WhatHasWorkedFundOct14Web

WHAT HAS WORKED IN INVESTINGThe Performance of Value Portfolios Versus Growth Portfolios Revisited through 2001In their article entitled, “Value and Growth Investing: Review and Update,” FinancialAnalysts Journal, Vol. 60, No. 1, pp. 71-86, January/February 2004, Louis K.C. Chanand Josef Lakonishok reviewed and updated the literature regarding the performance ofvalue versus growth strategies through 2001 and provided some new results based on anupdated and expanded sample. They found that even after taking into account theexperience of the technology led stock markets of the late 1990s, value stocks generatedsuperior returns. They further concluded that common measures of risk do not support theargument that the return differential is a result of the higher riskiness of value stocks, butrather, in their opinion, is due to behavioral considerations and the agency costs ofdelegated investment management.In their paper, Chan and Lakonishok constructed large cap and small cap portfolios, based onNYSE breakpoints, at every calendar year-end between 1969 and 2001, by sorting stocks on acomposite value indicator and placing them in 1 of 10 deciles. The composite indicatorpooled information from several valuation measures, including book value-to-price, cashflow-to-price, earnings-to-price and sales-to-price ratios in an effort to improve identificationof stocks that were undervalued relative to their fundamentals. As shown in Table 27, buyand hold returns for the year following portfolio formation were reported for the top twodeciles - glamour (growth) portfolios - and for the bottom two deciles (value portfolios).Table 27: Yearly and Geometric Mean Returns to Value and Growth Strategies withRefined Definitions, 1969 – 2001A. Large-Cap StocksPortfolioYear 1 (Glamour) 2 9 10 (Value)Russell 1000Value ReturnS&P 500Return(Deciles 9,10)- (Deciles 1,2)1969-2001 4.5% 6.7% 15.6% 16.4% N/A 11.4% 10.4pps1979-2001 7.9 10.4 18.6 20.4 15.4% 15.1 10.41990-2001 3.8 6.0 16.1 18.0 12.9 12.9 12.2B. Small-Cap StocksPortfolioYear 1 (Glamour) 2 9 10 (Value)Russell 2000Value ReturnRussell 2000Return(Deciles 9,10)- (Deciles 1,2)1969-2001 -2.8% 4.8% 16.6% 18.3% N/A N/A 16.5pps1979-2001 -1.8 7.8 20.8 22.8 16.0 13.8 18.81990-2001 -6.2 3.6 18.4 17.7 13.4 11.0 19.4From 1979 through 2001, the geometric mean return on the value portfolio (decile 10) forlarge cap stocks exceeded the Russell 1000 Value Index over the same period by 500 basispoints annualized. In the small cap study, the deep value portfolio outperformed theRussell 2000 Value Index by 680 basis points annualized.29