1. Global Investment Management Value Investing Strategies Geoff Allbutt Radoslav Djordjevic Andreas Kyriazis Kevin Lester

2. Agenda Background –Definitions –Relevant Academic Research Research Objectives Data and Methodology Results and Interpretation Conclusions

3. Value Strategies –Investing in stocks that have low prices relative to earnings, book value, dividends, or other measures of value. –Introduced by Graham and Dodd, ‘Security Analysis’, 1934 PBV ratio –Expected Growth Opportunities, ROE –Valuation –Low PBV: ‘Value’ –High PBV: ‘Growth’ Definitions

4. Fama & French [1992, 1996] –Value stocks generate higher average returns –Reflects compensation for additional risk Lakonishok et al [1994] –Little evidence of higher risk for value stocks –Value stocks underpriced due to behavioral factors Arshanapalli et al [1998] –Superior performance in 18 international markets –Higher absolute and risk-adjusted returns Kothari et al [1995] –Attribute superior performance to research design –Survivorship and look-ahead bias, data mining Relevant Research

5. Questions: 1.Do value strategies outperform the market? 2.Are value strategies riskier than growth strategies? 3.How do value strategies perform under different states of the market? Research Objectives

6. US Market Sample period – June 1990 to June 1999 Random sample of 90 stocks from S&P 500 Formation of 5-quintile portfolios (18 stocks) sorted based on price-to-book ratios where P1 is the low P/B (value) portfolio and P5 is the high P/B (growth) portfolio Annual rebalancing (June), assumed no transaction costs Holding Period Returns (price change plus dividends) –Equally Weighted –12 months: July-June Benchmark – S&P 500 Index Methodology

7. Value Portfolio Outperformed –21.6% vs. 18.4% for S&P –Beat S&P by 3.1%, Growth by 1.9% Results better in 1990-95 –Beat S&P by 11%, Growth by 8.5% –Recession effects? Growth beat S&P by 1.3% Results - Performance

8. Annual Results

9. Risk-adjusted returns not so good –0.36 for value, 0.38 for growth (9 yrs) –0.36 for value, 0.295 for growth (5 yrs) Standard deviation for value stocks larger –4.9% vs. 4.3% –Betas are smaller (0.81 vs. 1.01) –Value stocks subject to different risks Results - Risk

10. Up-market vs. Down-market Betas –Value stocks: Larger beta in down markets. –Growth stocks: Larger beta in up markets. Reflection of changing expected returns –Value stocks expected to outperform in down markets, visa-versa for growth Results – Changing Betas

11. Conclusions Value stocks do outperform! –S&P500, by 3.1% per year –Growth stocks, by 1.9% per year This outperformance seems to be due to risk –Not market risk –Not true for 1990-95, bubble influence? Up/Down market betas reflect changing expected returns.