By Justina Lee
From his vantage point in Wellesley, Massachusetts, George Patterson sees restless Americans everywhere desperate to board planes, take vacations and dine in restaurants.
To the $120 billion quant manager, these are telltale signs that stocks hitched to the economic cycle are set to boom anew and the Big Tech safety trade of the lockdown era is no more.
It all suggests to Patterson that value investing can extend its remarkable comeback after posting the worst drawdown in five decades in the pandemic mayhem.
“There’s still a huge opportunity for upside in value,” said the chief investment officer at QMA, PGIM’s systematic unit. “If we really extrapolate the trends of who the winners were in the middle of 2020, we’d basically all be working for Amazon. The economy is broader than that.”
That’s proving a godsend to big quant funds which were in free fall just months ago. The AQR Equity Market Neutral Fund is up 15% so far in 2021, for example, breaking a three-year losing streak. Meanwhile value exchange-traded funds have gained more than $110 billion since November to wipe out pandemic losses.
As investors price in businesses reopening and trillions in stimulus, the likes of American Airlines Inc. and Ford Motor Co. are trouncing tech favorites Microsoft Corp. and Facebook Inc. to an unprecedented degree.
But it’s been a long while since Patterson and his peers have sounded this gung-ho. A strategy of betting on companies that look cheap versus their expensive peers hasn’t performed this well on a quarterly basis since the dot-com bubble burst in 2000, a Bloomberg index shows.
Whether all this is sustainable is one of the biggest questions in global stock investing.
Everything from corporate earnings and inflation expectations to valuation gaps suggest the market rotation has only just begun. But a decade of sustained underperformance means existential doubts linger across quantland.
Does the buy-low-sell-high adage still ring true in a world where mega-cap companies with soaring valuations dominate their industries? The pandemic has only raised fresh doubts after investors last year sent these growth stocks to records.
For that reason, even diehard value fans are by no means issuing bragging rights.
Just ask Ian Heslop, who’s in charge of the Jupiter Merian Global Equity Absolute Return Fund that has shrunk from $16 billion in 2018 to $1.6 billion today. Heslop is as humble as ever even as his strategy is all set for its best quarter on record.
“We have to wait a little while before we talk about vindication,” said the co-head of strategy for systematic equities at Jupiter Asset Management. “We were always just cautioning clients that nothing works all the time. There is a cycle to everything.”
Holding steady for the long haul has proved a hard pill for his clients to swallow. With a stock bull market driven by a handful of tech companies over the past decade, factor quants like Heslop who tend to spread their exposures and bet on value have struggled to beat benchmarks.
But 2021 is proving a breakthrough. As economic optimism returns, riskier factors from value to small caps are rebounding. Overall a typical multi-factor portfolio is in far better shape today versus recent years.
“One of the main problems that has dislocated the equity styles is this very concentrated performance of mega-cap growth,” said Asbjorn Trolle Hansen, who oversees about $118 billion of multi-asset investments at Nordea Asset Management.
The year is proving a victory lap for some of the staunchest value advocates. On a quarterly basis the $8.5 billion DFA Global Equity Portfolio, managed by David Booth’s pioneering quant firm Dimensional Fund Advisors, is set for its best gain versus its benchmark since at least 2004. An ETF based on Research Affiliates’ models is poised to beat the Russell 3000 for the first time in more than a year.
These quants are also shining at a time when hedge funds overall have been blindsided by the rotation out of popular tech stocks, data from Morgan Stanley’s prime brokerage unit showed last week.
With big shifts in the global economy from globalization and automation to the 5G era hurting slow-moving business models that make up value portfolios, it’s easy to cast a skeptical eye toward those pouring cash into value ETFs at the fastest pace since at least 2014.
Nonetheless at long last value practitioners are in fighting spirits, as earnings forecasts recover and the stimulus-powered business cycle rises.
“I can’t tell you how many times in my career I’ve seen someone who’s had a particular belief and they’re just not patient long enough,” said Patterson at QMA. “We need to stick to our philosophy.”