Factor decay erodes traditional value investing alpha
The guest argued that traditional value investing factors like low PE and low book-to-market have suffered structural decay since 2008 due to the proliferation of ETFs and passive investing.
The argument
The guest explained that the rise of smart beta and dividend ETFs turned what was once diversified alpha into commoditized beta. Additionally, traditional value managers structurally underperformed by arbitrarily excluding a new cohort of high-growth, non-dividend-paying companies from their investment universe.
The thesis, stress-tested
✓ What validates it
- ✓Continued underperformance of pure factor-based value strategies relative to broader indices
- ✓Persistent fund outflows from traditional active value managers into passive smart-beta ETFs
▸ Risks discussed
- ▸Value factors may experience temporary cyclical rebounds, but their long-term structural alpha generation is permanently impaired by passive flows
Hear it yourself
"And that occurred, I believe, because of the proliferation of ETFs and passive money, and I don't think value managers appreciated what was happening in addition to a new cohort of companies that were growing to the top weights in the indexes."
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