On June 27, 2023, the Distinguished Speaker Series (DSS) Advisory Group of the CFA Society of Chicago welcomed Cliff Asness for a lunchtime discussion at the University Club. Nick Vassilos, CFA, Managing Director and Head of Risk and Performance Analytics for Schwab Asset Management, interviewed Asness.
Cliff Asness is a Founder, Managing Principal and Chief Investment Officer at AQR Capital Management. In 2006, CFA Institute presented Asness with the James R. Vertin Award, which is periodically given to individuals who have produced a body of research notable for its relevance and enduring value to investment professionals. He receivead a B.S. in economics from the Wharton School and a B.S. in engineering from the Moore School of Electrical Engineering at the University of Pennsylvania, graduating summa cum laude in both. He received an M.B.A. with high honors and a Ph.D. in finance from the University of Chicago, where he was Eugene Fama’s student and teaching assistant for two years.
The Society members in attendance learned that Asness’s investment success is a result of rigorous data analysis, the humility to question his investment convictions and the folksy wisdom of both his mother and Yogi Berra.
The discussion opened with Asness reflecting on what it means to be a Value investor, especially in times when Value does not work. Asness began by explaining that AQR are not pure Value investors. Momentum and Fundamentals also play a role in AQR’s investment process. However, when Value does poorly, that is typically AQR’s “tough time.” Such tough times have typically, but not always, been good years for the Technology sector.
Asness commented that, thirty years ago, he was probably more certain about what style and process would drive investment success. And while he emphasized the need to stick principles when particular factors are out of favor, Ansess has heeded the advice from his mother to keep an open mind, but not so much that your brains fall out. This means trying to figure out why you might be wrong this time, and investigating the bad news.
Vassilos turned the conversation to Artificial Intelligence (AI). Asness foresees AI making all of us collectively wealthier through a boost to productivity. He was not so sanguine about AI as an investment opportunity though, predicting that this exciting theme will culminate in a bubble. Within AQR, AI is used in the weighting of investment factors in their models, and to analyze conference call transcripts for signals of good or bad news.
Vassilos and Asness pivoted to Volatility Laundering. Asness coined this term to refer to the discretion private market (equity and debt) investment managers enjoy in valuing their investments. Asness told a story from his days on the proprietary trading desk at Goldman Sachs in the late 1990s. In the midst of the Asian Financial Crisis, on a day with markets sharply lower, a colleague from the private markets desk asked Asness how his global long-short fund was performing. Asness replied that, after the dust settles, we think we will be flat. “That’s great,” said his private markets counterpart… “us too.” Knowing that his colleague’s fund was primarily long private market mid-cap equities, and that public equities were getting hit hard, Asness retorted “no you’re not!” The freedom of private market investors to determine the value of their portfolio investments has seemed to irk Asness ever since. However, he has learned to recognize volatility laundering as a feature of private market investments, not a bug. That is, the asset owners who hire private market managers are pleased to reflect non-volatile investment returns in their own reporting.
Vassilos asked Asness to comment on equity and bond markets broadly. Asness observed that stock and bond markets are telling us different things about the future path of interest rates and economic activity. Equities are not pricing in a significant chance of recession, but this could be correct. Regarding interest rates, Asness opined that “no one knows a gosh darn (edit) thing about inflation.” He believes that the Federal Reserve will be more hawkish than the market currently expects.
A few times in the conversation, Asness commented on investing in international equities. He observed that the outperformance of US stocks vs International equities since 1990 was due to valuation. Japan’s de-rating, starting around that time, helped explain this occurrence. Asness acknowledged that US equities should trade at higher multiples than ex-US stocks, as the US is more innovative and is generally more business friendly than other regions. However, Asness seems to believe the current premium enjoyed by US equities over International stocks is too large.
Society members asked Asness about his relationships with some of the giants of the Investment field. Asness credited Jack Bogle with doing more to advance the wealth of ordinary investors than anything or anyone else over the past 50 years. On Harry Markowitz, Asness estimated that Finance would be twenty years behind if not for his work. Finally, Asness commented on his former professor, Eugene Fama, for whom he also served as a graduate assistant. Fama was a fervent advocate of believing the data, even if the conclusion was not comfortable. Fama encouraged Asness to publish work on Momentum, which Fama (and his collaborator French) considered an embarrassment to the Efficient Market Hypothesis.
This lunchtime discussion was educational and entertaining. Asness covered investment process, current market fundamentals and valuations, and reflections on industry giants, all while injecting good-natured humor to the conversation.