While research has shown that value stocks outperform the market over the long run, value strategies can underperform significantly during shorter periods. Capturing the full extent of value returns requires a long-term commitment on the investor's part. However, periods of pronounced underperformance often negatively affect investors' ability to “stay the course.”
Our research documents that a highly diversified strategy that combines value stocks with high price-momentum stocks (i.e., stocks with a high trailing 12-month total return) offers important risk reduction benefits to investors. It allows investors to stay invested for the long term by significantly mitigating potential underperformance in the short term.
Academic research has documented that value and momentum have provided significant market outperformance, or active returns, over the long run. Value and momentum are powerful and persistent sources of active returns, as depicted in the chart below.