“A huge part of our job is building a great investment process that will make money over the long term, but a fair amount of our job is sticking to it like grim death during the tougher times,” Asness tells The Australian Financial Review in an interview in the boardroom of AQR’s Sydney office.

Naturally, given Asness’ in-depth academic knowledge of the market, he’s a go-to-guy for answers on why it’s hard to understand forces of the market.

And the decade long “value factor” funk isn’t just perplexing some investors, but it’s also posing an existential threat to them.

Can value be cheap?

Value investing isn’t just failing in a systematic sense – that is using rules and formulas such as buying stocks with low price to book ratios and selling ones with high ones. But active value investors that do their homework and choose what they believe are undervalued stocks have also found themselves failing to keep pace with the market.

“We have actually had a fairly good 10 years but a terrible one and a half years. Value has had a terrible 10 years.”

Everyone wants to know when it’s going to turn.

Asness’ position is that you can't really time factors and he got in a heated debate when other investors suggested that because the “value factor” was cheap four years ago, it was time to bet on it working.


“I’ve been wrong about things for years. I’m not wanting to claim victory just because it’s worked out. But that time would have been disastrous [to buy value].”

While Asness says it is impossible to know exactly when value will work again, he’s got plenty of views and insights into why it does work and why it hasn’t worked lately.

Value, he says is a persistent factor, because of the forces of behavourial finance.

“Cheap stocks usually deserve to be cheap but people over-extrapolate and they get too cheap. You’re not buying better companies, you’re buying worse companies at a better price.”

He rejects the argument that the performance of value is influenced by “macro factors”.

Why value works and doesn't

The value factor, he says works, or doesn’t work for two reasons. The first is fundamentals – cheap stocks got too cheap, or were not cheap enough.

Sometimes the differential is right (cheap stocks were appropriately cheap) and sometimes it’s not enough (cheap stocks were overpriced), but that occurs in the minority, which is why value investing works over the long run.


The second reason is because of price movements. That is, more money flowed into cheap stocks.

“If the world just sells a whole bunch of value and buys a lot of expensive [stocks], even if the fundamentals didn’t change at all, a value manager is going to lose over that time.”

So what explains value’s failure over the last 10 years?

Asness says he’s not claiming precision on this, but for about the first eight years, value didn’t work because of the fundamentals – that is, cheap stocks were appropriately priced or over-valued.

The expensive stocks, such as the so-called FAANG stocks, delivered on the lofty promises implied by their valuations.

“We actually had a fairly strong period over that time,” Asness says, explaining that other factor bets that do well when companies are performing and beating market expectations – such as “profitability” and “momentum” – did well, even though value didn’t work.

“But value alone lost because a lot of expensive stocks actually turned out to be worth it.

“But it does feel much more like eight years of losses were about reality, and two years of losses were about things starting to get a little crazy.”


That is more, capital has flown out of cheap stocks and into expensive stocks, bidding up the former relative to the latter.

Turning points

It hasn’t been this crazy since the 1999-2000 tech bubble, but we’re a long way from that level of insanity and Asness says there’s a small chance we get anywhere close to those levels.

And he says the lesson from that period of market euphoria is that it is almost impossible to identify a catalyst that will result in a turn of fortunes.

No one knew what would prick the tech stock bubble and almost two decades later no one really knows what did prick it.

(Many market historians say it was a realisation that these companies were burning a a lot of cash, but Asness says that was known and they could keep issuing new equity.)

“What really changed was, at some point, people said ‘we’re not doing any more of this until we see results’.

“So the real question is why they choose that point and not an earlier or later point? And nobody knows.”


One common lament among stock-pickers is that the flow of funds from active to passive managers is having a distortive effect.

Asness says there will be a point where there is too much passive capital, a view he says was shared by the late Jack Bogle when they discussed the issue.

“Somebody has to be thinking about the price of individual securities. Passive investing is inherently a free rider [issue],” was how he characterised Bogle’s comments in a podcast discussion.

“The question is: to have an efficient world, or mostly efficient world, how many people need to be active managers?

“This might be heresy for someone from the active management world. But I will say, historically, we’ve had too much active.

“Not everyone in the world needs to deviate from the market, many people can simply pick up the risk premium of equities.”

The movement from active to passive is not over, he says but it won’t go to 100 per cent of the market either.

Rabbit ears


Asness may be a quantitative investor who immerses himself in numbers, but there’s no doubt he’s one of the industry’s great personalities.

He’s not afraid to share his views on social media from anything from investing, markets but also politics, baseball and comic books.

“I don’t think there are many CEOs of fairly decent-sized asset management companies that are willing to discuss strategies with people,” he says.

“The danger for me is when that person says something quite mean and unfounded. I do kind of need to explain to them why they’re wrong.”

He admits there are tail-risks to anyone with prominence on social media to say something they shouldn’t.

“When I used to play sports as a kid, my father used to use an ancient term. He said ‘you have rabbit ears’ for someone playing a game who listened to too much of the crowd.”

When it comes to investing, drowning out the crowd is absolutely critical.

“Calling turning points are so hard,” says Asness.

“People need to make smart bets and then set themselves up to stick with those bets. It’s simply way harder than it looks.”