Need to Know: This hedge-fund legend is ‘very excited’ after no-word blog on why value stocks should outperform growth
“That’s it, that’s the blog,” says Cliff Asness, the founder and chief investment officer of AQR Capital Management and five-time winner of the Bernstein Fabozzi/Jacobs Levy award for innovative portfolio management research.
He presents this chart, showing the valuation spread of value stocks over growth globally.
Now, in the footnotes, he explains the chart, and doesn’t just drop the mic as it were.
First, it’s a composite of five different measurements: book-to-price, earnings-to-price, forecast earnings-to-price, sales-to-enterprise value, and cash flow-to-enterprise value. The country split is 70% developed and 30% emerging.
“What we present here is the closest yet to how we actually view value and represents the value spread we look at most often in making decisions about tilts and the like,” says Asness. The spread is “extremely wide” in the U.S. but not as extreme in emerging markets, he adds. “Also, the spread has come in a tad in December along with value doing well, but it doesn’t change the graph above more than a smidgen,” he says.
Of course, the huge question when it comes to value is when such a bias will be rewarded. In a year with inflation of nearly 7%, the S&P 500/Citigroup pure value index SP500PV, +0.81% has narrowly outperformed the S&P 500/Citigroup pure growth index SP500PG, -2.64% by 29% to 25%.
“When it will work is not a question that has escaped us,” says Asness. (“I feel ya,” he said to a user on Twitter who posted a skeleton on a bench with the tag line, “Waiting for value to outperform.”)
“A common question is ‘What’s the catalyst.’ I look back at times like the peak in March of 2000 (tech bubble) and note that 21 years later we still don’t know what the catalyst was for it stopping there. But, while timing will always be bedeviling, we do believe the odds get better the crazier prices get, and the medium-term expected returns get better too.”
“Making some money on value this year while it’s gotten way cheaper (and record cheap) is not a bad combination and has us very excited for 2022 and beyond,” he adds.
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