Value is arguably the leading exhibit in the factor zoo. Quantifying the value factor is challenging, however, for multi-asset class portfolios for at least two reasons. Commodities aren’t easily valued because oil, gold, etc. don’t generate earnings or dividends. Even when there are cash flows to measure, putting a broad set of assets on a level playing field is difficult, perhaps impossible, if we use traditional valuation metrics, such as book value, price-earnings ratio, etc. Measuring valuation for real estate investment trusts (REITs), for instance, requires a different procedure vs. stocks, which is different from bonds. A solution (or at least a partial solution) that applies to everything is estimating valuation using return.

A 2013 paper by AQR Management’s Cliff Asness and two co-authors (“Value and Momentum Everywhere”) studies the value and momentum factors and outlines the logic for estimating the former with 5-year performance:

Momentum is straightforward since we can use the same measure for all asset classes, namely, the return over the past 12 months… For measures of value, attaining uniformity is more difficult because not all asset classes have a measure of book value. For these assets, we try to use simple and consistent measures of value… For commodities, we define value as the log of the spot price 5 years ago…. Fama and French (1996) show that the negative of the past 5-year return generates portfolios that are highly correlated with portfolios formed on BE/ME, and Gerakos and Linnainmaa (2012) document a direct link between past returns and BE/ME ratios [ratio of the book value of equity to market value of equity].

No one should confuse 5-year returns as a perfect solution, but it’s a useful first step for deciding how a broad mix of assets compare on a valuation basis. With that in mind, let’s crunch the numbers on the major asset classes based on a set of proxy ETFs for trailing 5-year performance. By that standard, valuation varies widely across markets. At the highest valuation extreme: US stocks, based on Vanguard Total Stock Market (VTI), which is currently posting a 13.9% annualized total return. On the flip side: broadly defined commodities via iPath Bloomberg Commodity (DJP), which is suffering with a 10.9% annualized loss through Apr. 25.