Value’s Latest Dive Shocks Cliff Asness

AQR co-founder had called for adding more low-priced stocks, figuring their bad times had ended. Oops.

Cliff Asness, a leading light of factor investing, is stunned that one such factor has taken an unexpected plunge. That would be value investing, which after a decade of lagging, finally picked up speed late last year. Until 2020 threw it back on its heels.

In November, the co-founder of AQR Capital Management recommended putting a slightly higher weighting on value stocks last year than their sorry performance seemed to warrant. He whimsically likened such a move as a “venial sin”—namely a minor transgression that didn’t merit eternal damnation. The reason: Asness is a strong critic of market timing.

But here, based on better 2019 results, he felt that value’s days in the basement might finally be over. And indeed, the value segment of the Russell 1000 logged 26.1% total return last year, much less than the growth component’s 35.8%, yet a decent seeming turnaround nonetheless.

Over the past 10 years, growth has surpassed value 4.4 percentage points on average, the difference between growth’s mean annual showing of 16.1% and value’s 11.7%.

And what happens? Perhaps because of the coronavirus or some other reason, value has taken a dive this year, logging 0.9%. Meanwhile, the market as a whole has recovered from the shock over the epidemic and soared to new heights, largely thanks to big growth players like tech. All in all, growth is up 8.9% to date.

Asness was gobsmacked. In a commentary he issued Wednesday, the headline read: “Never Has a Venial Sin Been Punished This Quickly and Violently!”

As he wrote, the slight favoring of value shouldn’t have been undone with such speed: “While we know such tilts are rarely, if ever, instantly rewarded, it’s also rare for them to be instantly incredibly punished (simply because “incredibly punished” is, thankfully, a rare thing). Well, welcome to 2020.”

With some rue, he recalled how in 1999, during the last days of the dot-com bubble, he also had advised sticking with value. The next three months were horrendous for value, he admitted, although he added that his forecasts typically cover several years, and in the end value “worked out well.”

Factor investing involves balancing the differing investing styles, which include value and growth. Trouble is, stocks have this way of surprising investors, not always pleasantly.

Asness pledged to keep at his process, undeterred by temporary setbacks. And he advised doing so despite the sure knowledge that bad times for the market overall, not just value, will at some point descend. And only by stouthearted devotion to factor-investing principles can his portfolio come out ahead in the long run, he argued.

“We’ve seen this movie before a few times and we know how, but definitely not when, it ends,” he declared. “We believe that sticking with the process is the only way to achieve the long-term gains we seek (and which won’t always be provided by a long-only market that continues to levitate).”

Related Stories:

Don’t Try to Time Factors, Says Cliff Asness

AQR’s Asness: How I Learned to Stop Worrying and Love Smart Beta

Factor Investing Doesn’t Always Deliver the Magic

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