To get a sense of the magnitude, let’s start with the most basic data. Take the Russell 1000 Growth and Value series starting in 1991. We consider this a pretty simplistic form of value investing, but it captures the core concept and is widely followed. From January 1st until February 13th of 2020 the cumulative daily return difference between the two is -6.4% (take a guess which one of the two was worse ). Comparing this period to all rolling periods of the same number of days going back to 1991, this difference falls below the 3rd percentile. Of course, that includes such famous events as the technology bubble of 1998-2000 and the GFC of 2008-2009. If you only look at 2010 to today, this is the zeroth percentile event. That is, in a decade quite bad for value investing, the start of 2020 is the absolute worst 6-week period.

Doing the same comparison among small stocks (Russell 2000 value vs. growth) from 1993 onward yields nearly identical results. Now, if we use Fama and French’s HML (using AQR data as Ken doesn’t update fast enough for this!), it’s a bit more extreme. This 6-week period falls below the first percentile since 1963 and, of course, is the worst such period since the value drawdown began a decade ago. Using AQR’s preferred method for measuring value, using more updated prices, which we call HML-Devil, it’s been much better at exactly 1st percentile bad since 1963. Take that, dissertation advisors! Adjusting HML-Devil for industries, something we’ve advocated since 1994, creates an exceptionally mild improvement. This value strategy comes in at only the 1.4th percentile back to 1963 and is off the zeroth schnide at 0.3th percentile in this ten-year value drawdown (it’s only not the zeroth because of a worse rolling period a few days earlier!).

Taking a large jump in complication, and we hope efficacy, AQR’s long-short value factor, our most proprietary version of value using our preferred mix of indicators and construction methodology, has sadly fared quite similarly. Its YTD 2020 performance ranks in the 1.5th percentile back to 1984 and the 0.7th percentile against same length periods since the general value drawdown began in 2010. This version of the value factor did indeed help us a lot from 2010-2017, a big contributor to why this was a good, not a bad, time for us despite value’s more general suffering (yes, I will keep reminding you we are still on an under two-year drawdown while most forms of just value are on a ten-year one – how long two years actually feels, versus how long it really is economically and statistically, is a monster issue in investing). As we have written about before, these (we believe) better versions of value have helped long-term and during most of the value drawdown. But they have decidedly not helped during these last two years. We, perhaps self-servingly, but backed by a fair amount of evidence and logic, think this is because the value drawdown from 2010-2017 was largely “rational” (the air quotes are because that’s always a loaded word), while that from 2018 to the present seems decidedly less so (and a very “irrational” loss for value is the environment we’ve never found a great way to hedge against as many other factors like profitability and fundamental momentum don’t help much, if at all – by the way, we saw this exact pattern, factors that normally help when value falls, not helping during the tech bubble).

The point is a simple one. Value has started 2020 with an extremely severe loss versus very long-term history, and, defined in a wide variety of ways, the worst loss yet (examining all of the same 6-week length periods) over the entire long 2010-2020 value drawdown.

So, what are we going to do? Well, when it comes to making big changes to the process, very little. It would be a fair critique to say that this piece is largely just “quantitative whining.” First and foremost we’re executing our preferred strategy of not making panicky changes to our process that would have (note the tense) alleviated recent pain. Nothing has changed save value has gotten cheaper this year. We will continue to watch the value spreads, and consider doing a bit more of a tilt if they ever, which we hope not to see but will persevere if necessary, get to tech bubble levels, or conversely if they remain high but are running into less of a negative trend headwind.

I have been a pooh-pooher (if that’s not a word, it should be) of some who compare this current value pain to the tech bubble. We have found value spreads are quite wide today, but not tech-bubble wide. Though I have to admit, while you don’t come to me for my feelings about markets (I make no claim to be better than anyone else in this regard – and I don’t think anyone is that great!), I will say comparisons to the tech bubble, in terms of seeing more radical events (no more slow steady losses for value, now it’s very quick big ones!), and the widespread embracing by many of all the reasons (which they usually have never mentioned before) as to why value is never going to work again (my colleagues have a paper on this I hope to blog about soon), are converting me. It’s getting very bubbly out there (number two here details how I try to use this word as little as possible – but more than I would’ve when emerging from the University of Chicago many, many years ago).

Again, our plan is to do very little. That doesn’t mean we don’t question everything constantly (“doing very little” does not apply to research into what’s going on or trying, as we always are, to improve strategies). But, if that questioning doesn’t result in damning evidence (again, the paper by my colleagues is forthcoming!), it means sticking with the process.

We’ve seen this movie before a few times and we know how, but definitely not when, it ends. We believe that sticking with the process is the only way to achieve the long-term gains we seek (and which won’t always be provided by a long-only market that continues to levitate). We also know that sticking with something that’s good through its occasional very bad times, and even acting as a contrarian when others are finding newly created (and creative) reasons to throw in the towel, is very difficult. But this very difficulty is a large part of why we believe it’s long-term rewarded, and much harder to arbitrage away than some seem to think. As they say, if something were easy, everyone would do it.