“Never has a venial sin been punished this quickly and violently,” says Cliff Asness of AQR, the quantitative-investing giant that manages around $185bn. Back in November, AQR began increasing its exposure to value stocks on the basis that they then looked exceptionally cheap compared to the wider market – despite the firm’s long-standing principle that trying to time the market in this way amounts to an investing “sin” (because market timing is hard to get right and likely to backfire).
Thankfully, “we only sinned a little”, by increasing exposure a small amount. That turned out to be very fortunate, because the timing of AQR’s decision could not have been worse.
“In a decade quite bad for value investing, the start of 2020 is the absolute worst six-week period”: between 1 January and 13 February, the Russell 1000 Value index underperformed the Russell 1000 Growth index by 6.4%. (The Russell 1000 tracks the 1,000 largest US stocks – it’s similar to the S&P 500 but broader.) On a 30-year view, a span that includes events such as the 1998-2000 tech bubble and the 2008-2009 global financial crisis, value has only done worse 3% of the time. And among smaller companies, this has been the worst spell for value since at least 1963.
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“I have been a pooh-pooher … of some who compare this value pain to the tech bubble.” Value is not quite as cheap relative to the rest of the market as it was back then. However, the comparison is getting stronger, in terms of both the scale (“no more slow steady losses for value, now it’s very quick big ones”) and “the widespread embracing by many of all the reasons … why value is never going to work again”. Value investors need to stick to their process, even though that’s difficult when performance is as bad as this and others are finding reasons to throw in the towel. “We’ve seen this movie before a few times and we know how, but definitely not when, it ends.”
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