23 slides from Alpha Architect US Quantitative Value ETF's conference presentation, May 18, 2023
Slide 1: The Value Spread
The Value Spread Presenter: Cliff Asness Discussant: Kai Wu Democratize Quant Conference 2023 May 18, 2023
Slide 2: Key Takeaways
Key Takeaways. 1. The value spread has retreated from its pandemic wides but remains significantly elevated (+1.8 standard deviations) 2. This cannot be explained by excluding the top decile of stocks on size or R&D/SG&A intensity 3. Wide spreads are correlated with high future returns 2
Slide 3: Q1: Is the Value Spread Still Wide?
Q1: Is the Value Spread Still Wide? What does the “value of value” look like today? 3
Slide 4: How Wide Is the Spread Today?
How Wide Is the Spread Today? Value spread remains 1.8 standard deviations above the mean 4
Slide 5: Is This Replicable? Yes.
Is This Replicable? Yes. Robust to a variety of universes, value metrics, and industry-neutralization 91st Percentile 1.6 Source: SEC, Sparkline. Universe is the U.S. top 2000 universe. Composite Value consists of the average across five valuation metrics, which are first cross-sectionally normalize
Slide 6: Q2: Can the Spread be Explained by Intangible Assets?
Q2: Can the Spread be Explained by Intangible Assets? Has value rotated into a bet on stocks with low intangible assets (implying weaker fundamental growth)? 6
Slide 7: Shouldn't Intangibles Matter?
Shouldn’t Intangibles Matter? Let’s explore this further… 7
Slide 8: What Are Intangible Assets?
What Are Intangible Assets? Intangibles are modern economic moats Intellectual Brand Human Network Property Equity Capital Effects Patents, proprietary Brand recognition Skilled, aligned Ecosystem of external knowledge, technology and customer and motivated producers and and data loyalty workforce c
Slide 9: Why Do Intangibles Matter?
Why Do Intangibles Matter? The economy has transformed from industrial to intangible “ Warren Buffett The four largest companies today by market value do not need any net tangible assets. They are not like AT&T, GM, or Exxon Mobil, requiring lots of capital to produce earnings. We have become an ass
Slide 10: Accounting Has Failed to Adapt.
Accounting Has Failed to Adapt. Financial statements mostly ignore intangibles “ Lev & Gu (2016) The constant rise in the importance of intangibles in companies’ performance and value creation, yet suppressed by accounting and reporting practices, renders financial information increasingly irrelevan
Slide 11: Building an Intangible Value Factor.
Building an Intangible Value Factor. Due to limitations in accounting data, we rely heavily on alternative data Unstructured Data AI/NLP Intangible Value Factors Total Intangible Value 11
Slide 12: Value Is Short Intangible Value.
Value Is Short Intangible Value. Correlation increasingly negative due to rising intangible relevance Composite Value (P/B, P/E, EV/EBITDA, P/FCF, P/E_NTM) Academic Value (P/B) Source: SEC, Sparkline. Cross-sectional position-level correlations. Universe is the U.S. top 2000 universe. Value ratios (
Slide 13: Intangible-Adjusted Value Spread.
Intangible-Adjusted Value Spread. Explains ~60% of the spread today Value x Intangible Value Long = (Hi HML) x (Hi IHML) Short = (Lo HML) x (Lo IHML) Value 1.6 0.6 Source: SEC, Sparkline. Universe is the U.S. top 2000 universe. Composite Value consists of the average across five valuation metrics, w
Slide 14: Q3: Does the Value Spread Predict Future Returns?
Q3: Does the Value Spread Predict Future Returns? How much should we bet when spreads are extended? 14
Slide 15: Contrarian Factor Timing Is Deceptively Difficult.
Contrarian Factor Timing Is Deceptively Difficult. Asness, Chandra, Ilmanen, and Israel (2017) ● Extreme spreads obvious only in hindsight (e.g., 1997) ● More realistic out-of-sample test shows weak link between spread and future returns Dot-Com ● Why? Low breadth (one bet) Bubble and reliance on ra
Slide 16: Timing in a Portfolio Context.
Timing in a Portfolio Context. High correlation to static value factor limits portfolio utility ● Value-based timing is highly correlated to static value factor (70%) ● Thus, limited gain from adding it to portfolio that already includes value https://www.iijournalseprint.com/JPM/AQR/Quant17Contrari
Slide 17: Our research supports sticking to a diversified portfolio of uncorrelated factors
“ Our research supports the approach of sticking to a diversified portfolio of uncorrelated Asness et al. factors that you believe in for the long term, (2017) instead of seeking to tactically time them. https://www.iijournalseprint.com/JPM/AQR/Quant17ContrarianFactorTiming3gy/index.html 17
Slide 18: Summary.
Summary. 1. The value spread remains significantly elevated 2. However, value is rotating into an increasingly negative bet on intangible value, which may help explain part of the spread 3. Moreover, it is unclear how investors should respond to the wide spread due to its low out-of-sample predictiv
Slide 19: Appendix
Appendix SPARKLINE CAPITAL
Slide 20: Intangible Value as a Factor.
Intangible Value as a Factor. Positive excess returns and low correlations to other factors Source: Ken French, Sparkline. Market and long-short portfolios constructed per the Fama-French Source: Ken French, Sparkline. Daily return correlations. 3/31/1995 to 3/31/2023. Rm-Rf, HML, SMB, RMW, and MOM
Slide 21: Intangible Value = Future Quality.
Intangible Value = Future Quality. Leads to higher future profits and is not captured by existing factors (e.g. quality) 6.0% Building intangible moats requires large upfront investments that can take many years Annual backtested return of to pay off (e.g., R&D and advertising) long-short Intangible
Slide 22: Intangibles Increasingly Important.
Intangibles Increasingly Important. Difference between Value x Intangible Value and Value Source: SEC, Sparkline. Universe is the U.S. top 2000 universe. Composite Value consists of the average across five valuation metrics, which are first cross-sectionally normalized. We compare the results for th
Slide 23: Disclaimers.
Disclaimers. Disclaimer This presentation is solely for informational purposes and is not an offer or solicitation for the purchase or sale of any security, nor is it to be construed as legal or tax advice. References to securities and strategies are for illustrative purposes only and do not constit