Small-Caps Rally: Stocks of the small-cap variety in the US have been trailing their large-cap brethren this year, but Mr. Market threw out the script this week. That, at least, is the narrative for this week’s strong rally in the lesser realm of capitalization — a rally that suggests that a rotation into smaller firms may be at hand.

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Resurrecting the Value Premium
David Blitz (Robeco) and Matthias X. Hanauer (Technische Universität München)
October 15, 2020
The prolonged poor performance of the value factor has led to doubts about whether the value premium still exists. Some have noted that the observed returns still fall within statistical confidence intervals, but such arguments do not restore full confidence in the value premium. This paper adds to the literature by showing that the academic value factor, HML, has not only suffered setbacks in recent years but has, in fact, been weak for decades already. However, we show that the value premium can be resurrected using insights that are well documented in the literature or common knowledge among practitioners. In particular, we include more powerful value metrics, apply some basic risk management, and make more effective use of the breadth of the liquid universe of stocks. Our enhanced value strategy also suffers in recent years, but this is largely explained by an extreme widening of valuation multiples similar to the late nineties. We conclude that a solid value premium is still clearly present in the cross-section of stock returns.

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