AJO Partners, a 37-year-old value-oriented asset manager, survived the 1990s when value stocks were left for dead amid the dot-com boom in growth companies. This time around, as value continues to underperform growth, the firm is calling it quits. Sources say that similar firms are likely at risk as well.
In a letter to clients earlier this week, Ted Aronson, co-CEO of AJO, cited the “drought in value” as the main reason for closing the firm.
“Our revenues are largely driven by U.S. mandates with a value tilt,” he wrote. “Our relative performance has suffered because our investment edge, our ‘secret sauce,’ is at odds with many forces driving the market. However, the drought in value — the longest on record — is at the heart of our challenge. The length and the severity of the headwinds have led to lingering viability concerns among clients, consultants, and employees. At this point, I believe a certain, transparent, and graceful end (even at $10 billion in assets under management) is preferable to the likely alternative for all involved.”
Earlier this year, the firm had more than $18 billion in assets.
Sources say that other independent managers that primarily invest using a value style could also shut down soon. AJO’s downfall also highlights the business risks to all niche asset managers that experience a period of underperformance, even if their investment process is sound.
[II Deep Dive: Why Value Investing Sucks]
After hearing the news of AJO, many investment professionals were quick to make comparisons to 1999, when value was at its underperformance peak. One source noted that Palley-Needelman, a well-respected value manager, went out of business that year. “But this cycle for deep value has been even more prolonged,” the source said. Another person familiar with the mergers and acquisitions market added that selling to a competitor isn’t an answer for all firms. “It’s not a good time to sell a value manager,” they said.
In an interview, Gina Moore, co-CEO of AJO Partners, said that selling the firm isn’t as easy as many people think. “Our clients hired us, and they want to have the choice of what happens next,” she said. “A sale is very dependent on that ability to transfer the clients. That’s a challenging endeavor in good times, let alone when performance is hurting you. Now what has an opportunity to turn that? Performance. But we’re just not there yet.”
Moore acknowledged that her firm’s investment process “isn’t perfect.”
“It has had its challenges over the last 20 quarters, even relative to a value benchmark,“ she said. “We’ve continued to work on that. If we could hang around long enough, our investment process would see a benefit from a return to a value cycle. I just don’t have confidence when that will occur.”
“I’m sure someone would be happy to buy aspects of our computer code,” Moore added. “But our clients aren’t cattle, they don’t just go with it.”