Value’s Latest Dive Shocks Cliff Asness

Cliff Asness, a leading light of factor investing, is stunned that one such factor has taken an unexpected plunge. That would be value investing, which after a decade of lagging, finally picked up speed late last year. Until 2020 threw it back on its heels.

In November, the co-founder of AQR Capital Management recommended putting a slightly higher weighting on value stocks last year than their sorry performance seemed to warrant. He whimsically likened such a move as a “venial sin”—namely a minor transgression that didn’t merit eternal damnation. The reason: Asness is a strong critic of market timing.

But here, based on better 2019 results, he felt that value’s days in the basement might finally be over. And indeed, the value segment of the Russell 1000 logged 26.1% total return last year, much less than the growth component’s 35.8%, yet a decent seeming turnaround nonetheless.

Over the past 10 years, growth has surpassed value 4.4 percentage points on average, the difference between growth’s mean annual showing of 16.1% and value’s 11.7%.

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And what happens? Perhaps because of the coronavirus or some other reason, value has taken a dive this year, logging 0.9%. Meanwhile, the market as a whole has recovered from the shock over the epidemic and soared to new heights, largely thanks to big growth players like tech. All in all, growth is up 8.9% to date.

Asness was gobsmacked. In a commentary he issued Wednesday, the headline read: “Never Has a Venial Sin Been Punished This Quickly and Violently!”

As he wrote, the slight favoring of value shouldn’t have been undone with such speed: “While we know such tilts are rarely, if ever, instantly rewarded, it’s also rare for them to be instantly incredibly punished (simply because “incredibly punished” is, thankfully, a rare thing). Well, welcome to 2020.”

With some rue, he recalled how in 1999, during the last days of the dot-com bubble, he also had advised sticking with value. The next three months were horrendous for value, he admitted, although he added that his forecasts typically cover several years, and in the end value “worked out well.”

Factor investing involves balancing the differing investing styles, which include value and growth. Trouble is, stocks have this way of surprising investors, not always pleasantly.

Asness pledged to keep at his process, undeterred by temporary setbacks. And he advised doing so despite the sure knowledge that bad times for the market overall, not just value, will at some point descend. And only by stouthearted devotion to factor-investing principles can his portfolio come out ahead in the long run, he argued.

“We’ve seen this movie before a few times and we know how, but definitely not when, it ends,” he declared. “We believe that sticking with the process is the only way to achieve the long-term gains we seek (and which won’t always be provided by a long-only market that continues to levitate).”

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Tags: AQR, Cliff Asness, factors, growth investing, value investing

In a surprise move, John D. Skjervem, who oversaw investment activities at the $82 billion Oregon Public Employees Retirement Fund (PREF), has announced his resignation.

Skjervem, the chief investment officer for the Oregon State Treasury, will leave his Oregon post at the end of March and will join the California investment consulting firm of Alan Biller and Associates in April.

The news was announced in a release by the investment consulting firm. Oregon State Treasury officials could not be immediately reached for comment, but it is expected that they will pursue a national search for Skjervem’s replacement.

Skjervem took over the pension fund and other investment activities for the state treasurer’s office in 2012. Before that, he was an executive vice president at Northern Trust.

He held a variety of portfolio management and leadership positions at the Chicago bank, including chief investment officer at the firm’s wealth management division.

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Overall, at the Oregon State Treasurer’s office, Skjervem managed $111 billion in various funds administrated by the office.

At his new firm, Skjervem will replace founder Alan Biller as CEO. Biller will remain as chairman of the firm and will stay active in both the firm’s operations and client service initiatives, the press release said.

The firm is known as a major consultant for union pension plans and has aggressively expanded its outsourced chief investment activities over the past few years, using delegated authority to make investment decisions for many of its clients.

Biller’s largest client is the Western Conference of Teamsters Pension Trust, the largest multiemployer pension plan in the US with more than $40 billion in assets under management (AUM).

It’s expected that Skjervem will help spearhead efforts to increase alternative assets at the union plans represented by Biller and Associates.

The firm has about $100 billon in assets under advisement, and has delegated authority for nearly half of the assets.

Union plans generally have not been as aggressive as state and local pension plans in building alternative assets, and it is expected that Skjervem will use his expertise to help coordinate that effort at his new firm.

The Oregon Public Employees’ Retirement Fund has the fourth-largest private equity portfolio among US pension plans, and Skjervem has continued the high asset allocation to the pension plan. Private equity asses total about $16 billion, nearly 20% of total plan assets.

Only the California Public Employees’ Retirement System, the California State Teachers’ Retirement System and the Washington State Investment Board have larger private equity portfolios.

At the Oregon pension plan, Skjervem has emphasized de-risking the pension plan’s assets under management. Last year, he led the pension system’s efforts to reduce equity exposure to 32.5% from 35.5%. The Oregon plan also created a risk parity sleeve and a discreet diversifying strategies sleeve for alternatives.