion (see “Performance and Implementation”).

Value has several dimensions: the stock price as a multiple of company earnings, price as a multiple of dividends paid, price as a multiple of book value, and other such “ratio descriptors.” Academics and investors differ on which best represents a value company, creating opportunity in the marketplace for a variety of investment products.

The MSCI Enhanced Value Index applies three valuation ratio descriptors on a sector relative basis:

• Forward price to earnings (Fwd P/E);

• Enterprise value/operating cash flows (EV/CFO); and

• Price to book value (P/B).1

The index aims to address the pitfalls of value investing, among them “value traps” – stocks that appear cheap but which in fact do not appreciate. Our analysis shows that using forward earnings has helped provide protection against value traps, and that whole-firm valuation measures, such as enterprise value, have reduced concentration in highly leveraged companies, meaning those that have borrowed heavily.

FACTOR FOCUS: VALUE

DEFINING VALUE

AT THE CORE OF VALUE INVESTING

IS THE BELIEF THAT “CHEAPLY”

VALUED ASSETS TEND TO

OUTPERFORM “RICHLY” VALUED

ASSETS OVER A LONG HORIZON.

IN THE REALM OF INVESTING, A FACTOR IS ANY CHARACTERISTIC THAT HELPS EXPLAIN THE LONG-TERM RISK AND RETURN PERFORMANCE OF AN ASSET. MSCI FACTOR INDEXES ARE DESIGNED TO CAPTURE THE RETURN OF FACTORS WHICH HAVE HISTORICALLY DEMONSTRATED EXCESS MARKET RETURNS OVER THE LONG RUN.

MSCI Factor Indexes are rules-based, transparent indexes targeting stocks with favorable factor characteristics – as backed by robust academic findings and empirical results – and are designed for simple implementation, replicability, and use for both traditional passive and active mandates.

MSCI.COM | 3

FACTOR FOCUS: VALUE

Many investors use this approach in identifying assets that they expect the market to revalue.

The concept of value was first popularized in the 1930s by economists Benjamin Graham and David Dodd, who advocated owning companies that provide a “margin of safety” – meaning the current stock price is less than it is expected to be under conservative projections of the firm’s future earnings.2

In the chart below, the top panel shows the returns of deciled groupings that demonstrate increase in factor exposures of

the three ratio descriptors. On average, higher-value stocks outperformed lower-value stocks, as measured by any individual ratio descriptor, over the 17 years through 2014. The cumulative return of the top minus the bottom decile isolates the effect of each ratio descriptor and approximates a pure-factor return.

The bottom panel illustrates the value of combining the three ratio descriptors. Because they had low correlation – meaning they moved largely independent of each other over the business cycle – the performance of the combined ratio descriptors was superior to any standalone ratio descriptor.

THE IMPACT OF VALUE RATIO DESCRIPTORS, AND THE REASON FOR COMBINING THEM 0

100

200

300

400

500

600

700

800

80

90

100

110

120

130

140

150

Bear Markets MSCI World MinVol/MSCI World (lhs) MSCI World (rhs)

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

HealthCare

Inf. Tech Industrials Materials Energy Cons.Stpls.

Cons.Disc.

Financials Utilities Telecom.

Unconstrained With Active Sector Exposure limited to 5%

0

20

40

60

80

100

120

140

160

180

Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15

World Min Vol MSCI World

80

100

120

140

160

180

200

Cum

ulat

ive

Rela

tive

Retu

rn 6M

12M

Combined

7.70%9.16%

10.14%11.62%

12.50%11.56%

14.64% 15.21%

20.72%

28.46%

2.09%3.39%

4.04%5.42%

6.17%5.38%

8.58%9.42%

15.22%

23.69%

0%

5%

10%

15%

20%

25%

30%

Decile 1 Decile 2 Decile 3 Decile 4 Decile 5 Decile 6 Decile 7 Decile 8 Decile 9 Decile 10

Annualized Return CAPM adj. Premium

5.50%

7.03%7.74%

8.37% 8.49%

7.60% 7.75%7.04%

5.60%

3.21%

0.73%

2.36%3.05%

3.67% 3.80%

2.92%3.58%

2.37%

0.86%

-1.96%

-0.04

-0.02

0

0.02

0.04

0.06

0.08

0.1



0

100

200

300

400

500

600

70019

98

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Cum

ulat

ive

Retu

rn

B/P Fwd E/P CFO/EV Combined

-5

0

5

10

High Exp 2 3 4 5 6 7 8 9 Low Exp

Activ

e Re

turn

vs.

MSC

I Wor

ld (%

)


0

50

100

150

200

250

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

ROE Quality EV D/E

6.15%

8.54% 8.91%9.72%

8.92%9.42%

10.12% 10.44%

9.28%

8.21%

0.62%

2.62% 2.98%3.60%

2.64%3.05%

3.69% 3.84%

2.67%

0.29%0%

2%

4%

6%

8%

10%

12%



92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14HIGH SIZE LOW SIZE

Annualized Return of Deciled Descriptors (1998 - 2014)

Annualized Return of Deciled Descriptors (1998 - 2014)

WHY INSTITUTIONAL INVESTORS HAVE USED VALUE STRATEGIES

0

100

200

300

400

500

600

700

800

80

90

100

110

120

130

140

150

Bear Markets MSCI World MinVol/MSCI World (lhs) MSCI World (rhs)

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

HealthCare

Inf. Tech Industrials Materials Energy Cons.Stpls.

Cons.Disc.

Financials Utilities Telecom.

Unconstrained With Active Sector Exposure limited to 5%

0

20

40

60

80

100

120

140

160

180

Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15

World Min Vol MSCI World

80

100

120

140

160

180

200

Cum

ulat

ive

Rela

tive

Retu

rn 6M

12M

Combined

7.70%9.16%

10.14%11.62%

12.50%11.56%

14.64% 15.21%

20.72%

28.46%

2.09%3.39%

4.04%5.42%

6.17%5.38%

8.58%9.42%

15.22%

23.69%

0%

5%

10%

15%

20%

25%

30%



5.50%

7.03%7.74%

8.37% 8.49%

7.60% 7.75%7.04%

5.60%

3.21%

0.73%

2.36%3.05%

3.67% 3.80%

2.92%3.58%

2.37%

0.86%

-1.96%

-0.04

-0.02

0

0.02

0.04

0.06

0.08

0.1



0

100

200

300

400

500

600

700

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Cum

ulat

ive

Retu

rn


-5

0

5

10

High Exp 2 3 4 5 6 7 8 9 Low Exp

Activ

e Re

turn

vs.

MSC

I Wor

ld (%

)


0

50

100

150

200

250

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

ROE Quality EV D/E

6.15%

8.54% 8.91%9.72%

8.92%9.42%

10.12% 10.44%

9.28%

8.21%

0.62%

2.62% 2.98%3.60%

2.64%3.05%

3.69% 3.84%

2.67%

0.29%0%

2%

4%

6%

8%

10%

12%



92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14HIGH SIZE LOW SIZE

4 | MSCI.COM

FACTOR INVESTING

Over time, individual factors have delivered outperformance relative to the market.

From a longer-term perspective, the MSCI World Value Weighted Index generated an annualized return of over 14% during the 40-year period represented in the chart below.

Although factor strategies have exhibited long-term outperformance, in the short-term factor performance has been cyclical and has generated periods of underperformance.

PERFORMANCE & IMPLEMENTATION

15%

14%

13%

12%

11%

10%

11% 12% 13% 14% 15% 16% 17%

Annualized Risk

Annu

aliz

ed R

etur

n

Volatility

Yield

Quality

Momentum

Value

Size

MSCI World

MSCI WORLD FACTOR INDEXES

LONG-TERM PERFORMANCE: JANUARY 1976 TO DECEMBER 2016

0

50

100

150

200

250

300

350

400

450

WORLD

WORLD EQUAL WEIGHTED

WORLD MINIMUM VOLATILITY (USD)

WORLD RISK WEIGHTED

WORLD HIGH DIVIDEND YIELD

WORLD MOMENTUM

WORLD QUALITY

WORLD VALUE WEIGHTED

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

0

50

100

150

200

250

300

350

400

450

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Perf

orm

ance

Perf

orm

ance

World MomentumWorld Equal Weighted (Size)

World Minimum VolatilityWorld QualityWorld High Dividend Yield

World Value WeightedWORLD

MSCI.COM | 5

FACTOR FOCUS: VALUE

HOW THE SIX FACTORS HAVE PERFORMED RELATIVE TO EACH OTHER: VALUE

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

45.6% 1.5% -4.5% -9.6% 56.7% 28.6% 28.4% 31.0% 19.9% -29.2% 42.0% 18.2% 8.0% 16.7% 32.7% 12.1% 5.8% 10.3%

40.1% 1.2% -8.0% -9.8% 50.4% 24.1% 17.2% 28.9% 16.8% -33.5% 41.9% 16.5% 4.8% 16.5% 30.3% 9.0% 4.5% 9.4%

25.3% 0.3% -10.0% -13.6% 33.8% 21.3% 15.2% 22.1% 10.3% -39.9% 33.8% 12.8% 4.8% 15.0% 27.7% 7.0% 4.2% 8.9%

20.5% -2.1% -11.5% -14.4% 30.5% 20.8% 10.0% 21.2% 9.6% -40.3% 33.5% 12.3% 4.4% 14.8% 27.4% 5.5% -0.3% 8.2%

18.4% -10.2% -12.1% -15.1% 26.0% 20.0% 8.5% 20.7% 7.3% -41.9% 30.8% 11.4% -5.0% 13.7% 26.5% 4.6% -1.0% 8.2%

8.6% -12.9% -16.5% -16.5% 25.9% 15.2% 8.3% 19.1% 6.4% -42.4% 17.2% 9.1% -9.3% 13.3% 22.9% 3.4% -2.4% 5.1%

8.4% -18.9% -20.5% -19.5% 22.0% 12.7% 6.0% 16.8% 6.1% -42.6% 14.8% 7.2% -11.0% 8.9% 19.4% 3.3% -2.7% 4.7%

ValueYield Momentum WorldSizeVolatility Quality

The analysis and observations in this report are limited solely to the period of the relevant historical data, backtest or simulation. Past performance — whether actual, back tested or simulated — is no indication or guarantee of future performance. None of the information or analysis herein is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision or asset allocation and should not be relied on as such.

The time periods covered in the charts in this paper were dictated by the data available when we conducted the simulations which produced them.

There are frequently material differences between backtested or simulated performance results and actual results subsequently achieved by any investment strategy

6 | MSCI.COM

FACTOR INVESTING

Data from November 28, 1975 to September 30, 2016.

Sharp decline Moderate decline Moderate uptick Sharp uptick

Volatility Yield Quality Momentum Value Size

Qua

rter

ly R

elat

ive

Ret

urn

(Ave

rage

)

2%

1%

-1%

-2%

0%

Defensive Factors Pro-cyclical FactorsPersistence

MACRO EFFECTS ON FACTOR PERFORMANCE

Sharp decline Moderate decline Moderate uptick Sharp uptick

75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15

102.5

100.00

97.5

95.0

The Composite Leading Indicator used here, designed to provide early-warning signals on business-cycle turning points, is an aggregate time series displaying a reasonably consistent leading relationship with the reference series for the macroeconomic cycle.

In general, factor performance has been cyclical in nature. Individual factors have been shown to outperform during different macroeconomic environments. As the charts on this page illustrate, the value factor falls into the “pro-cyclical” category, meaning that this type of strategy historically outperformed during rising market conditions over the study period.

MSCI.COM | 7

FACTOR FOCUS: VALUE

CONCLUSION

Value investing is premised on identifying stocks whose prices seem to understate their intrinsic value. While many institutional investors may agree with that premise, implementation of value-index strategies differs widely. MSCI Enhanced Value Indexes are based on research that has found that combining value ratio descriptors has captured the value factor better than using any individual ratio descriptor alone.

1. Exceptions are Financials: Forward P/E and P/B, Real Estate:

EV/CFO

2. Graham, B., D. Dodd, S. Cottle, R. Murray and F. Block. (1989).

Graham and Dodd’s Security Analysis, McGraw-Hill.

Alighanbari, M., R.A. Subramanian and P. Kulkarni. (2014).

“Factor Indexes in Perspective: Insights from 40 Years of Data.”

MSCI Research Insight.

Bender, J., R. Briand, D. Melas and R.A. Subramanian. (2013).

“Foundations of Factor Investing.” MSCI Research Insight.

Chen, N. and F. Zhang. (1998). “Risk and Return of Value

Stocks.” Journal of Business, Vol. 71, No. 4, pp. 501-535.

Fama, E. and K. French. (1992). “The Cross-Section of Expected

Stock Returns.” The Journal of Finance, Vol. 47, pp. 427-465.

Fama, E. and K. French. (1998). “Value Versus Growth: The

International Evidence.” Journal of Finance, Vol. 53, No. 6, pp.

1975-99.

Gupta, A., A. Kassam, R. Suryanarayan and K. Varga. (2014).

“Index Performance in Changing Economic Environments.”

MSCI Research Insight.

Owyong, D. (2013). “Value Stocks and the Macro Cycle.” MSCI

Research Insight.

Siegel, L. and J.G. Alexander. (2000). “The Future of Value

Investing.” Journal of Investing, Vol. 9, pp. 33-45.

Zhang, L. (2005). “The Value Premium.” Journal of Finance, Vol.

60, pp. 67–103.

FOOTNOTES & REFERENCES

VALUE

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Our line of products and services includes indexes, analytical models, data, real-estate benchmarks and ESG research.

MSCI serves 97 of the 100 largest money managers, according to the most recent Pensions & Investments ranking.

For more information, visit us at www.msci.com.

ABOUT MSCI

The information contained herein (the “Information”) may not be reproduced or disseminated in whole or in part without prior written permission from MSCI. The Information may not be used to verify or correct other data, to create indexes, risk models, or analytics, or in connection with issuing, offering, sponsoring, managing or marketing any securities, portfolios, financial products or other investment vehicles. Historical data and analysis should not be taken as an indication or guarantee of any future performance, analysis, forecast or prediction. None of the Information or MSCI index or other product or service constitutes an offer to buy or sell, or a promotion or recommendation of, any security, financial instrument or product or trading strategy. Further, none of the Information or any MSCI index is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. The Information is provided “as is” and the user of the Information assumes the entire risk of any use it may make or permit to be made of the Information. NONE OF MSCI INC. OR ANY OF ITS SUBSIDIARIES OR ITS OR THEIR DIRECT OR INDIRECT SUPPLIERS OR ANY THIRD PARTY INVOLVED IN THE MAKING OR COMPILING OF THE INFORMATION (EACH, AN “MSCI PARTY”) MAKES ANY WARRANTIES OR REPRESENTATIONS AND, TO THE MAXIMUM EXTENT PERMITTED BY LAW, EACH MSCI PARTY HEREBY EXPRESSLY DISCLAIMS ALL IMPLIED WARRANTIES, INCLUDING WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. WITHOUT LIMITING ANY OF THE FOREGOING AND TO THE MAXIMUM EXTENT PERMITTED BY LAW, IN NO EVENT SHALL ANY OF THE MSCI PARTIES HAVE ANY LIABILITY REGARDING ANY OF THE INFORMATION FOR ANY DIRECT, INDIRECT, SPECIAL, PUNITIVE, CONSEQUENTIAL (INCLUDING LOST PROFITS) OR ANY OTHER DAMAGES EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES. The foregoing shall not exclude or limit any liability that may not by applicable law be excluded or limited.

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focus: value - mscifactsheets+value.pdf · 2017-05-03 · factor focus: value defining value at the...

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