Value Investing: A study on the performance of factor-based value investment strategies in the US

Simon Møller Blok & Marco Schwennesen Orland

Student thesis: Master thesis


This thesis tests whether a factor-based approach to value investing in the US have been profitable historically. Value investing is a contrarian strategy that profits from identifing stocks, which the investor believes to be undervalued by the market. Discretionary value investing have proven successful in the past, and we seek to test if a quantitative factor-based approach have been succesful as well. Academics have proven that exposure towards certain stock characteristics can explain stock return patterns. Factor-based investing indicates exposure towards risks related to these stock characteristics, with the aim of obtaining a return in compensation. To conduct the analysis, we use predefined value, momentum and quality factors to construct value, value-momentum and value-quality portfolios. The results are compared to existing litterature, to analyze the validity of the results. We find that a factor-based value premium exists, but that a combination between value and momentum have the most attractive risk-return profile. However, when adjusting for transaction costs, the short-term nature of the momentum factor greatly reduces the portfolios return, making value-quality the most attractive strategy. The development of the performance is examined by splitting the portfolios into multipe time-baskets. The combined portfolios proved stable without any negative returns in either of the time-baskets, contrary to the US market index and the pure value strategy. Since 1985, the US market index has significantly outperformed the value strategies, which questions the future viability of the factorbased value apporach. The thesis further takes a macroeconomic perspective, and test how the portfolios perform under different economic states. According to our findings, the investor can optimally switch between the proposed strategies during different economic cycles. When taking the future market outlook into account, we recommend the value-quality portfolio due to its defensive nature, as we believe that the market currently trades at a dangerous all-time high. Overall, the factor-based value approach has proven profitable in the past, but a combination amongst factors are more preferable than a pure value factor exposure.

EducationsMSc in Finance and Accounting, (Graduate Programme) Final ThesisMSc in Finance and Investments, (Graduate Programme) Final Thesis
Publication date2017
Number of pages119
SupervisorsOle Risager