Quants score gains with value strategy that punished popular funds

NEW YORK: By most measures, it was a rough year for value investing. Long-only indexes tracking the buy-cheap credo suffered their second-worst performance on record versus their counterparts geared to growth.

The story of how a few sophisticated fund shops bucked the trend underscores the subtle dynamics beneath a blockbuster year for tech mega caps. Armed with the ability to go short, the firms won out thanks to sector and factor weightings that exposed them to a historic rebound in chips and internet shares. Also helping were gains in key markets outside the United States.

Among the winners were AQR Capital Management’s Equity Market Neutral Global Value Strategy, up 17.3% through the end of November after surging 44.7% in 2022, according to people familiar with the figures. The gains partly reflect a spreading-out of bets across industries that dulled the impact of deadbeat sectors like utilities and energy.

“Tech has strongly outperformed, particularly in the United States, and naive value tends to be biased toward disliking the sector,” said Andrea Frazzini, AQR’s head of global stock selection. “We take diversified bets in each industry and have seen substantial gains across various industries and sectors.”

Decisions like those helped separate the fund from the larger value-investing universe, which was punished in 2023 by swoons in regional banks, industrials and consumer staples. Utilities and energy stocks lead year-to-date declines in the S&P 500, down roughly 10% and 5%, respectively. And while financials have bounced a bit, their 10% increase this year trails the S&P 500’s 25% rally. Globally, MSCI’s World Value Index gained 8.9% this year, versus 36% in its growth counterpart – a gap eclipsed just once, in 2020.

The returns of firms like AQR are also a rebuke to the prevailing spirit of gloom blanketing Wall Street when it comes to the investing style’s future. With the siren song of artificial-intelligence-fuelled tech blaring, even those sell-side strategists betting on a broadening of the equity rally are still reluctant to pronounce a big value revival in 2024. Goldman Sachs Group Inc and Wells Fargo & Co are among those who see more of the same.

“We still don’t think there’s enough value in value,” said Christopher Harvey, head of equity strategy at Wells Fargo, who has been calling for a growth rally since the second half of 2022. “Uber-caps have great balance sheets. They, in some cases, have cash on the balance sheet and though they’re longer-duration assets, they’re less affected by the cost of capital.”

Money managers have cooled on exchange-traded funds tracking the buy-cheap philosophy, pouring more than three times more cash into their growth counterparts – a reversal from last year. And earlier this month, robo-adviser Betterment told clients in an email that it’s reducing exposure to value in 2024.

Not everyone hates the trade. With value stocks looking particularly cheap – the valuation gap is double the 17-year average over growth – Morgan Stanley and Citigroup Inc are among those touting its appeal. Cheap-looking stocks are currently trading 13 times their projected earnings, compared with 25 times for their more expensive counterparts, according to data compiled by Bloomberg.

Bobby Bierig, portfolio manager of the value large-cap-focused Natixis Oakmark Fund – which is headed for more than a 30% gain this year – says stock picking can still get you far. The US$624mil fund focuses on 50 to 60 stocks that it judges are trading at significant discounts to their intrinsic business values. It has benefited from bets in communications services like Alphabet Inc and Meta Platforms Inc, and financial services like Capital One Financial Corp and Wells Fargo.

“After a year like this one, we think the set-up is unusually attractive for value managers like ourselves,” he said. “In this two-tiered market, there’s ample opportunity to put together what we believe is an inexpensive portfolio.” — Bloomberg