Pzena: Value vs. Value-Light – Why Investors Are Leaving Returns on the Table

In their latest article, the team at Pzena Asset Management notes that investors often claim allegiance to value investing, yet their portfolios tell a different story. As makes clear, “Many investors opt for ‘value-light’ strategies that sacrifice key value principles.”

That compromise may feel comfortable, but it introduces a structural drag on long-term returns that is difficult to overcome.

The appeal of dilution is understandable. True value investing can be uncomfortable by design. The article notes, “There can be pain and discomfort when purchasing out-of-favor stocks.”

That discomfort is precisely where the opportunity lies. Strategies that avoid it are, in effect, opting out of the very mechanism that drives excess returns.

The data presented reinforce a point that seasoned investors have long recognized but often fail to implement consistently.

“Superior returns from value investing have passed the scrutiny of a myriad of studies since Graham and Dodd first printed Security Analysis in 1934.”

Yet despite that long track record, many investors still gravitate toward diluted approaches that soften volatility at the cost of performance.

This trade-off is not subtle. According to the same article, “Since these strategies purchase stocks beyond the cheapest quintile, and historically have much lower returns, we believe they sacrifice too much of the rewards of the value philosophy to generate significant long-term outperformance.”

In other words, value-light strategies may look like value on the surface, but they lack the core ingredient that drives alpha.

Risk perception is another factor that keeps investors from fully committing. The persistent belief that value is inherently more dangerous continues to shape allocation decisions.

However, the article challenges this directly: “The measure of ‘risk’ they use is generally volatility of short- term returns, which we believe is a poor measure of risk.”

When evaluated over longer horizons, the supposed risk premium looks far less compelling relative to the returns delivered.

Importantly, investors focusing only on short-term fluctuations miss the broader payoff.

“Looking at volatility in isolation ignores the significant reward an investor may earn for bearing the potential near-term volatility.”

That framing shifts the discussion from discomfort avoidance to reward maximization, where value strategies have historically excelled.

Perhaps the most overlooked issue is how value exposure is implemented. Passive approaches, often assumed to be efficient, can introduce unintended distortions.

As the article states, “the vagaries of index formation have led to value indices that are filled with stocks that we would not consider bargains.”

This structural flaw means investors may believe they own value when, in reality, they hold something quite different.

The conclusion is straightforward but not easy to execute. Investors must decide whether they want the full benefit of value investing or a diluted version that prioritizes comfort. The evidence suggests that discipline, not compromise, remains the key differentiator over time.

Full article here:

Pzena: Value vs Value Light