Defining value as something that's not cheap, but should be.
What was billed as a kind of battle royal between Cliff Asness of AQR and Rob Arnott of Research Affiliates to kickoff day two of the Morningstar conference in Chicago, somehow evolved into a wonky deep dive into how much research each had written and read.
In terms of a bottom line, the co-panelists seemed to agree that when value stocks are cheap they should not be ignored, and sometimes it's okay to try and time the market.
“Timing the market is hard, and we call it a sin, but we recommend that investors sin a little,” said Mr. Asness, founder and managing principal at AQR.
In a conversation that was at times more philosophical than specific, the co-panelists danced around the general pros and cons of smart beta strategies, and ultimately appeared to agree more than disagree on most points.
“The point of our whole exercise is check the price tag of what you're buying,” said Mr. Arnott, chairman and chief executive of Research Affiliates. “ If it's not cheap and it should be, put a post-it note on your fridge and check it later.”
In a subtle swipe at the kinds of smart beta strategies for which Mr. Arnott is best known, Mr. Asness said he believes “a fair amount of what goes into the factor zoo is actually small tweaks to other factors.”
In terms of which factors inside the expansive smart beta universe have the best outlook, Mr. Asness cited “value and momentum are two biggies that I think will stay around.”
Ultimately, both panelists agreed that investors are, and will continue to be, victims of human nature, especially when it comes to buying high and selling low.
“People pile into what's worked recently, and yank money out of what's hurt them recently and they earn 1% or 2% less than what's available to them in those funds,” said Mr. Arnott. “Evolution conditions us to want less of what has inflicted pain and more of what has given us happiness. You want to buy low and sell high, but we're not conditioned to.”
Acknowledging the challenge of convincing clients to “double down on a segment that has been through a horrible last five years,” Mr. Arnott advised against abandoning value when value is cheap.
To that, Mr. Asness partially agreed, saying “behavioral biases do matter, and I don't think they will go away. But I think Rob is overconfident about our ability to take advantage of investors' overconfidence.”
