Quants scores gains with value strategy that punished popular funds

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(Bloomberg) — In many ways, it’s been a tough year for value investing. Long-only indexes that follow the buy-low credo saw their second-worst performance on record compared to their growth-oriented counterparts.

The story of how a few sophisticated fund firms bucked the trend underscores the subtle dynamics behind a blockbuster year for tech mega-caps. Bolstered by their ability to short, the companies gained through sector and factor weightings that exposed them to a historic rebound in chip and Internet stocks. Gains in key markets outside the United States also contributed to performance.

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Among the gainers were AQR Capital Management’s Equity Market Neutral Global Value strategy, up 17.3% through the end of November after rising 44.7% in 2022, according to sources familiar with the figures. The gains partly reflect a spread of bets across sectors that softened the impact of low-paying sectors like utilities and energy.

“Tech has strongly outperformed, especially in the U.S., and naive value tends to be skewed and dislike the sector,” said Andrea Frazzini, head of global stock selection at AQR. “We are taking diversified bets in each sector and have seen substantial gains across various sectors and industries.”

Such moves helped separate the fund from the broader universe of value investing, which has been hurt in 2023 by the collapse of regional banks, industrial sectors and consumer staples. Utility and energy stocks are leading the S&P 500’s year-to-date declines, down about 10% and 5%, respectively. And although financial stocks have rebounded slightly, their 10% rise this year lags the 25% rally in the S&P 500. Globally, the MSCI World Value Index gained 8.9%. this year, compared to 36% for its growth counterpart – a gap that has only been eclipsed once, in 2020.

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The returns from companies like AQR are also a rebuke to the gloom and doom that reigns on Wall Street when it comes to the future of the investing style. With the siren song of artificial intelligence-powered technology, even sell-side strategists betting on a broadening rally in stocks are still reluctant to announce a strong rally in stocks in 2024. Goldman Sachs Group Inc. and Wells Fargo & Co. are among those seeing more of the same.

“We still don’t think there’s enough value in the stock,” said Christopher Harvey, head of equity strategy at Wells Fargo, who is calling for a resumption of growth since the second half of 2022. “The Ubers -caps have excellent balance sheets. In some cases, they have cash on the balance sheet and, although they are longer-duration assets, they are less affected by the cost of capital.

Fund managers have eschewed exchange-traded funds that follow the buy-low philosophy, investing more than three times as much cash in their growth counterparts – a reversal from last year. And earlier this month, robo-advisor Betterment told clients in an email that it was reducing its exposure to the value in 2024.

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Not everyone hates trading. While value stocks look particularly cheap — the valuation gap is double the 17-year average relative to growth — Morgan Stanley and Citigroup Inc. are among those touting its appeal. Cheap stocks currently trade at 13 times their projected earnings, compared to 25 times for their more expensive counterparts, according to data compiled by Bloomberg.

Bobby Bierig, portfolio manager of the large-cap value Natixis Oakmark Fund – which is expected to gain more than 30% this year – says stock picking can still take you far. The $624 million fund focuses on 50 to 60 stocks that it says are trading at significant discounts to their intrinsic business value. It has benefited from bets on communications services like Alphabet Inc. and Meta Platforms Inc., and on financial services like Capital One Financial Corp. and Wells Fargo.

“After a year like this, we think the structure is particularly attractive to value managers like us,” he said. “In this two-tier market, there are many opportunities to build what we believe to be an inexpensive portfolio.”

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In London, Jupiter Investment Management reaped the rewards of a portfolio decision made a few years ago thanks to significant losses in value in the grip of the so-called quantitative winter. Essentially, it was about moving away from blind faith in a single philosophy and remaining agile in style decisions as the economic context evolves.

Nowadays, the company has the opportunity to increase or lose value based on fluctuations in market sentiment. It has worked in 2023, as the Jupiter Merian World Equity Fund is up almost 26%, with value contributing to third-quarter gains, while a focus on quality and growth has driven performance over the past three month of this year.

“Value is more opportunistic, it’s not a long-term bet,” said Amadeo Alentorn, portfolio manager at Jupiter. “In this environment, it is very useful to dynamically move from one style to another as the market environment evolves.”

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