Despite intensive evidence indicating the death of value investing in the US over the past 2 decades, no investigation has been conducted in the UK. This paper aims to examine the recent performance of the original and new value strategies in the UK stock market.
Our dataset includes all companies listed in the UK from June 1995 to June 2024. To build the original value strategy, we sort all sample stocks according to their book-to-market. For the new value strategy, stocks are ranked on the ratio between cash-based operating profit (CBOP) and market capitalization. We also evaluate the explanatory power of the new value factor (NVF) by employing spanning regressions, Fama-MacBeth cross-sectional, and mean-variance efficiency.
The original value premium in the UK vanishes after 2006, with a negligible return of only 0.18% per month. By contrast, the new value strategy yields a strong and consistent average return of 1.18%, which is significant after controlling for asset pricing models. The NVF subsumes the original factor and provides sizable alpha in spanning regression as well as a statistically positive premium in the Fama-MacBeth framework. According to mean-variance efficiency, replacing the original value factor with this new one enhances the explanatory power of asset pricing models.
The paper makes two primary contributions. Our findings extend the recent literature on the dismal value premium by focusing on the UK, the biggest stock market in Europe. Our results also speak to the market finance literature. The ratio of CBOP to market capitalization is a reliable predictor of UK stock returns and is a relevant asset pricing factor. These empirical results contribute to both investment decisions and asset pricing.
