Improving the Odds of Value Investing

Tactical versus Strategic Allocations to Value

May 2021. Reading Time: 10 Minutes. Author: Nicolas Rabener.


  • The stock market volatility, skewness, and yield curve influence the performance of the value factor
  • Investors require a certain market environment to buy troubled companies
  • The key performance driver of the value factor is risk sentiment


Ted Theodore first wrote about value versus momentum stocks way back in 1984, but almost 40 years later, there still is no real consensus among investors or academics on what is driving either strategy.

That’s not due to a lack of research. Thousands of papers have scrutinized equity factors across markets and asset classes, and some have analyzed strategies going back more than 200 years.

Part of the problem is that performance drivers have been identified but lack widespread acceptance from practitioners. That’s understandable. If what’s driving a strategy’s returns is crystal clear, fund managers will be out of work when the environment for their investment style turns unfavorable. They’re better off remaining publicly vague about performance drivers as that helps to retain their assets under management (AUM).

A second issue is that performance drivers are never crystal clear. Finance is not a hard science with immutable, gravity-like laws. Markets change continuously and historical performance and trends are not perfectly replicable. So when it comes to performance drivers, finance practitioners must live with relatively low standards of proof.

Our framework for determining a performance driver consists of four criteria:

  1. It should have a sound economic basis.
  2. It should work on average, but not all the time.
  3. It should be implementable.
  4. It should hold when tested across time, markets, and asset classes

So what is the value factor’s key performance driver? On what evidence do we base that determination?


The value factor generates positive returns when cheap stocks outperform expensive ones. So when does that happen? (read Mapping My Mind: Value Factor)