“I think everyone knows what they’re supposed to do here,” says Cliff Asness, the co-founder of quantitative investing group AQR. Markets generally are now so expensive that the expected return on a 60/40 portfolio (that is, the traditional mix of 60% global equities, 40% global government bonds) “is at a record low”. Meanwhile, “value” stocks are as cheap relative to “growth” stocks, such as Tesla, as they were in the 1990s tech bubble.
Anyone paying attention to history would at least have to consider “lightening up” on growth and sticking to, or even adding to, their positions in value. Yet, while value has started to make a bit of a comeback since November, it’s only been a modest rebound and has left AQR’s overall portfolio underperforming badly in what has been a strong year for most strategies.
What comes next? It’s extremely psychologically painful to stick with a strategy – even when you know it to be time-tested and proven – when it’s struggling so badly and for such a prolonged period. But “the bottom line is that bad things sometimes happen to good, long-term processes over anything short of the very long term”, notes Asness. So he plans to continue with AQR’s tilt towards value investments.
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Indeed, “the pain of these periods might actually be the key to why some strategies actually do work over the long term”. If it wasn’t painful to stick with them, the opportunity to generate higher returns over time would be arbitraged away. Of course, “realising this doesn’t make it easy to live through”.
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