Value Investing Still Works: Cliff Asness on Low Price to Fundamentals Strategy

Value investing still works if done correctly, according to Cliff Asness, founder and CIO of AQR Capital Management. Asness believes in the concept of paying a low price compared to fundamentals, which he calls the "low price to fundamentals factor." He notes that value stocks performed better than growth stocks in 2022, but emphasizes that value investing is not just about price-to-fundamentals, but also considers profitability and risk. Asness also discusses the use of artificial intelligence at AQR and his views on private markets and tariffs.

In a recent episode of The Long View, Cliff Asness, founder and chief investment officer of AQR Capital Management, discussed the enduring appeal of value investing and the role of artificial intelligence in investment strategies. Asness emphasized that while value investing is not a one-size-fits-all approach, it remains a viable strategy when executed correctly.

Asness defines value investing as the concept of paying a low price compared to fundamentals, which he calls the "low price to fundamentals factor." He notes that value stocks performed better than growth stocks in 2022, but cautions that value investing is more complex than just price-to-fundamentals. It also considers profitability and risk.

Asness believes that value investing works because of behavioral reasons. He argues that investors often overreact, driving prices too low or too high. This mispricing provides opportunities for value investors. However, he emphasizes that the construction of value portfolios is crucial. Traditional value indexes, which are cap-weighted and heavily focused on the United States, can lead to extreme outperformance of growth stocks. Asness suggests that a more quantitative approach, such as equal-weighting stocks and avoiding industry bets, can provide better risk-adjusted returns over the long term.

Asness also discussed the role of artificial intelligence at AQR. He noted that AI is used to enhance investment strategies, but it is not a replacement for human judgment. Instead, AI helps in processing vast amounts of data and identifying patterns that may not be immediately apparent to humans.

In terms of non-US equities, Asness sees them as an indirect value play. He argues that non-US stocks are generally cheaper compared to US stocks, but acknowledges that the US has outperformed the world for a long time due to multiple expansions. He prefers a diversified portfolio that includes non-US equities, but cautions that pure value strategies for country selection may not be the best approach.

Asness also touched on the topic of tariffs, criticizing the Trump administration's tariff policy. He believes that tariffs can have short-term and long-term implications for economic growth and inflation.

In conclusion, Asness's insights underscore the importance of a well-constructed value investment strategy. While value investing has its challenges, it remains a viable approach when executed correctly. [1]

References:
[1] https://www.morningstar.com/stocks/why-value-investing-still-worksif-you-do-it-right