Cliff Asness on Sources of Return for Investment Portfolios

The CFA Institute Annual Conference is an unrivaled opportunity to access high-quality, unbiased educational content that equips investment professionals with the latest thinking on critical industry issues. The 72nd CFA Institute Annual Conference will be held in London on 12–15 May 2019.

Clifford S. Asness, co-founder of AQR Capital Management and named by Bloomberg Markets magazine as one of the 50 most influential people of 2012, understands the importance of applying sound quantitative analysis in the face of extreme market volatility. During the global financial crisis, AQR’s assets under management dropped from $39 billion in 2007 to $17 billion in 2008, but the firm kept its portfolios focused on strategies that used quantitative research to seek out sources of return.

In a 2010 interview with Richard Teitelbaum for Bloomberg Markets, Asness shared his thoughts on the subject:

“We believed in the models,” Asness says. While that punished AQR in the sell-off, it left the firm positioned for the rebound beginning in March 2009.

“It’s riding a statistical beast,” he says. “Having a lodestone to come back to helps.”

That lodestone has guided AQR to substantial returns: As of June 2013, AQR had $80 billion in assets under management.

In these articles from the Financial Analysts Journal, Asness and his co-authors examine some sources of return and the ways that they can affect investment portfolios:

• “Leverage Aversion and Risk Parity”: Asness and his co-authors demonstrate how risk parity portfolios can equalize risk allocation across asset classes, taking advantage of leverage aversion to achieve the same risk as the market portfolio with a higher expected return.

• “International Diversification Works (Eventually)”: Asness and his co-authors show that even though an international diversification strategy can be vulnerable to short-term market crashes, it can be used as a long-term investment strategy to protect investment portfolios over an extended period of time.

• “Surprise! Higher Dividends = Higher Earnings Growth”: Asness and Robert D. Arnott challenge the suspected correlation between low dividend payouts and strong future earnings, asserting that expected future earnings growth is fastest when current payout ratios are high.

• “Stocks versus Bonds: Explaining the Equity Risk Premium”: Asness looks at the long-run difference in volatility between stocks and bonds as a way to explain the difference between stock and bond market returns.

• “The Interaction of Value and Momentum Strategies”: Asness finds that value strategies are strongest when applied to low-momentum stocks, while momentum strategies are applied most effectively to low-value stocks. Asness published these findings in 1997, when he was a managing director at Goldman, Sachs & Company, but remains convinced of their effectiveness. In 2011, he told Fortune editor-at-large Shawn Tully that “momentum is good on its own, but it’s amazing when you add it to value.”

At the 67th CFA Institute Annual Conference in Seattle, Asness discussed asset pricing and the dispute over efficient markets.

If you liked this post, consider subscribing to the CFA Institute Annual Conference blog.

Note: An earlier version of this post mistakenly stated that Asness was one of Bloomberg’s 50 most influential people in 2008. The year has since been corrected.

The content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.