On the US bourses, the shares of sleepy companies have recently bested those of exciting companies. This is just the beginning of a big trend, says the billionaire money man running AQR
Vindication is coming for fund manager Clifford Asness. It was certainly a long wait.
For a depressingly protracted period, the value-conscious portfolio managers at AQR, which Asness, 56, co-founded in 1998, lost ground to competitors chasing hot growth stocks. Then came last year’s stock market rout. As the air exited inflated tech stocks, AQR funds became winners.
This is how Asness describes what bubbles do to value players: “It starts out ugly and then it turns wonderful.” Wonderful, that is, if you hang in there. Which some clients didn’t.
Asness is not one to cut and run, and he is not shy about expressing his convictions. On Twitter, he has been waxing indignant about bond yields below the rate of inflation and welfare for Silicon Valley Bank’s depositors. In academic papers and pronouncements for clients he makes the case that value’s rebound is far from over.
There is a lot going on in the data-intensive stock picking at AQR, a far-flung operation with six branches abroad, a headquarters in Greenwich, Connecticut, $100 billion under management and a roster of researchers festooned with advanced degrees. But one theme shines through: The idea that value beats growth over the long haul.
Value stocks are the shares of sluggish, unexciting companies that only contrarians love—like Stellantis, the Chrysler-Dodge-Fiat car company. The market darlings are fast-growing and sexy. Ferrari, for example. Growth stocks should trade at a premium to boring stocks. But how much of one? Expensive stocks, as AQR defines that universe, are trading at triple the multiple of earnings that cheap stocks trade at. Asness thinks they ought to be at only twice the multiple.
Value proved out for most of the past hundred years until, beginning when the Fed responded to the financial crisis by dumping money from helicopters, it stopped working.
Cheap stocks stayed cheap. Growth stocks, fuelled by artificially low interest rates, raced to ever greater premiums.
AQR’s clients began to lose faith. Assets in AQR’s Equity Market Neutral Fund, which marries long positions in value stocks to short-sale bets against the favourites, evaporated from $2.4 billion to a low of $55 million. The years 2018 through 2020 were unpleasant at AQR, which shrank its staff from a peak near 1,000 to a recent count of about 600.
“A three-year super-tough period is not long statistically but is gigantically long emotionally,” Asness says. “The world fires people for losing money for three to five years.”
Salvation began, hesitantly, not quite three years ago and was dramatic in 2022. Last year, AQR’s market-neutral fund delivered a 27 percent return, its Macro Opportunities Fund 29 percent.
Two large-company funds lost money but less than the stock market as a whole. A “carbon-aware” fund, opened in late 2021 to make both long and short-sale bets on climate-sensitive companies, was 35 percentage points ahead of the stock market in 2022.
The product line at AQR includes 22 US-registered mutual funds and an array of offshore hedge funds. Most of the firm’s work is hidden from view, but the results of the mutual funds, which are public, indicate that AQR’s clients have a way to go to make up for the lost years. The AQR Managed Futures Strategy HV Fund, for example, up a dramatic 50 percent last year, has averaged a disappointing 3.6 percent a year since it opened in 2013.
When value lagged, the case for buying it, at least in theory, got stronger and stronger. But so did a client’s urge to flee. Asness tracks what he calls the value spread, the degree to which value stocks have gotten too cheap relative to growth stocks. During the bleak years, Asness recollects, “Sometimes I thought: ‘How could anyone leave us when the spread is so high?’ And sometimes I thought: ‘How did anyone stick with us when it was so painful?’ ”
Asness earned a Ph.D. at the University of Chicago in 1994 under the tutelage of Eugene Fama, a Nobel economist famous for expounding the idea that stock prices take an unpredictable random walk, albeit with some tendency for value stocks to outperform.
Asness explored the possibility that stocks with recent upward momentum could also beat the market. What if you favoured both value and momentum? Buy value stocks that have turned the corner while shorting stocks that are overpriced and weakening.
The value-momentum
double play hit paydirt. Asness’ dissertation was accepted and, along with two fellow theorists from Chicago, he landed a job running a market-neutral hedge fund at Goldman Sachs. The fund earned 140 percent in its first year.
A couple years shy of the millennium, the threesome, along with a fourth Goldman alumnus, opened AQR (Applied Quantitative Research). Affiliated Managers Group, a publicly traded confederation of portfolio managers, owns a fourth of the business. AQR insiders own the rest, Asness with the lion’s share.
Investment styles, whether value or momentum or any other angle, have good stretches and bad stretches, and the stretches last long enough to draw in clients willing to pay handsomely.
AQR collects fees on the mutual funds ranging from 0.4 percent to 1.7 percent a year, not counting interest and short-selling outlays, plus undisclosed sums on the private accounts that represent most of the firm’s assets under management. The firm is quite the gold mine when the market cooperates. Its profit occasionally comes into view when Affiliated is compelled to reveal it: For 2017, $807 million on revenue of $1.3 billion.
If style stretches are destined to last for years, then value players seem well positioned, despite a weak first quarter of 2023. Asness notes that when the value spread peaked in November 2021 it was at the 100th percentile of its historic range. The past several years have taken that spread only partway back, to the 88th percentile.
Ferrari, the glittering carmaker that shows up as a short position in AQR Market Neutral’s last public filing, is priced at 49 times trailing earnings. Stellantis, a long, can be had for three times earnings. Asness hazards the prediction that the value rebound is in the “early innings.” He might be right.
