Perspective

Shorting Your Way to a Greener Tomorrow

It would be an understatement to say there is confusion in the industry about the use of shorting in an ESG context. When it comes to calculating a portfolio’s ESG score, we have heard arguments ranging from "ignore the shorts” to “net them against longs,” and, my favorite as it’s creatively insane, “pretend the shorts are actually longs.” This note explains why it is critical that shorts be properly accounted for, so that investors can use shorting to reduce carbon exposure, to get to net zero or to achieve other ESG goals.

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Value

Are Value Stocks Cheap for a Fundamental Reason?

By far the most popular question we get from value skeptics is “are the fundamental prospects for value stocks unusually poor today, justifying their low valuations versus expensive stocks?” Well, we now have an answer that doesn’t require a four-hour time commitment nor a PhD.

Factor/Style Investing

The Replication Crisis That Wasn’t

Factor investing has long faced criticisms of data mining, and more recently faced another criticism – some backtests might never have been right to begin with. A growing body of mostly well-done papers examine these issues, generally concluding that factors have been disappointing since their “discovery.” We’ve long addressed these concerns through robust out-of-sample evidence and a compelling theory for why a factor should work. What we’ve lacked, until now, is a formal test. My colleagues’ new paper tests brilliantly, what we have argued, largely anecdotally, for years. Their results are rather startlingly (even to me) positive for the field in general.

Value

The Long Run Is Lying to You

Everyone knows the value strategy has been a grave disappointment out-of-sample since, say, 1990, based on realized returns. However, odd as it might sound, the realized average return on a strategy is not necessarily the best estimate of its true long-term expected return. In fact, the right estimate of the true long-term expected return of the value strategy is considerably higher than many might think if they were to just look at simple past returns – especially right now. Why? I explain it in this note (spoiler: it has to do with changes in valuation).

Tax Aware

Now There's Nothing Certain But Death

Over the last few years, we’ve built a considerable effort in tax-optimized investing. Admittedly, this was a little bit of a “if we build it, they will come” venture, given many taxable investors seem to ignore after-tax returns. Thus, it is gratifying to see my AQR colleagues win the Top Graham and Dodd Award for their research on tax optimization, a topic that I’ve long thought deserved a much more prominent place in asset management.

Value

A Gut Punch

Sure, the last nearly three years have hurt, but at least the explanation was straightforward. A core part of our process, value, suffered. So when value rebounds, we will too, right? Well, not necessarily. To be clear, if value makes a prolonged major recovery, we certainly believe we will as well, but over short periods that doesn’t have to happen. Unfortunately, this is what we have experienced since the end of October. Regardless, it does not change my view one drop that going forward multi-factor investing is a darn good bet in a world that needs some darn good bets.

Factor/Style Investing

There Is No Size Effect: Daily Edition

We have written several pieces on the famous small-firm or size effect, the two most important being our study of the interaction of size and quality and a fairly comprehensive survey of all things size. This note focuses on daily instead of the longer-horizon data studied in these other papers and, while not changing the overall story, this leads to a powerful illustration of what’s going on in small stocks.

Value

Is (Systematic) Value Investing Dead?

When value has underperformed for so long, it’s natural and proper that people wonder if it’s ever going to work again. To test the popular explanations for why value investing is “broken,” Cliff tweaks the value factor’s construction to remove the stocks that best fit these stories. He finds no “this time is different” explanation holds water, affirming our belief that the medium-term odds are rather dramatically on value’s side.

Value

The Valuesburg Address

One score and eight years ago Fama and French brought forth on this world, a new factor, conceived in either risk or behavioral effects, and dedicated to the proposition that all portfolios are not created equal. Now we are engaged in a great drawdown, testing whether investors in that factor, or any factor so conceived and so dedicated, can long endure…

Sic Transit Gloria Mundi

To quote Kipling, it’s crucial to “meet with Triumph and Disaster and treat those two imposters just the same.” Cliff explains that throughout the good and bad times, we’ve stressed that long-term investment success is about sticking with real but modest edges.

Value

Never Has a Venial Sin Been Punished This Quickly and Violently!

Three months ago in “It’s Time for a Venial Value-Timing Sin,” Cliff demonstrated the value factor’s historic cheapness, suggesting it’s time to “sin a little” and modestly overweight value. While portfolio tilts are seldom promptly rewarded, it’s also rare they are instantly punished. In this piece, Cliff shows how 2020 has been the exception to the rule, as value has begun this year with its worst loss in its decade-long drawdown.