Hedge fund manager Cliff Asness of AQR Capital Management told Bloomberg TV’s Stephanie Ruhle that there’s one strategy that investors should incorporate into their portfolio.
Asness pulled up a chart that shows cumulative returns to HML (high minus low), a construct by Eugene Fama and Ken French, and means cheap versus expensive.
In a piece for Institutional Investor earlier this year, Asness and John Liew described this as “a trading strategy that goes long a diversified portfolio of cheap U.S. stocks (as measured by their high book-to-price-ratios) and goes short a portfolio of expensive U.S. stocks (measured by their low book-to-price-ratios). The idea is that “cheap stocks tend to outperform expensive stocks and therefore that HML produces positive returns over time.”
Here’s a look at the chart:
“I joked with them for years that they don’t call it this, but they built a little hedge fund, a long-short on pure diversified value,” Asness told Ruhle. “You might notice from when the graph was up it goes up a lot more than it goes down. Over time cheap has beaten expensive.”
So what are the two key takeaways for investors from this chart?
First, is that he would be long cheap and short expensive. “I would do that in stocks, I would do that in stocks around the world, I would do that when it came to countries, when it came to bonds and when it came to currencies.”
Second, “that chart can look a little too good.” Asness emphasised that they had circled a part of the chart that showed the “the greatest dip for value investing ever: the tech bubble.”
“If you went long cheap and short expensive, 1999 was not the year to do it. So the other thing you should take away from this chart is this is a pretty good thing to have as part of your portfolio but it does not always work, cause nothing does. It should be part of your portfolio you should look to add that, diversify it with other things, it’s not an arbitrage.”
Asness said we’re looking at lower returns over the next 10 to 20 years.
Of course we think this perfectly good interview was marred by a sexist line from Asness at the start of the interview that he later tried to explain away as more a joke about himself.