Quantitative Value Research: NCAV/MV Factor

Quantitative Value Research: NCAV/MV Factor

November 15, 2014 Research Insights, Value Investing Research
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(Last Updated On: January 18, 2017)

Testing Benjamin Graham’s Net Current Asset Value Strategy in London


It is widely recognized that value strategies – those that invest in stocks with low market values relative to measures of their fundamentals (e.g. low prices relative to earnings, dividends, book assets and cash flows) – tend to show higher returns. In this paper we focus on the early value metric devised and employed by Benjamin Graham – net current asset value to market value (NCAV/MV) – to see if it is still useful in the modern context. Examining stocks listed on the London Stock Exchange for the period 1981 to 2005 we observe that those with an NCAV/MV greater than 1.5 display significantly positive market-adjusted returns (annualized return up to 19.7% per year) over five holding years. We allow for the possibility that the phenomenon being observed is due to the additional return experienced on smaller companies (the “size effect”) and still find an NCAV/MV premium. The profitability of this NCAV/MV strategy in the UK cannot be explained using Capital Asset Pricing Model (CAPM). Further, Fama and French’s three-factor model (FF3M) can not explain the abnormal return of the NCAV/MV strategy. These premiums might be due to irrational pricing.

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Core Idea:

This paper tests a value metric employed by Benjamin Graham – net current asset value to market value (NCAV/MV) – to see if it is still useful in a modern context.

  • Examining stocks listed on London Stock Exchange for the period 1981 to 2005.
  • NCAV/MV Security Selection: Only those stocks with NCAV/MV higher than 1.5 are included in the NCAV/MV portfolios.
  • Results: Firms with an NCAV/MV greater than 1.5 display significantly positive market-adjusted returns (annualized return up to 19.7% per year) over five holding years.
  • Additionally, the differences in returns of the NCAB/MV holdings cannot be explained by the Fama-French three-factor model (which includes size and value factors).
2014-10-03 17_34_11-0Value Reseach Recap.pptx - Microsoft PowerPoint (Product Activation Failed)
The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.

Toby Carlisle, Sunil Mohanty, Jeff Oxman have a paper on the subject in the US market.


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Definitions of common statistics used in our analysis are available here (towards the bottom)

About the Author

Wesley R. Gray, Ph.D.

After serving as a Captain in the United States Marine Corps, Dr. Gray earned a PhD, and worked as a finance professor at Drexel University. Dr. Gray’s interest in bridging the research gap between academia and industry led him to found Alpha Architect, an asset management that delivers affordable active exposures for tax-sensitive investors. Dr. Gray has published four books and a number of academic articles. Wes is a regular contributor to multiple industry outlets, to include the following: Wall Street Journal, Forbes, ETF.com, and the CFA Institute. Dr. Gray earned an MBA and a PhD in finance from the University of Chicago and graduated magna cum laude with a BS from The Wharton School of the University of Pennsylvania.

  • Steve

    Very cool seeing results from elsewhere.

    Do you know if anyone has ever done a study on NCAV/MV in a relative study? Like the usual deciles / quintiles rather than the absolute 1.5 (2/3rds discount) that Graham required?

    In other words, has it been tested like a price to book, price to earnings ratio as a measure of relative value?

  • I don’t think we’ve ever tested that to be honest. I’ll add to our R&D list…

  • PaulieWalnuts

    I think the study by Carlisle, et. al., did the research in that way. If I remember correctly, the finding was that future returns increase as NCAV/MV increases EXCEPT for the decile where NCAV/MV is the highest. I guess the very highest NCAV/MV stocks must have some blow ups.