MyAQR Education Strategies About Us VALUE The Devil in HML's Details June 1, 2013 - Cliff Asness Andrea Frazzini Topics - Value Momentum Equities The Devil in HML's Details This paper challenges the standard method for measuring “value” used in academic work on factor pricing. This is particularly true for the high-minus-low factor (HML), which is based on the observation that companies with high book-to-market ratios (value stocks) outperform those with low ones (growth stocks). The standard method calculates book-to-price (B/P) at portfolio formation using lagged book data, aligns price data using the same lag (ignoring recent price movements), and holds these values constant until the next rebalance. Thus by the time the data is updated the price used to determine “value” is 18 months old. We propose two simple alternatives that use timelier price data while retaining the necessary lag for book data. We construct portfolios based on the different measures for a U.S. sample (1950–2011) and an international sample (1983–2011). We show that B/P ratios based on timelier prices better forecast true (unobservable) B/P ratios at fiscal year end. We then show that in the context of a five-factor model including momentum, this logically superior value measure is actually superior in terms of returns. We further extend this to a monthly updated value strategy and find that, for precisely analogous reasons, the return advantage grows far stronger. Value portfolios based on the timeliest measures earn statistically significant alphas ranging from 305 to 378 basis points per year. The bottom line is that while the standard approach to value was a reasonable and conservative choice that has served the field well, it is not the best possible choice. — Bernstein Fabozzi/Jacobs Levy Best Article Award 2014 Research Journal Article Published In The Journal of Portfolio Management View Related Thinking The Devil in HML's Details (Supplement) Interview - December 26, 2017 A New Core Equity Paradigm White Paper - March 1, 2013 The Interaction of Value and Momentum Strategies Journal Article - March 1, 1997 Value and Momentum Everywhere Journal Article - June 1, 2013 Data Sets The Devil in HML's Details: Factors, Monthly October 31, 2021 AQR Capital Management, LLC, (“AQR”) provide links to third-party websites only as a convenience, and the inclusion of such links does not imply any endorsement, approval, investigation, verification or monitoring by us of any content or information contained within or accessible from the linked sites. If you choose to visit the linked sites, you do so at your own risk, and you will be subject to such sites' terms of use and privacy policies, over which AQR.com has no control. In no event will AQR be responsible for any information or content within the linked sites or your use of the linked sites. The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of AQR Capital Management, LLC, its affiliates or its employees. This information is not intended to, and does not relate specifically to any investment strategy or product that AQR offers. It is being provided merely to provide a framework to assist in the implementation of an investor’s own analysis and an investor’s own view on the topic discussed herein. Past performance is not a guarantee of future results. Hypothetical performance results have many inherent limitations, some of which, but not all, are described herein. The hypothetical performance shown was derived from the retroactive application of a model developed with the benefit of hindsight. Hypothetical performance results are presented for illustrative purposes only. Diversification does not eliminate the risk of experiencing investment loss. Certain publications may have been written prior to the author being an employee of AQR. This material is intended for informational purposes only and should not be construed as legal or tax advice, nor is it intended to replace the advice of a qualified attorney or tax advisor. AQR Capital Management is a global investment management firm, which may or may not apply similar investment techniques or methods of analysis as described herein. The views expressed here are those of the authors and not necessarily those of AQR. Education Featured Thinking Research Cliff's Perspectives Data Sets Learning Center Quick Clips Podcasts Strategies Overview Equities Fixed Income Alternatives ESG Tax-Aware Investment Vehicles About Us Our Firm News Careers Academic Engagement Contact Us MyAQR Log In Register Privacy Policy Social Media Disclaimers Terms of Use Disability Accommodation for Applicants Equal Opportunity Employer ©2021 AQR Capital Management, LLC. All rights reserved.