In January, Bloomberg’s Erik Schatzker interviewed AQR co- founder Cliff Asness on the state of value investing and, more specifically, the rough sledding AQR has experienced in the last year.
Here are highlights from the interview:
Although 2020 was a “disastrous year for value,” Asness said that the period between 2010 and 2017 was also terrible for “most traditional measures of value, for most multi-factor quants,” but noted that AQR did fairly well during that period.
The last few years, according to Asness, have represented an “irrational, bubblish loss for value where we haven’t seen fundamentals moving enough to justify the prices.”
Regarding how AQR is responding to the current landscape, Asness argued, “You can easily find things that go up in a bubble but finding things that go up in a bubble that you can either time when to be in them or that make money over the long haul, that we’ve not succeeded at.”
Whether value is permanently broken, Asness explained, is the “trillion-dollar question,” but he believes probably not. “I’ve spent a lot of time, especially over the past two years, trying to explore every hypothesis…We don’t think human nature has changed to that degree.”
During the pandemic, Asness explained that his firm shifted its focus to look more at forecasting versus trailing earnings: “Current trailing measures and the earnings we’re going to see for the next six months really are not what stocks are priced off of.”
Asness disagreed with the common characterization of quant investors as “cold, unemotional beings,” arguing, “There is a difference between feeling emotion and acting emotionally and letting it affect the investment process.” He added, “I don’t think anyone at AQR would tell you that I came in one day and changed our investing strategy because I was angry or in a bad mood.” Being a quant, he said, “doesn’t mean you’re a Vulcan,” but it does mean “you run the process like you’re a Vulcan.”
At an intellectual level, Asness said he is “certain enough” that the models work, emphasizing, “Not for blind faith reasons but rather for critical self-examination reasons.”
“I think we’re going to see a grand comeback” for value, Asness contended, but qualified that he would be “absolutely open” to doing things differently if he saw sufficient evidence and data to support it. “I don’t think we’re wrong,” he said, “so we’re going to stick with what we believe is a great bet, particularly in a world that doesn’t offer a lot of great bets.”
Although the current market cycle has run longer than he would have expected, Asness said, “Creating a strategy that doesn’t send us up a wall for a few years at a time is inconsistent with a strategy that lasts in the long term.”
On Bitcoin, Asness retorted, “It’s a little trendier than I want to be.”