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It has been all over the investing news for months: “The value premium is dead.”

Value (low price-to-earnings or price-to-book) stocks, the pundits say, are no longer outperforming growth (high P/E or P/B) stocks. But almost invariably they are referring to U.S. markets, which normally attract all the attention. And indeed, evidence suggests the value premium (that is, value-stock returns minus growth-stock returns) has been mostly negative in the United States for the past 10 to 12 years.

But is this also the case in the Canadian market?

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To provide evidence on the Canadian value premium, my colleague Lucy Ackert and I obtained a sample of Canadian companies from the Compustat database for 1983 through 2018.

We excluded firms with a P/B of less than zero, as well as stocks with prices of $1 or less. Our sample included firms that are headquartered in Canada and traded only on a Canadian exchange. That is, our sample excluded interlisted stocks. Our goal was to provide insight into the Canadian experience (Canadian stocks traded in the U.S. may show patterns closer to those of American firms).

For each year of our sample, we ranked firms using P/B from low to high and then divided the data into quartiles. Quartile 1 (Q1) included stocks with the lowest P/B firms (the value stocks) and quartile 4 (Q4) included stocks with the highest P/B firms (the growth stocks). In addition, we computed a time series of non-overlapping returns for each stock within each quartile for the full sample, subperiods, bear and bull markets and recessions and recoveries. Bear market years are 1987, ’90, 2000, ’02, ’08 and ’11; all other years in the 1983 through 2018 period are characterized as bull markets. Recession years are 1990, 2001, ’08 and ’09.

The accompanying table summarizes the results, which suggest the value premium is more persistent in Canada than the United States.

Even though the value premium has declined considerably, from about 6 per cent in 1983 to 2000 to near zero in the past 17 years, it has not turned significantly negative – as it has in the United States. The Canadian value premium is particularly strong in bear markets (7 per cent). Low P/B stocks imply market pessimism about future growth, whereas high P/B stocks imply market optimism about growth. High growth expectations are quashed in a bear market and as a result growth stocks react more negatively than value stocks to lower expectations.

The value premium is also strong for low-price stocks, varying from 11 per cent to 12 per cent during the period from 1983 to 2000, to between 5 per cent and 8 per cent from 2001 to 2018. Low-price stocks tend to be more obscure, are followed by fewer analysts and are typically less liquid than high-price stocks. Thus, stocks with low prices tend to react more strongly to positive market sentiment (which is more prevalent than negative sentiment), leading to their higher value premium.

These findings point to the fact that Canadian markets are not as efficient as U.S. markets and so the value premium is more difficult to eliminate. Active portfolio management can still be profitable in Canada, particularly in small-price stocks and in bear markets. The news of the death of the value premium may be premature.

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Value investing: A Canadian Perspective

Here are mean and median value premiums (value stock returns less growth stock returns) based on price-to-book for 1983-2018 and two sub-periods. While the value premium has declined in the Canadian market, it has not turned significantly negative as it has in the U.S. Moreover, the value premium is still significantly positive in bear markets and for low-price stocks.

YearQ1 minus Q4 (Mean)Q1 minus Q4 (Median)
1983-201834
1983-200067
2001-2018-0.50.5
Bear markets77
Bull markets23
Recessions35
Recoveries34
Small-price stocks:
1983-2018810
1983-20001112
2001-2018 58
Large-price stocks:
1983-201822.5
1983-200044
2001-2018-1.5-1

Source: George Athanassakos, Lucy F. Ackert

George Athanassakos is a professor of finance and holds the Ben Graham chair in value investing at Ivey Business School, University of Western Ontario.

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