Risk and Premium – A Tale of Value

GMO

John Pease

Research

13 Pages

GMO analyzes why the value premium has lagged, breaking returns into growth, income, rebalancing, and valuation components. The paper suggests recent underperformance reflects structural valuation shifts rather than weaker fundamentals, challenging whether value’s long-term edge is temporarily delayed or structurally diminished.

Key Takeaways

Value Discount Widening: Value stocks trade at historically wide discounts, with spreads versus growth near multi-decade extremes despite 13 years of underperformance post-2005.
Return Drivers Shifted: From 1981–2005 value outperformed, but post-2005 income and rebalancing contributions declined materially, explaining most of the performance gap over the last 13 years.
Valuation Compression Impact: Falling yields and rising multiples reduced income differentials, with equity risk premiums compressing significantly since the Global Financial Crisis.
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