Cliff Asness of AQR Capital Management
Earlier this month, Asness published a blog post that merely contained a chart showing the valuation spread of value stocks versus growth, which suggests value stocks will continue to outperform growth in the near future. The headline of the no-word blog post states: \That\’s it, that\’s the blog.\
Asness\’ no-word blog
The post also contains four footnotes to explain the chart. It\’s a composite of five measurements: book-to-price, earnings-to-price, forecast earnings-to-price, sales-to-enterprise value, and cash flow-to-enterprise value. The chart consists of 70% developed markets and 30% emerging markets.
Asness explains that the spread between value and growth is \extremely wide\ in the U.S. but wider in emerging markets. He added that the spread has declined very slightly this month while value has continued to do well, \but it doesn\’t change the graph above more than a smidgen.\
The AQR founder noted that a critical consideration for the question of when value will outperform growth is the catalyst. Asness looks back at periods like the peak during the tech bubble in March 2000 and points out that we still don\’t know the catalyst for it stopping there.
\While the timing will always be bedeviling, we do believe the odds get better the crazier prices get, and the medium-term expected returns get better too,\ he stated.
Is Asness right about value stocks finally?
The problem with the long-running debate of value over growth stocks is that value proponents have been arguing in favor of value stocks for quite some time. They all say that this is the year for value to outperform growth finally. In 2021, value proponents were finally right—for part of the year. However, Asness isn\’t the only fund manager who thinks 2022 will be an even better year for value stocks.
Gerard O\’Reilly of Dimensional Fund Advisors told CNBC earlier this month that they maintain their long-term view and are advising their clients to consider tilting their portfolios toward small-cap and value stocks in 2022. O\’Reilly said that even after years in which small-caps and value have outperformed large-caps and growth, like in 2021, the following 12 months \tend to be pretty good for small and value.\
CNBC notes that the small-cap Russell 2000 was lagging other major indices. However, the Russell 2000 Value Index was outperforming the S&P 500, the Dow Jones Industrial Average, and the Nasdaq Composite and gaining on the Nasdaq 100
Why might value hedge funds finally be right about value?
Other market participants told CNN that they also expect 2022 to be a banner year for value stocks. Lisa Shalett of Morgan Stanley Wealth Management expects an increased debate about valuations and the direction of inflation. That should be good for value stocks and cyclicals but bad for tech when the Federal Reserve starts hiking interest rates. She believes tech stocks are becoming \more tired and crowded.\
Higher interest rates could eat into earnings growth for many of the most popular tech firms, and the Fed is starting to taper its bond-buying program, which could also weigh on the sector. Shalett is also concerned about the possibility of increased regulations and crackdowns against Big Tech.
On the other hand, proponents of momentum stocks argue that some Big Tech names are starting to trade more like value stocks than like growth names.