AQR’s Asness: Prices Are Too High—But It’s Not All Bad

Valuations across most asset classes are at the highest levels they have ever been, according to AQR.

Stocks and bonds, particularly in the US, are in the top 85^th percentile of historic levels, said AQR founding principal Cliff Asness at a briefing in London on Thursday. He also warned: “I don’t know of any large liquid asset class that’s not expensive.”

“If banks are unwilling to take on risk now they will be very unwilling in the next big bad event. It will make things function worse, not better.”—Cliff Asness, AQRAntti Ilmanen, principal at the group, added that, as there was not one single asset class or area that was significantly more expensive than others, “these types of value signs are not useful for contrarians”.

“There could be a price that is too high but timing when that happens is very difficult,” he said.

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Although AQR admitted concern over valuations, Asness and his colleagues maintained that it did not mean a market crash or financial crisis was imminent.

“It could be the case that the world crashes, but it could be that things stay expensive and generate returns, but less than expected,” Asness said.

Michael Mendelson, principal, said investors had become complacent but “that doesn’t mean a bad event is more likely.”

The S&P 500 hit an all-time high last month, closing at 2,011 on September 18. This marked a 9.7% gain for the year, but the index since fell back to close at 1,946 on Thursday.

US 10-year government bonds have also rallied this year, with yields declining from 3.03% at the start of 2014 to 2.43% on Thursday. A Bloomberg index of global corporate bonds has risen 3.2% in 2014.

On bond market liquidity, Mendelson echoed the views of some fixed income investors that bank withdrawals from the market have hurt liquidity. He said the situation was “on the road to getting worse” and “can make certain types of trades more expensive”, although he played down the impact in the current environment.

Asness added: “If banks are unwilling to take on risk now they will be very unwilling in the next big bad event. It will make things function worse, not better.”

Mendelson emphasised that liquidity and transaction cost issues had not affected AQR as the firm trades primarily in equity and futures, both of which he said were cheaper than ever to trade.

AQR features in the Risk Parity Survey, published in the October edition of Chief Investment Officer. To subscribe to the print or digital editions, click here.

The board of the San Diego County Employees Retirement Association (SDCERA) declined to terminate its contract with outsourced-CIO Salient Partners at a meeting on Thursday.

As predicted by those close to the $10 billion fund, the vote came down to the wire. After nearly five hours of discussion, a motion brought by trustee Dianne Jacobs to fire Salient was blocked by five trustees, including Chairman Skip Murphy, and backed by four.“We don’t think you’re prepared to make major changes, and we urge you not to cancel the Salient contract…” Susan Mallett, Retired Employees of San Diego County

Several stakeholders presented formal recommendations about the action before the board’s vote. The majority of these representatives urged the fiduciaries not to reverse their course—a risk-parity oriented portfolio overseen and invested by Salient.

“We believe your board is at a serious juncture,” said Susan Mallett, president of the county’s retired employee association. “You are suddenly and unexpectedly considering a reversal from an investment strategy you had agreed on after years of considered discussion. As a representative of thousands of members who absolutely depend on their pensions, I have received as many worried letters about leverage as I have about the actions of this board.”

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Mallett, who opened the meeting, expressed a position later echoed by the fund’s chief legal counsel, primary consultant, and several other stakeholders. Speaking on behalf of retirees, she said: “We don’t think you’re prepared to make major changes, and we urge you not to cancel the Salient contract… Please return to cohesive, mutually respectful conversation. If you ultimately decide to cancel the contract, please direct your staff to come up with a well thought out plan for transitioning.”

The trustees in support of terminating Salient’s contract pushed back against the notion that firing the provider would be impulsive, and a break with the board’s legacy of measured decision making.

“Any characterization of what’s happening here—which is democracy at work—as knee-jerk reactions is inappropriate,” said Trustee Samantha Begovich, a recent addition to SDCERA’s board and vocal critic of its OCIO arrangement. “To say, ‘Samantha’s position is knee-jerk while mine is reasonable’ is, frankly, inappropriate.”

The board continues to have the capability to terminate Salient’s contact with a majority vote and 30 days’ notice.