Value investors have a rough road.

The average value investor underperforms an S&P 500 index fund, even before fees, by almost a percentage point — even though the average value fund outperforms the S&P 500.

This, and other shortcomings of value investors, is the subject of Research Affiliates’ latest newsletter.

Readers may already be scratching their heads on two counts. First, how does the S&P 500 beat value and value beat the S&P 500? They can’t both be right!

And secondly, could that really be Research Affiliates — whose smart-beta indexes are essentially rules-based systems for buying undervalued stocks and selling overvalued stocks — that makes this apparently anti-value claim?

Careful readers will understand that at issue here is investor underperformance rather than investment underperformance; and further, that the Newport Beach, Calif.-based value shop’s seeming trashing of value is but a prelude for a deeper understanding of the value of value — that is, the “tremendous opportunities” it holds for disciplined contrarian investors.

Firm co-founder Jason Hsu and senior researcher Vivek Viswanathan do yeomen’s work in unpeeling this investing paradox by first airing what they call “an inconvenient truth.”

The data show that value investors underperform the buy-and-hold S&P 500 index return by 0.92%.

This is not to say that they concede the argument of cap-weighted index champions like Vanguard’s Jack Bogle that picking stocks, even value stocks, is risky and undesirable.

On the contrary, Hsu and Viswanathan unequivocally affirm the value is king of all investment anomalies, having “consistently delivered a premium over the capitalization-weighted market portfolio for the last 90 years.”

One poignant proof of this is that value investors underperform value funds by an even greater amount than S&P 500 funds, losing out on an annual 1.31% (given investment returns of 9.36% and dollar-weighted investor returns of 8.05% between 1991 and 2013).

So the inconvenient truth is that value investors’ 23-year losing streak indicates they are neither extracting a value premium nor exploiting the mistakes of their counterparties taking the other side of the trade.

By comparing actual fund investor purchases and redemptions with reported fund returns, the Research Affiliates duo conclude that investors in value funds are trend chasers, who sell after their funds underperform and buy after they outperform.

In other words, value fund investors are not true contrarians but market timers, succumbing to the behavioral pitfalls that snare investors in growth and other market styles.

But Hsu and Viswanathan are careful to reiterate that the fault lies not in the value strategy they endorse but rather in investors’ infidelity to that strategy.

“An investor who spurned value strategies after the bludgeoning they received during the tech rally of the 1990s lost out on the value premium’s 94% run between July 2000 and June 2002,” they write, citing one extreme example of the kind of return investors forfeit by buckling to fear.

The analysts draw two implications from all this.

First, they remind investors that mean reversion applies to the value premium just as it does to other facets of investing. Thus, trend chasing would not harm investors “if the value premium were constant over time,” they write. But trend chasing in the face of mean reversion is a formula for value investor “whiplash.”

Second, given the high level of “excess return” the value premium holds, one might reasonably ask, who are the financially naïve investors taking the other side of the trade? Why don’t investors arbitrage away the excess return of value investing?

And herein lies Hsu’s and Viswanathan’s key insight: Ironically, “value investors are supplying a premium to other market participants rather than collecting one.”

By buying and selling at the wrong times, at least some of their counterparties are profiting handsomely.

That is because the number of trend chasers numerically outweigh (and considerably so) buy-and-hold value investors.

It is thus the inconstancy of this trigger-happy population of investors (whose ranks include sophisticated institutional investors, they add) who are, by funding the value premium, providing the “tremendous opportunities” of excess return for rules-based value investors who can profit from their behavioral foibles.

— Check out 7 Smart Beta Questions, Answered on ThinkAdvisor.