Adjusting the Value Factor for Intangible Assets and Decomposing Its Returns

Summary

This research review examines why the traditional book-to-price value factor underperformed growth stocks over an extended period. It argues that book value misses internally developed intangibles such as software, brands, research, and customer relationships, which can make intangible-heavy firms appear expensive under conventional measures. The proposed adjustment capitalizes selected intangible investment and uses adjusted book value relative to market value to form an alternative value factor, iHML. The reported historical comparison finds that iHML outperformed traditional HML after 2007 and experienced a shorter, shallower drawdown over the studied period.

The review also decomposes value’s relative returns into valuation changes, migration between value and growth classifications, and income yield. It attributes much of the recent shortfall to relative repricing, while treating migration and income yield as more structural components. The authors argue that unusually wide value-growth valuations may support future value returns, but this depends on repricing not continuing indefinitely. The evidence is historical and does not establish that valuations will mean-revert, that the adjustment will generalize, or that future outperformance is assured.

Key ideas

• Traditional book-to-price measures can understate the assets of firms that invest heavily in internally developed intangibles.
• The proposed iHML factor adjusts book value for intangible investment before comparing it with market value.
• The review separates value returns into repricing, migration between style groups, and income yield.
• It attributes much of value’s recent relative weakness to valuation changes rather than a clear collapse in structural drivers.
• Any expectation of a value rebound relies on assumptions about valuation mean reversion that may not hold.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.