Facts about Formulaic Value Investing

The term “value investing” is increasingly being adopted by quantitative investment strategies that use ratios of common fundamental metrics (e.g., book value, earnings) to market price. A hallmark of such strategies is that they do not involve a comprehensive effort to determine the intrinsic value of the underlying securities. We document two facts about such strategies. First, there is little compelling evidence that these strategies deliver superior investment performance for US equities. Second, instead of identifying undervalued securities, these strategies systematically identify companies with temporarily inflated accounting numbers. We argue that these strategies should not be confused with value strategies that use a comprehensive approach in determining the intrinsic value of the underlying securities.A practitioner's perspective on this article is provided in the In Practice piece "Value Investing: Do Quant Strategies Measure Up?" by Phil Davis, online 6 March 2017. Disclosure:The views and opinions expressed herein are those of the authors and do not necessarily reflect the views of Victory Capital Management, Arch Mortgage Insurance Company, or their affiliates or employees.U-Wen Kok is an employee of RS Investments, an investment franchise of Victory Capital Management. Jason Ribando was an employee of RS Investments during the research and writing phases of this article. Richard Sloan has served as a paid consultant for RS Investments. RS Investments provided access to resources used to conduct this research.Editor’s note:This article was reviewed via our double-blind peer-review process. When the article was accepted for publication, the authors thanked the reviewers in their acknowledgments. Tim Loughran, CFA, and Allen Michel were the reviewers for this article.Submitted 17 May 2016Accepted 19 October 2016 by Stephen J. Brown