The underperformance of U.S. value stocks since the Great Recession has received much attention from the financial media, and prompted at least some investors to conclude that value investing is dead. That has led to papers being written, such as AQR’s May 2020 article, “Is (Systematic) Value Investing Dead?” Because the value premium has been much larger in small stocks than in large, we’ll review the performance of small-value stocks compared with broad market indexes. From 2008 through July 2023, while the S&P 500 returned 9.8% per year, the Fama-French small-value research portfolio returned 8.6%, an underperformance of 1.2 percentage points annually. (Fama-French data is from Ken French’s website.)

A Cautionary Tale

We heard the same argument about the death of the value premium in 2000. From 1994 to 1999, the S&P 500 returned 23.6%, annually outperforming the Fama-French small-value research portfolio by 7.2 percentage points. However, the declaration of the death of the value premium was premature. From 2000 to 2007, while the S&P 500 returned 1.7%, the Fama-French small-value research portfolio returned 16.2%, outperforming by 14.5 percentage points annually. Such performance should be a cautionary tale for those declaring the death of value.

If the underperformance of the value premium in U.S. stocks since 2008 was a sign that value was dead, we should see similar underperformance outside the U.S. From 2008 through July 2023, the MSCI EAFE Index returned 3.2%, but the Dimensional International Small Cap Value Index returned 5.2%, outperforming by 2.0 percentage points annually. In emerging markets, while the MSCI Emerging Markets Index returned 1.7%, the Dimensional Emerging Markets Targeted Value Index returned 4.1%, outperforming by 2.4 percentage points. Thus, outside the U.S., investors who diversified their portfolios to include small-value stocks benefited.

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