Value & Quality Factor Valuations

Where is the Value?

June 2017. Reading Time: 10 Minutes. Author: Nicolas Rabener.


  • Value and Quality stocks are typically polar opposites from a valuation perspective
  • The Value factor can be considered cheap across developed markets
  • The Quality factor is cheap in some and expensive in other markets


The day after the US election in November 2016 there was a massive shift in sentiment from risk-off to risk-on as investors changed their perception from seeing Trump as a political risk to a political asset. The Value factor generated strong positive performance while Quality decreased significantly. In the months following the election the sentiment changed again and in the first quarter of 2017 Quality outperformed Value. In this short research note we’re going to analyse the current factor valuations of Value and Quality using valuation spreads.


The Value portfolios are calculated by using a combination of price-to-earnings and price-to-book ratios while return-on-equity and debt-to-equity are used for the Quality portfolios. Both factors can be defined in many ways, however, by using these ratios we keep the investible universe quite large. It’s worth highlighting that the factor trends look much more similar when using different Value metrics than with different Quality metrics as these tend to be more heterogenous. We take the bottom and top 10% for the US, Europe, and Japan and 20% for UK and Australia as they have smaller stock universes.

Stocks can be valued by applying different valuation methodologies and the same applies to factors, which are much more abstract than single stocks. We are going to analyse factors by looking the difference between the long and short portfolios in terms of price-to-book (PB) multiples, which we call valuation spreads (read Value US: Sectoral Analysis).


Before we start looking at valuation spreads it makes sense to review the factor performance. The chart below shows the performance of the Value factor for the major developed markets from 2001 to 2017. We can observe a strong performance of Value from 2001 to 2006, however, that is somewhat misleading as Value had a strong negative performance during the Tech