The Chart of the Day is actually two charts and the topic is probably worth a lengthy slide deck because not all factor portfolios are created equal. We use the example of the longstanding “Value” and “Growth” indices constructed from the Russell 2000. Note that this cycle phenomenon is visible across capitalizations and many value factors across the global landscape. It’s for illustration of Arnott’s thematic call-out:
We don’t doubt the answer is cyclical and that there is a place for a piece of your asset allocation set aside to capture the long-term value premium. While you’d probably have to conclude it’s different this time to bet the next 10 years will be like the last, there are some real structural considerations with P/B type of Fama-French historical analysis (methodology for the popular Russell “value” factor indices). We’ll give OSAM credit for the most concise outline of this debate: Negative Equity, Veiled Value, and the Erosion of Price-to-Book.
Due to the evolution of modern accounting practices, there is ~$4Trillion of Market Cap that is disregarded by some of the most popular and longstanding factor benchmarks for active managers. Again, that’s another can of worms...