- Value stocks beat the market
- Most managers fail to do the same
- Even value managers fail to beat a value index
- The gap between the performance of the active value managers, and the underlying performance of a value benchmark is likely due to systematic behavioral errors
- To outperform, a fund must have a sound strategy that protects against behavioral errors
The quantitative method outpaces most active value managers, and with more consistency. It does so because our behavioral errors are most pronounced when we reason intuitively. We can reduce our errors by relying on statistical evidence, and limiting our discretion. This does not necessarily argue against active management; it only suggests that active managers should be measured against the correct benchmark, which, in the case of a value investor, is a passive index of value stocks. If an active process adds value, then it should outperform that passive benchmark. If it does not, then it’s reasonable to ask whether the costs of active management are worth bearing. The evidence seems to suggest that, in the aggregate, active value management does not beat the passive value benchmark. This is the rationale for a quantitative approach to value investment.
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Click here to read Simple But Not Easy: The Case for Quantitative Value Investment. Winter 2012 White Paper.