Cliff Asness: It’s Time For A Venial Value-Timing Sin

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Random Walker
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Cliff Asness: It’s Time For A Venial Value-Timing Sin

Post by Random Walker » Thu Nov 07, 2019 9:28 am

https://images.aqr.com/-/media/AQR/Docu ... 748AFFDCB8

In this article from Cliff’s Perspectives, Cliff Asness of AQR looks at the current “value of value”. He looks at the current spread in valuations between growth and value, and puts it in historical perspective. The spread is at or near all time highs depending on how it’s measured and viewed. Maybe it’s time for value to make a big comeback?

Dave

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JoMoney
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Re: Cliff Asness: It’s Time For A Venial Value-Timing Sin

Post by JoMoney » Thu Nov 07, 2019 9:38 am

Maybe. It certainly looks to have a larger spread these days.
It also looks like interest rates should be rising, but the extremely low/negative interest rate environment has gone on longer than most expected too.

If you consider the idea that dividends have a relationship to value stocks, and dividends to the relative "duration" of a stock, you might make some ties between interest rates and value as well.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: Cliff Asness: It’s Time For A Venial Value-Timing Sin

Post by Johnnie » Thu Nov 07, 2019 10:08 am

Venial? Some BH cardinals might challenge that.

Specifically, it looks like making an A/A shift based on what appears hot right now - value.

OTOH, here's a timing sin I regard as legitimately "venial," and one I committed to my advantage this year (IOW, I got lucky): Holding off on intended Roth conversions until a market downdraft. I caught a 2% blip on a $6k conversion in August and it felt like winning the Irish Sweepstakes! Sinned and got away with it.
:sharebeer

I hold value and am encouraged by this but aren't looking to add more.
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Re: Cliff Asness: It’s Time For A Venial Value-Timing Sin

Post by asif408 » Thu Nov 07, 2019 10:25 am

Johnnie wrote:
Thu Nov 07, 2019 10:08 am
Specifically, it looks like making an A/A shift based on what appears hot right now - value.
When exactly has value been "hot" recently? I only see a small amount of value outperformance in the last 1-3 months in the US, and the last 1,2,3,5 & 10 years growth has trounced value. Pretty much every indication is that investors, if anything, have been dumping value for all the other "hot" factors, like low vol, momentum, multi-factor, etc.

Back to Dave's OP, I imagine if you have a long time horizon the odds of you coming out ahead with a value tilt are high. The better question is do you have the patience to wait for the tide to turn. FWIW, value in developed ex-US and emerging markets has outperformed growth since January 2016, so if you consider almost 4 years of outperformance a turn, the tide has already turned overseas. In the US, it's hard to say if that has happened yet.

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Re: Cliff Asness: It’s Time For A Venial Value-Timing Sin

Post by Silk McCue » Thu Nov 07, 2019 10:49 am

Johnnie wrote:
Thu Nov 07, 2019 10:08 am
V
OTOH, here's a timing sin I regard as legitimately "venial," and one I committed to my advantage this year (IOW, I got lucky): Holding off on intended Roth conversions until a market downdraft. I caught a 2% blip on a $6k conversion in August and it felt like winning the Irish Sweepstakes! Sinned and got away with it.
:sharebeer
Congrats on catching that blip.

I performed our $20k conversion for the year the first week in January. I just checked and that was the lowest point in the year for our accounts. That was 8% lower than the involved accounts (tIRA and Roth combined) as of the 1st of August. I'd say that was a big win for the Roth.

Cheers

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Re: Cliff Asness: It’s Time For A Venial Value-Timing Sin

Post by lazyday » Thu Nov 07, 2019 3:43 pm

Value also looks cheap outside the US. From footnote 30:
Looking around the world all at once (what we call the “developed” region)
you get approximately the same percentile (using the AQR full model value portfolio) as you get for the U.S.A. (actually one percentile point
less cheap). Japan is the least wide (the lowest value of value) with a percentile in the low 80s. Europe and emerging markets are almost (not
quite) as cheap as the U.S.A. In the large cap world that we’re examining in this note, the lowest spread (again, using the AQR value portfolio)
is Canada, coming in today at the 64th percentile (disappointing, eh?). While not my focus, looking at the value spreads region by region but
only in the small cap universe shows very similar results, though a bit less extreme (the value of value is quite attractive but less so versus its
own history than in large caps – this is likely the result of poor fundamental performance of small firms which makes the value spread widen
less than you might guess from just performance).
Or check out Research Affiliates, they let you see their data: https://interactive.researchaffiliates. ... ated-value

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Re: Cliff Asness: It’s Time For A Venial Value-Timing Sin

Post by nisiprius » Thu Nov 07, 2019 7:01 pm

According to the booster of any asset class, that asset class is always great.

If it is doing well, there you are. Told you so.

If it is doing poorly, then it is "cheap," expected return is high, and the asset class must surely be on the verge of a big comeback.

Asness cleverly justifies factor timing now, after deprecating it for years. "...we simply think factor timing, while not impossible, is a lot harder than some others believe..." I'm too lazy to go back and look how consistent that is with what he was saying when he was attacking it.

Eh. If you find him convincing, don't try to sin yourself, buy one of his firm's funds and let him do the sinning for you.
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Re: Cliff Asness: It’s Time For A Venial Value-Timing Sin

Post by Random Walker » Thu Nov 07, 2019 8:11 pm

He says throughout the article that factor timing is very hard! I took the article simply as affirmation to stay the course with my fairly heavy value tilt. We can only invest looking forward. And looking forward, makes most sense to not throw in the towel on Value.

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Re: Cliff Asness: It’s Time For A Venial Value-Timing Sin

Post by Jeff Albertson » Thu Nov 07, 2019 9:27 pm

Is this the same guy who, in 2010, warned quantitative easing "risk currency debasement and inflation"?
https://blogs.wsj.com/economics/2010/11 ... -bernanke/

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Re: Cliff Asness: It’s Time For A Venial Value-Timing Sin

Post by columbia » Fri Nov 08, 2019 7:35 am

PE per Vanguard:

Ex-US: 14.4
Vanguard Value: 16.3

S&P 500: 20.5

I have no knowledge as to whether those lower prices will lead to outperforming VOO, of course.

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Re: Cliff Asness: It’s Time For A Venial Value-Timing Sin

Post by nisiprius » Fri Nov 08, 2019 8:19 am

Well, he's been careful to hedge his statements with qualifiers like "very hard" and "deceptively difficult." I always read "very hard" as meaning "I actually think it's impossible myself but I want to keep some wiggle room," but, of course, that's reading between the lines.

This 2016 paper, since it was published in the Journal of Portfolio Management, can be fairly treated as a definitive statement of his opinions at that time. Yes, it uses carefully hedged language. It also uses the metaphor of "sin" which frankly puts me off, people should keep this kind of emotive language out of financial discourse.

The Siren Song of Factor Market Timing is downloadable at no cost from the link. Both the abstract and the full paper say (boldfacing is mine:)
Factor timing has the potential of reintroducing a type of skill-based “active management” (as timing is generally thought of this way) back into the equation. I think that siren song should be resisted, even if that verdict is disappointing to some. At least when using the simple “value” of the factors themselves, I find such timing strategies to be very weak historically, and some tests of their long-term power to be exaggerated and/or inapplicable.
Institutional Investor described another of Asness' papers as "blast[ing] Rob Arnott" summarized their opinions by saying
While some, like Research Affiliates and founder Arnott, believe factors can become expensive and that investors should time their exposures to buy low and sell high, others, like Asness, argue that diversification, not timing, is the best way to achieve returns through factor exposures.
So, even though he is flipping from one hedged opinion to another, it's still a flip and a pretty big one. He acknowledges this himself in the blog posting.

He says this:
If you believe, as we do, that value is a good long-term strategy, and an important part (not all) of an investment process, we would recommend a modest extra amount of value than the norm.
That's so hedged that it's almost unfalsifiable, but I say it's a call and it's time means it's time, so it will be fair to revisit this in a year or so and see whether he was right.

I wanted to illustrate this with an image of a classic painting of Ulysses untying himself from the mast and embracing the sirens, but I couldn't find one.
Last edited by nisiprius on Fri Nov 08, 2019 8:24 am, edited 1 time in total.
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Re: Cliff Asness: It’s Time For A Venial Value-Timing Sin

Post by alec » Fri Nov 08, 2019 8:23 am

columbia wrote:
Fri Nov 08, 2019 7:35 am
PE per Vanguard:

Ex-US: 14.4
Vanguard Value: 16.3

S&P 500: 20.5

I have no knowledge as to whether those lower prices will lead to outperforming VOO, of course.
Aren’t value stocks almost always supposed to have lower PEs and PBs?
"It is difficult to get a man to understand something, when his salary depends upon his not understanding it!" - Upton Sinclair

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Re: Cliff Asness: It’s Time For A Venial Value-Timing Sin

Post by dkturner » Fri Nov 08, 2019 8:52 am

alec wrote:
Fri Nov 08, 2019 8:23 am
columbia wrote:
Fri Nov 08, 2019 7:35 am
PE per Vanguard:

Ex-US: 14.4
Vanguard Value: 16.3

S&P 500: 20.5

I have no knowledge as to whether those lower prices will lead to outperforming VOO, of course.
Aren’t value stocks almost always supposed to have lower PEs and PBs?
Yes.

The issue being discussed on this thread is the magnitude of the the difference in valuation metrics between growth and value stocks.

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Re: Cliff Asness: It’s Time For A Venial Value-Timing Sin

Post by lazyday » Fri Nov 08, 2019 8:54 am

nisiprius wrote:
Fri Nov 08, 2019 8:19 am
, it's still a flip and a pretty big one. He acknowledges this himself in the blog posting
I thought you were going to talk about his comparing himself to Inspector Kemp.

Early in Young Frankenstein: “A riot is an ugly thing. And once you get one started, there is little chance of stopping it, short of bloodshed. I think, before we go around killing people, we had better make damned sure of our evidence.”

Later in the film: “A riot is an ugly thing... and I think it is just about time that we had one!”

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Re: Cliff Asness: It’s Time For A Venial Value-Timing Sin

Post by sailor18 » Fri Nov 08, 2019 9:22 am

Sorry to bring up an old and tired subject, but I hopped on QSPIX fairly early and am still smarting from my losses. Most every investment strategy has its day in the sun, but I'm not sure that Cliff is particularly good at predicting when that will be.

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Re: Cliff Asness: It’s Time For A Venial Value-Timing Sin

Post by Random Walker » Fri Nov 08, 2019 9:27 am

sailor18 wrote:
Fri Nov 08, 2019 9:22 am
Sorry to bring up an old and tired subject, but I hopped on QSPIX fairly early and am still smarting from my losses. Most every investment strategy has its day in the sun, but I'm not sure that Cliff is particularly good at predicting when that will be.
I think he’d agree with you.

Dave

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Re: Cliff Asness: It’s Time For A Venial Value-Timing Sin

Post by columbia » Fri Nov 08, 2019 9:27 am

dkturner wrote:
Fri Nov 08, 2019 8:52 am
alec wrote:
Fri Nov 08, 2019 8:23 am
columbia wrote:
Fri Nov 08, 2019 7:35 am
PE per Vanguard:

Ex-US: 14.4
Vanguard Value: 16.3

S&P 500: 20.5

I have no knowledge as to whether those lower prices will lead to outperforming VOO, of course.
Aren’t value stocks almost always supposed to have lower PEs and PBs?
Yes.

The issue being discussed on this thread is the magnitude of the the difference in valuation metrics between growth and value stocks.
Correct. Is that too much value to pass up? Dunno...

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Re: Cliff Asness: It’s Time For A Venial Value-Timing Sin

Post by JoMoney » Fri Nov 08, 2019 11:16 am

Perhaps I'm mistaken, but it makes sense to me that in the current environment Growth/Value multiples would have a wider spread.
When interest rates are lower/flat, a "growth" company that has higher Return On Equity and is able to reinvest its earnings and grow it's owners book-value at a higher rate of return should trade at higher multiples relative to a more traditional "value" company that is not able to intrinsically 'grow' and reinvest its earnings, but pays them out as dividends (or buybacks).
This makes the interest rate sensitivity and relative duration of a "growth" stock higher, but relatively more valuable when rates are relatively lower.

Consider it analogous to comparing a zero-coupon bond earning 6% in perpetuity to a regular bond paying a 6% coupon every year.
If interest rates drop to 3%, the regular bond holder who is receiving his coupon payment can only reinvest it at the 3% rate while the zero-coupon bond holder is continuing to compound at the 6% rate.
On the other side of the coin, if interest rates rose to 9% the zero-coupon bond holder is locked in growing at the lower 6% rate on his initial investment relative to the one receiving regular coupons and will be able to reinvest those at the now higher 9% rate.

Among the problems if interest rates start to rise though, is the squeeze on relatively lower earning companies that were only viable if leveraged up at interest rates lower than their marginal profitability.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: Cliff Asness: It’s Time For A Venial Value-Timing Sin

Post by lazyday » Fri Nov 08, 2019 12:07 pm

JoMoney, low interest rates were mentioned in a footnote:
48 Some point to low interest rates and/or passive indexing as causes for value’s travails (negative catalysts that presumably could one day
turn around). The interest rate point may be directionally right, as value is a shorter duration asset than growth, but is quite weak explaining
very little of the historical returns to value. The indexing thing I don’t even fully get (value spreads are also wide within the major indices). But
no matter. These are possible reasons for why value has gotten extremely cheap vs. history. But that it has gotten extremely cheap versus
history is the salient fact. Anyway, neither for these, based on their power and their story, seem likely useful candidates for timing value going
forward. If you think rates are going to rise don’t use that to bet on value, short a bond.

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Re: Cliff Asness: It’s Time For A Venial Value-Timing Sin

Post by JoMoney » Fri Nov 08, 2019 12:19 pm

I guess I can agree with him that interest rates are not something expected to be able to "time" your trading on.
... and continue to disagree with factor investors that the historical "value factor" is not something to expect to garner higher returns from.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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