Has Anyone Seen the Value Premium?

Extending on Hayden’s discussion regarding the Value premium at our Annual Client Briefing here is another independent article found on this issue that APC feels might be of interest to some of our clients.

Written and researched by GARRETT QUIGLEY and posted on the evidence based investor website September 2019;

There has been plenty of commentary recently on the fact that value has been underperforming growth. We wrote a piece on this in 2016 when we showed that standard value/growth indices were then indicating that value had underperformed growth over the prior 10-year period by 1.1% p.a. Here we update this data and introduce some related topics which we will consider over the coming months.

For our returns and characteristics data, we use a well-known source of independent data provided by Style Analytics. Using their analysis tools, we create portfolios based on book-to-market (B/M), which is a standard metric for sorting stocks on value-versus-growth, and then track the returns and characteristics of these simulated portfolios through time. For our purposes here, we create global portfolios where we capture the top 30% (Value) and the bottom 30% (Growth) by market value of stocks when ranked by B/M. We set the country weights in each portfolio to match their market weights in a broad index. We also exclude the bottom 5% of each market to avoid any potential distortions due to micro-cap stocks. All returns are in UK sterling,

We start the portfolios at the end of 1989 (if we go further back than this, the data coverage declines). A chart of the returns is shown in the figure below,

Total Return of Value and Growth Portfolios since January 1990 (in GBP)






To track the relative returns of Value versus Growth, each month we subtract the return of the global Growth portfolio from the global Value portfolio, and we cumulate that sum through time as shown in the chart below. As the chart shows, the relative return of Value versus Growth has been declining recently – i.e. value stocks have been doing relatively worse than growth stocks globally, and this continues a trend that has been apparent for some years. Indeed, the negative trend has continued since we wrote about it in 2016.

The Ft*lath’s Performance of Value vs. Growth Stock Portfolios







This has caused some commentators to worry about Value as a factor in general and others to argue that now is a good time to rotate portfolios towards Value. However, a key issue that is worth considering here is the degree to which the respective ratings of Value and Growth stocks have changed over time. One proxy for this is the Price-to-Book ratio of each portfolio. Price-to-Book or P/B is simply the inverse of B/M but is somewhat more intuitive and is generally preferred as a metric by investors.

The chart below shows the P/B ratio of the Growth and Value portfolios constructed as above as well as that of the overall market, all as solid lines using the left-hand scale. It is clear from this chart that the P/B ratio of Growth stocks has been trending up since the onset of Quantitative Easing (OE) in early 2009 and is now at 9.8 on a weighted average basis versus a long run average of 6.67 over the nearly 30-year period covered below. Growth stocks are now trading at a rating similar to that prevailing in late 1999 in the middle of the Tech boom. Of course, Tech stocks are much more profitable now compared to then, but on a P/B basis, they are trading at a historically high level.

Since the onset of QE, Value stocks have not been bid up anything like as much as Growth stocks. In fact, they trade at a P/B of 1.12 compared to their long run average P/B of 1.27, hence at a small discount to that long run average. This change in the rating spread between Growth and Value stocks is shown in the dotted line on the chart below (and maps to the scale on the right-hand side). This dotted line is simply the ratio of the P/B of Growth stocks divided by that of Value stocks. As of the end of July this year, the P/B spread is 8.74 and as the chart shows, it is at a level that looks extremely stretched historically.

Price-to-Book Ratios of Global Value and Growth Portfolios






Some of these ratios are shown over the last 10 and 20 years in the table below. In Panel 1, the P/B ratios are shown for Growth and Value stocks, and the Spread (here shown as the ratio of the P/B of Growth divided by the P/B of Value) is shown on the rightmost column. The changes in P/B are shown in Panel 2. For example, over the last 10-year period, the P/B of Growth stocks increased by 131% whereas the P/B of Value stocks increased by only 23%. The annualised change in the P/B ratios is shown on the right of Panel 2. So over 10-years, the Growth stock portfolio experienced an annualised uplift in its P/B ratio of 8.7% p.a. compared to just 2.1% for Value stocks.

From Panel 3, we can infer the effect of the P/B changes on returns. Over the last 10 years, Growth stocks had a total return of 325%, equivalent to 15.6% p.a. and Value stocks returned 213%, or 12.1% p.a, a difference of 3.5% p.a. in favour of Growth stocks. However, as we saw in Panel 2, Growth stocks have also been substantially rerated – at least insofar as their P/B ratios have been pushed higher indicating high future return expectations.

On the right of Panel 3, we show the effect of deducting the rating change from the return of Growth and Value portfolios over 10- and 20-year periods. For example, the 15.6% return for Growth stocks over the last 10 years is reduced to 6.8% after adjusting for the 8.7% p.a. rating change etc. Value stocks on the other hand had a smaller uplift in their P/B level of just 2.1% p.a. so when this deducted from the 10-year Value return the adjusted return is 10%, which is 3.2% higher than the adjusted Growth return.










Of course, this is a rather crude rating adjustment and there are other metrics that one might consider as well as the current and expected levels of profitability of Growth versus Value stocks. The broader point is that Growth stocks may have done relatively well over a sustained period, and this has occurred once before in the last 30-year period. However, the last time Growth stocks traded at this high a level was in late 1999. We can see from the top chart and Panel 3 of the table that over the 20-year period since mid-1999, when the P/B spread was at 6.4, less than it is now, Growth stocks underperformed value stocks by 2.1% p.a. This was in spite of the fact that over the 20-year period, Value stocks were pulled down by a greater decrease in their P/13 level.

It is unwise to think that markets will repeat these patterns in a simple way, especially since we are in unusual times with $15 trillion of government and corporate debt across the world exhibiting negative yields. However, it is equally unwise to be influenced too much by recent relative performance. Doing so would have led to very poor asset allocations historically and the simple fact remains that valuation still serves as a useful, if imperfect, guide to long-run expected returns

Uncommonly Average

Jim Parker, Vice President, Dimesional Fund Advisors – May 2019

Ask a farmer about average rainfall figures and he’s likely to look at you sceptically. Knowing how actual rainfall varies from year to year, farmers will carefully manage their crops and irrigation. It’s a lesson many investors could learn as well. Staying disciplined when markets are volatile is easier once you accept that references to “average” annual returns, like rainfall, can mask a wide range of possible outcomes.

For instance, from 1980 to 2018 the Australian share market delivered an average annual return of nearly 13%. But in only four years over that near four–decade period have actual returns been within two percentage points either side of that average. In those 39 years, the local market has fallen in 11 calendar years and gained in 28 years, or more than 70% of the time in other words. The biggest one–year fall was during the global financial crisis of 2008, when the S&P/ASX 300 index fell nearly 40% on a total return basis. The biggest one–year gain was in 1983, when the market rose nearly 70%. Exhibit 1 shows that only in four years—1996, 1997, 2016 and 2017—has the local market’s annual movement been between two percentage points either side of the near four–decade average annualised return of 12.94%.

Dealing with volatility is part of the price investors payfor the returns on offer from equity markets. Those returns are unpredictable from year to year, making it near impossible to time the market. This means the only way of securing the long–term average returns on offer is staying in your seat. The benefits of a long–term focus can be seen in Exhibit 2. This shows you the historical frequency of positive returns from Australian shares over different rolling periods. This is a way of comparing returns for overlapping holding periods, starting from different dates. So, in this case, the first period starts in January 1980, the second in February 1980 and so on. In this case, we are projecting one year, five years and 10 years forward from each starting point.

The chart shows you that one–year returns on a rolling basis were positive 77.5% of the time in our sample period from 1980 to 2018. This increased to 95.6% over five–year periods and 100% over 10–year periods. (By the way, just because the 10–year rolling period performance in this relatively short sample has always been positive doesn’t mean it will always be so. In the US, for instance, where we have data going back to the 1920s, there have been longer periods when there was no market premium). What this all means is that just being aware of the range of potential outcomes in markets year to year can help you remain disciplined, which in the long term can increase the odds of having a successful investment experience.

Aside from discipline, another way of dealing with volatility is diversification. Just as farmers deal with variable rainfall by planting different types of crops, investors can manage volatility by spreading their bets. Exhibit 3 compares the return of Australian shares over the rest of the world from 2000 to 2018. The result is the gap between the two. A negative number means Australia outperformed the rest of the world. A positive means the rest of the world beat Australia.

So, you can see that Australia did very well in the early years of the millennium, compared to other markets. You may recall this was the time of the China–led resource boom. More recently, Australia has lagged other markets. The point of this is to show that you can lessen your reliance on the year–to–year performance of the Australian market (which after all only makes up about
2% of the world market) by spreading your investments to include international markets. Diversification is a way of reducing the bumpiness of returns and of increasing the reliability of outcomes. This way you become less exposed to one market or one or two dominant sectors, which in Australia’s case currently are resources and banks.

In summary, the notion of “average” returns can be misleading. It’s wise to understand and be prepared for the range of individual outcomes that makes up that average. You can deal with the ups and downs in two ways. Firstly, by taking a long–term view and remaining disciplined, you are more likely to experience that average return. Secondly, you can diversify across countries so that you lessen the impact of big swings in any one market. Of course, this still doesn’t guarantee there won’t be investment droughts, but this may make it easier for you to stick with your plan and reap the harvest in the end. (See a shorter version of this article on our public website Perspectives blog here.)

This article has been prepared and is provided in Australia by DFA Australia Limited (AFS Licence No. 238093, ABN 46 065 937 671). The article is provided for informational purposes only. Any opinions expressed in this article reflect the authors judgment at the date of publication and are subject to change. No account has been taken of the objectives, financial situation, or needs of any particular person. Accordingly, to the extent this material constitutes general financial product advice, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. This is not an offer or recommendation to buy or sell securities or other financial products, nor a solicitation for deposits or other business, whether directly or indirectly. ©2019 Dimensional Fund Advisors LP. All rights reserved.

Poll Position?

Jim Parker, Vice President, Dimensional Fund Advisors  May 2019

Australia’s recent federal election result not only confounded the pollsters, the pundits and the punters, it provided another lesson about the dangers of using political news headlines to guide your investment strategy. By just about every measure, the Australian Labor Party was seen as the overwhelming favourite to defeat the six-year-old Liberal-National Coalition government in the May 18 election by securing a majority in the 151-seat House of Representatives.

In the weeks leading up to the election, every major opinion polling company—from Newspoll to Ipsos to Galaxy to Essential to Morgan—had Labor ahead either at 52-48% or 51-49% on a two-party preferred basis. As well, the view of most media pundits was that Labor would almost certainly get across the line, with only the margin of victory in doubt. The bookmakers were also confident of the outcome, with the ALP at odds of as skinny as $1.16 in the days before the poll. Before polling day, one agency even paid out $1.3 million to gamblers who had backed Labor early in the process. As it turned out, the election outcome defied them all.

The Coalition secured a slight majority in the House of Representatives. Labor’s expectations of solid gains in Victoria were foiled, while the electorate swung heavily against it in Queensland and Tasmania in particular. The overall result was almost the exact opposite of what the pollsters predicted, with the Coalition ahead 51-49%. While others comb over the political implications, the lessons for investors are familiar.

News is quickly built into securities prices and unless you can predict what tomorrow’s news will be, you will struggle to do better than by just accepting market pricing and building a diversified portfolio around the long-term drivers of higher expected returns. For instance, in the months leading up to the election, some investors predicted that Labor’s announced policies on franking credit refunds, negative gearing and capital gains taxes would have a negative impact on banks and financial services companies, while its plan to cap annual health insurance premium increases might hurt listed health insurers.

When the election result confounded just about everyone’s expectations, the pricing of stocks in those sectors adjusted to reflect the outcome. The lesson is that markets are constantly changing their assessments about expected returns based on new information. Trying to second guess prices requires getting two things right—what will happen next and how the market will react to it.

Pundits were similarly wrongfooted in other votes in recent years. In 2016, ahead of Britain’s referendum on leaving the European Union, there were predictions of turmoil in global markets should the ‘leave’ camp win the vote1. To be sure, there was an adverse reaction initially to the unexpected victory by the Brexiteers. But this reaction was short-lived. By October of that year, the UK benchmark FTSE-100 index was near record highs, with analysts attributing the gains to the competitive advantages provided to British companies by the weaker pound2.

Likewise, ahead of the US presidential election that year, there were media predictions of a market decline if Donald Trump won. CNN ran with the headline that a Trump win would ‘sink stocks’3. The Atlantic said investors were terrified of a Trump victory. Yet in the two and a half years since his election, the S&P 500 has gained more than 35%, hitting repeated highs and reaching record levels by April this year. We should expect that markets will continually weigh the implications of political, economic and other news on expected returns. People can make predictions about political outcomes. But we have seen that this is a haphazard occupation. And even if you did anticipate what would happen, there is still no guarantee the market will move in the way you expect.

Geopolitics is only one of a myriad of influences on markets. And separating any one influence out is extremely difficult. By all means take an active interest in political news as a citizen. But as an investor, it’s a tough ask to build a strategy around it. That all suggests the best approach is to focus on your own investment goals, build a diversified portfolio aimed at getting you there and let markets deal with the news.

This article has been prepared and is provided in Australia by DFA Australia Limited (AFS Licence No. 238093, ABN 46 065 937 671). The article
is provided for informational purposes only. Any opinions expressed in this article reflect the authors judgment at the date of publication and are
subject to change. No account has been taken of the objectives, financial situation, or needs of any particular person. Accordingly, to the extent this
material constitutes general financial product advice, investors should, before acting on the advice, consider the appropriateness of the advice, having
regard to the investor’s objectives, financial situation, and needs. This is not an offer or recommendation to buy or sell securities or other financial
products, nor a solicitation for deposits or other business, whether directly or indirectly. ©2019 Dimensional Fund Advisors LP. All rights reserved.

1. Brexit Could Unravel the Global Markets, Fortune, June 20, 2016.
2. FTSE 100 Nears Record High as UK Exporters Take Advantage of Pound Collapse, The Independent, October 11, 2016.
3. ‘A Trump Win Would Sink Stocks’, CNN, Oct 24, 2016. ‘Why Investors are Terrified of a President Trump’, The Atlantic, October 24, 2016.

Different Horizons

“World stock markets have rounded off a wild and difficult year,” the article began, pointing to multiple uncertainties in a polarised US political system, a crisis–ridden Eurozone and a rapidly slowing Chinese economy.

Does that sound familiar? That was from a calendar year wrap–up of markets published by BBC News on 30 December 2011, more than seven years ago.1 The report itself was accurate enough. In fact, it was a fair reflection of some of the sentiment dogging financial markets at that time.

The US had lost its ‘AAA’ credit rating that year after a congressional deadlock over the debt ceiling. In the Eurozone, the focus was on the heavily indebted members Portugal, Ireland, Italy, Greece and Spain and the future of the currency union.

In China, the government was clamping down on lending and investment to cool inflation. Now, seven years on, markets confront a new set of uncertainties—trade tensions between the US and China, the fate of Brexit, domestic political polarisation in the US, the rise of populist movements in Europe and sundry geopolitical flashpoints.

Yet, in the time between the 2011/12 headlines above and the 2018/19 ones, global equity markets (as measured by the MSCI World IMI Index in Australian dollar terms) have risen for seven consecutive years for an annualised return of 15%.

To be sure, those returns over seven years have not been distributed evenly. In 2018, for instance, global equity markets were as good as flat in Australian dollar terms, while in 2013 they gained by close to 50%. But the point is that markets do not move in a straight line.

News travels quickly and prices can adjust in an instant, up or down. When there is more uncertainty, there is often more volatility. Individuals who seek to anticipate what markets will do next based on today’s news just add unnecessary anxiety and risk to the process.

By necessity, the media’s horizon when it comes to financial news is very short term. If you are publishing in real-time, your need for fresh material is insatiable. It’s not that these headlines are wrong. But for an individual investor, whose horizon is measured in years or even decades, day–to–day news is less relevant.


1. ‘World Stock Markets End Tumultuous Year Well Down’, BBC News, 30 December 2011

Author: Jim Parker, Vice President of Dimensional Fund Advisors

SPIVA Scorecard: The Index Wins Again

The annual review of Active fund managers against their relevant benchmark to June 2018 was released recently by leading ratings agency S&P. The S&P Indices vs Active Management or SPIVA report is considered to be the leading industry report when considering the efficacy of active managers who try to ‘beat’ the market through either market timing or stock selection.

Long term clients of APC will know that for many years we have relied on the ‘evidence’ to underpin our investment methodology of tilting our portfolios to Small and Value companies. This latest report continues to support our view that these sectors deliver superior performance to Large companies and the broader market over time and that active management does not consistently deliver superior performance against benchmark after manager fees.

The table below provides a summary of some of the key findings of the report. Note the performance of Small companies over Large (S&P/ASX 200 and S&P Developed ex-Australia LargeMidCap). Also note the percentage of managers who beat their index over 1 year. Over 3 years the percentages fall even further.






The report also looked at performance persistence of outperforming funds, finding that only a minority of high-performing funds could maintain out-performance against the index or peers for three or more years. This supports the theory that ‘active management outperformance’ it is often more luck than skill.

Among the top quartile funds in the 12-month period ending June 2014, only 2.2 per cent maintained a top quartile rank in the following four years and only 4 per cent consistently beat their benchmark over the four years.

Of the 303 Australian funds that outperformed their respective benchmark in the five-year period ending June 2013, only 27.7 per cent continued to outperform in the following five years.

“Overall, results from various evaluation matrices suggest weak performance persistence among top-performing funds in Australia. Actively managed winning streaks are often short-lived,” the report says.

APC’s Client Survey

Recently we completed our 2018 survey which we shared some of the results at our recent Annual Client briefing at the NGV.  For those clients who took the time to complete the survey we are most grateful as this information is taken very seriously by our team and is used to improve our service to you.

Our scores were again very strong in this survey and APC outperformed the national average in all of the nine Key Performance Indicators and ranked in the top quartile in all of the headline areas.  Remember it is only the better firms that actually are willing to survey their clients in this way. 

Overall our results were also well up on our 2016 survey.  All scores are out of 5 and some highlights of the survey were;

  • Our response rate was 69% which is phenomenal and well above the national average of between 30%-35
  • 93% of our clients are willing to refer APC to their friends, family and associates which is outstanding and something we are very appreciative of. Our growth only comes from referrals
  • APC’s average score across all categories was 4.73 as compared to the benchmark average score is 4.21 which puts APC in the top quartile of businesses in this survey’s national benchmarking group
  • APC’s clients scored us most highly for the Standard of Support Staff with an average score of 4.85. We are very proud of the work Luke, Calypso, Hiro and Petra do in providing excellent service to our clients.  Although the survey refers to ‘Support Staff’ our view is and will always remain that we are all one cohesive team working together to deliver the very best service to our clients and to represent their best interests at all times
  • APC’s second highest scores were 4.81 measuring Business Relationship (which measures the level of trust you feel with APC) and Professionalism (of APC)
  • APC’s greatest result above the national benchmark average was the Financial Review Process or what you would know as our Regular Planning Meetings (RPMs). APC’s score was 4.71 vs the national benchmark average of 3.97.   Our clients continue to tell us that they value our RPMs greatly and feel at the end of our meetings they have real clarity about their overall strategy and how they are tracking to their personal goals


Younger Clients

In this survey we scored 4.60 for Range of Financial Services.  Whilst the benchmark average is 4.13 our offering to a younger client has been identified as an area where we would like to improve.  We have been developing our Foundation Client Service which assists a younger person who is post university and/or are early in their working lives.  It is designed to help build good money management behaviours as early as possible.  Many of our clients who have been with APC for many years have said that had they engaged APC earlier in their working lives they would be in an even better position now.

If you would like to discuss the Foundation Client Service and how it may assist your child please contact a member of the APC advice team.

Charts of all 9 Key Areas from our Client Survey

























Business Relationship











Financial Knowledge











Range of Financial Services











Implementation of Services











Professionalism of Practice











Standard of Support Staff











Financial Review Process












Aged Care Presentation – 6th June

On the 6th June we had our Aged Care Presentation delivered by Jayne Maini of Millenium Aged Care Consultants. Below is the presentation with audio of the very informative session in case you were unable to be there.






Market Corrections. How Bad Can They Get?

Market “pullbacks”, “corrections” and “bear markets”

Sharemarket declines are often labelled differently depending on the degree of share price losses sustained. Let’s talk about the semantics first: Although opinions can vary, the worst – but best known – sharemarket downturn is called a “bear market” which tends to be defined as a peak-to-trough decline in prices of 20% or more. By contrast, sharemarket declines of more than 10% (but less than 20%) are typically called “corrections“.  Smaller market declines (less than 10%) go by many names, but I like to call them “pullbacks“. At the time of writing, the S&P 500 has already experienced a maximum decline of 10.1% from its closing recent peak of 2,872.8 on January 26 – placing this decline in the “correction” territory so far.

What do typical market declines look like?

As seen in the table below, market pullbacks are the most common form of market decline – analysing the US S&P 500 Index, there have been 466 pullbacks since the market recovery from the Great Depression(1), with an average decline of 1.5% taking place on average over one and a half weeks. Recovery on average takes a further week. Note the vast bulk of these pull backs (93%) involve declines of less than 5%.  In short, market declines of 5% or less are very common and hard to get too worried about.

By contrast, there have been nine bear markets, with an average market decline in these periods of 35.8%, over an average of 65 weeks(2).  On average it takes almost twice as long – 116 weeks – for the market to recover its previous (price) peak.  As the saying goes, the market goes down the elevator but up the stairs.

What about corrections?  The table indicates there have been 11 “corrections” which, perhaps surprisingly, is only slightly more than actual bear markets.  Even if we include 10 to 20% market declines during a market recovery (i.e. before prices have reached their previous peak) the number of corrections grows to 13 – which still implies an average of only 1.4 corrections for every bear market.

Of the 11 strictly defined corrections, the average market loss has been 13.2%, which takes place on average over 20 weeks – or almost six months!  Note, moreover,  that unlike during bear markets, the average time of market recovery following a correction is considerably quicker than the downturn – only 11 weeks.

Breaking this down further, it’s apparent that 9 of these 11 corrections (82%) were less than 15%.  All 11 corrections, along with their depth, length and date of market trough are detailed in the chart below.  Also included is the latest correction.

All up, this analysis suggests that if we are truly in only a market correction then chances are that we’ve almost reached bottom.  That said, it could take a few more weeks (even months) before the actual bottom is in place.

Has market behaviour changed over time?

To gain an insight into long-run trends over time, the chart below details the peak-to-trough declines in closing daily prices of the US S&P 500 Index over this period.

Just eyeballing the chart, it’s evident that overall market volatility does not appear to have appreciably lessened.  If anything, since the early 1990s there have been two relatively extended periods of low volatility but also two relatively deep and more extended bear market periods. This is consistent with the “Great Moderation” in macro-economic volatility in recent decades, but also the potentially greater threat now posed by financial market imbalances in creating bear markets.

Indeed, the two greatest bear markets since the Great Depression also happen to be the two most recent – the early 2000s dotcom crash and the 2007-09 financial crisis.

What’s the implication of all this?  To the extent the recent extended period of low volatility does manage to reassert itself for a time, history suggests this may build up pressure such that the next inevitable bear market could also prove relatively deep and protracted.


(1) The Great Depression period was excluded because it was such an outlier in terms of the depth and length of the market downturn.  It was instead decided to focus on the more recent post-war period – which still covers more than 50 years!

(2) A week is defined as 22 trading days.

Bitcoin and the Blockchain Presentation

As promised, we have the audio from the Bitcoin and the Blockchain presentation combined with the Powerpoint slides for those who missed the presentation or anyone that was there who would like to re-listen to what Myron and Andrew had to say on this topic.




Our next presentation / information evening will be on Aged Care. Please see the APC Event Schedule on the “Client Portal” page for further information.