This is only a teaser. The actual piece is somewhat lengthy, but we think an accessible and worthwhile read.
Q3 2019 hedge fund letters, conferences and more
For a long while, even as value suffered, we cautioned against upping the value weight. Our reasoning was twofold: 1) timing is hard (so hard that we’ve called market timing an investing “sin,” recommending to only sin a little, and only at reasonably extreme events), and 2) because despite the losses, value simply didn’t look exceptionally cheap (so not a reasonably extreme event!).
However, the last almost two years have been different. Value has continued to suffer, but lately for less fundamental and more just price reasons. We think the first eight-plus years of value’s recent 10-year losing streak were “rational” (for want of a better word). The expensive companies ex post more than justified their ex ante starting prices. In contrast, the last almost two years have seen value lose for “irrational” reasons. Value fundamentals have not come in worse over this recent painful period, it’s prices alone that have gone the wrong way. When losses are due to price moves, not fundamentals, and occur over shorter periods, that is when things actually cheapen.
To evaluate this, we look at how to measure whether a factor, in this case the value factor, is itself rich or cheap versus history. We look at three approaches, from academic to more AQR-like, and the answer, regardless of the approach taken in measuring cheapness, is that value is currently quite cheap compared to history. And it has gotten that way over the last almost two years. In other words, value does not look like a factor with too many people chasing it today (as we are often asked), rather it looks like a shunned out-of-favor factor. At best that creates opportunity, at worst it means the last almost two, or even the last 10, years don’t show a permanently broken value factor.
We end up with a view that, unlike a few years ago, it is indeed time to “sin a little” and up the value weight somewhat.
Ok, now check out the full story!
Article by Cliff Asness, AQR
