Revisiting the Value Factor

Key takeaways: 

• Value factor remains a relevant and investable factor, but how it is defined and implemented has a significant impact on outcomes
• A composite approach using multiple valuation measures provides a more robust definition of Value factor than relying on a single metric factor definition
• Careful index construction, including the neutralisation of unintended country and sector exposures, can improve risk-adjusted returns and deliver purer factor exposure

Points of differentiation: 

• Revisits the Value factor through the lens of today's market environment, where intangible assets play a much larger role in company valuations
• Demonstrates the benefits of FTSE Russell's established composite Value methodology, which combines cash flow yield, earnings yield and sales-to-price measures
• Quantifies the impact of factor implementation choices, showing how index design can influence performance, risk and investability

What does our research mean for investors? 

• Investors seeking Value factor exposure should look beyond simple valuation ratios and consider how factor strategies are defined and constructed
• A well-designed Value factor approach can help investors capture the intended factor premium while reducing unintended exposures to sectors, countries and other factors
• The findings reinforce the importance of transparent, rules-based index methodologies in building portfolios that deliver more consistent and reliable factor exposure

This publication focuses on the FTSE Russell Value factor methodology; style index methodologies are outside its scope.