Three months ago, Cliff Asness announced that it was time for investors to “sin a little” by tilting their portfolios toward the long-suffering value factor. That bet was “quickly and violently” punished, the AQR Capital Management co-founder said Wednesday.
In a blog post on AQR’s website, Asness noted that higher exposures to the value factor were “incredibly punished” during the first six weeks of this year. “Value has started 2020 with an extremely severe loss versus very long-term history, and, defined in a wide variety of ways, the worst loss yet… over the entire long 2010-2020 value drawdown,” he wrote.
Citing the performance of the Russell 1000 growth and value indexes, the factor investor said that the cumulative daily return difference between the two strategies was -6.4 percent — putting value’s underperformance below the third percentile for all periods since 1991.
“Of course, that includes such famous events as the technology bubble of 1998-2000 and the GFC of 2008-2009,” Asness wrote. “If you only look at 2010 to today, this is the zeroth percentile event. That is, in a decade quite bad for value investing, the start of 2020 is the absolute worst 6-week period.”
The same comparison “yields nearly identical results” for small-cap stocks, and other measures of value performance made the last six weeks look similarly bad, according to Asness.
Even AQR’s proprietary value factor — which performed well from 2010 to 2017 — “sadly fared quite similarly” at the start of 2020, the AQR co-founder said. “These (we believe) better versions of value have helped long-term and during most of the value drawdown,” Asness wrote. “But they have decidedly not helped during these last two years.”
[II Deep Dive: Why Value Investors Shouldn’t Expect a ‘Massive’ Comeback]
Despite this immediate rebuke for committing the “venial sin” of factor timing, Asness said that AQR won’t be making many “big changes” to its investment process.
“We’re executing our preferred strategy of not making panicky changes to our process that would have (note the tense) alleviated recent pain,” he wrote. “Nothing has changes save value has gotten cheaper this year.”
He added that the quant firm would “continue to watch value spreads, and consider doing a bit more of a tilt if they ever, which we hope not to see but will persevere if necessary, get to tech bubble levels.”
While Asness has, in his words, been a “pooh-pooher” of comparisons between the current market environment and the tech bubble, he acknowledged that it is “getting very bubbly out there.”
“We’ve seen this movie before a few times and we know how, but definitely not when, it ends,” the AQR co-founder concluded. “We believe that sticking with the process is the only way to achieve the long-term gains we seek.”