“It looks like we’re going through a bubble every bit as big as the tech bubble was, every bit as big as in the global financial crisis, but it’s happening much more under the radar.” Andrew Dyson, CEO of QMA
Nobody is a market timer until their particular investment style goes out of favor.
Depending upon how you measure it, quantitative value has been out of favor ranging from a few years to the better part of a decade, with the last three years being particularly rough.
So we shouldn't be surprised that QMA, Research Affiliates, and AQR all wrote pieces over the last 12 months all arguing that value is cheap and growth is quite rich (at least, from a historical perspective), with the general conclusion being, "now might be a good time to tilt into value."
The problem, as we see it, is that simply defining value is a non-trivial exercise, and the value spreads seen through the lens of a long/short academic interpretation may not actually be realizable for long-only investors.
This is confused even further when we consider that style-box driven value indices can be quite different than more modern factor-based approaches.
In this week's research note, we do not aim to answer the big question, but simply try to address these problems and provide more data for the debate. (PDF)
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→ STYLE TIMING: "We have built a model that considers two simple factors: 1) the spread in valuation multiples between a value portfolio and a growth portfolio (the value spread), and 2) the spread in expected earnings growth between a growth portfolio and a value portfolio (the earnings growth spread). We find that the greater the value spread and the smaller the earnings growth spread, the better the forecast for value versus growth going forward." Style Timing: Value vs Growth