Quant Pioneer Cliff Asness Says It’s ‘Too Early to Gloat’ as Value Stocks Rally
(Bloomberg) -- Cliff Asness is fighting the urge to say “I told you so.”
As Wall Street prepares for a new era of tighter monetary policy, the co-founder of AQR Capital Management is riding a historic comeback in his beloved value trade.
The firm’s $1 billion Absolute Return fund just posted the best five days in its 23-year history through Jan. 7 with a 10% gain, according to a person familiar with the matter.
Yet after getting lashed by years of value underperformance, the influential quant manager knows it’s premature to declare victory.
“It’s too early to gloat,” the 55-year-old said in an interview from his office in Greenwich, Connecticut. “We haven’t made back all the money yet, so I’ll feel vindicated when our clients are well ahead.”
Despite an 8% surge to start 2022 and its best performance on record last year, AQR’s Equity Market Neutral Fund is still down 14% on a five-year basis. The quant firm overall now manages about $124 billion, compared to roughly $220 billion it oversaw in late 2018 --in large part thanks to the seemingly insatiable love for pricey tech names and a pandemic that intensified that.
Now rising yields, rampant inflation and the economic upturn are boosting the systematic strategy of buying cheap-looking stocks while dumping pricey counterparts -- a trade the firm is famous for. Among the factors used by AQR to pick equities, value’s surge has more than made up for declines in momentum as well as quality.
Value is notorious for its short-lived rebounds in the post-crisis era, and took a breather Tuesday as bond yields slipped. But Asness sees a market that is finally aligning with his long-standing view that the trade will reward the faithful.
“We think it’s firing on all cylinders now,” he said. “The fundamentals are right, the price momentum is right and the valuation spreads are still, ignoring the prior six months, at records.”
In early December -- the last time the quant pioneer banged the drum about stretched valuations -- global value stocks traded at a 55% discount to growth based on price-to-earnings multiple, the widest since the 2000 dot-com era, MSCI indexes show. Now it’s about 51%, compared with a 25% average in data going back to 1980.
That metric, as Asness himself would admit, has never been good at timing turning points. The spread has been historically wide for years, and value only started recovering in late 2020 as the announcement of Covid vaccines fired up risk appetite. Even then, it has been a bumpy ride, and the strategy gave up much of its rebound last summer when pandemic fears returned.
Then as now, bonds were the apparent catalyst. Treasuries just posted the worst selloff in 11 months as conviction grows that the Federal Reserve is set to raise interest rates faster than expected to fight inflation. Since value shares are typically more cyclical with more near-term cash flows, they have outperformed in that shift.
While AQR has stressed in the past that there’s no reliable link between value and rates in historic data, Asness agrees that in the short-run the factor may be acutely sensitive to bond swings. But even based on the tight relationship seen in recent years, bonds would have to rally significantly to change the picture.
“With valuation spreads where they are now, the last I looked, yields will have to drop 300 basis points to turn our one-year outlook on value to negative,” he said.
Whatever the outcome, for the moment Asness is spending less time defending value from claims it is obsolete in the era of Big Tech and zero rates. He and his fellow advocates harbor hopes of a multi-year vindication, like the one that followed the dot-com peak.
“It took a while for people to hate value,” he said. “It’ll take a while for people to love value.”
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