So let me introduce you to numbers that most retail investors have never heard of that help explain what’s been going on in the U.S. stock market the past few years.
I’d also like to introduce you to the person who introduced me to these numbers.
He’s an honorable guy named Ted Aronson, who is closing his Value-oriented money-management firm, AJO Partners, and sending back his investors’ $10 billion because he has grown increasingly dissatisfied with his investment performance and doesn’t want to keep fighting a losing battle against markets.
Before we proceed, let me explain the difference between Value and Growth.
Shares of Value stocks trade at modest levels relative to their net assets and earnings. Growth stocks are priced at higher levels on the assumption their earnings and asset values will grow rapidly. Warren Buffett’s Berkshire Hathaway is a classic Value stock; Jeff Bezos’ Amazon is a classic Growth stock. (Bezos owns The Washington Post).
Growth is doing much better than Value these days, as we can see from two market indicators most nonprofessional investors have never heard of: the S&P Value Index and the S&P Growth Index.
I’ve learned about these indexes over the years from looking at the numbers Aronson’s AJO distributes monthly showing the results of Value, Growth and 61 other market indicators — that’s right, a total of 63 sets of numbers — for 32 periods that range from the most recent month to 45 years.
That’s a lot of numbers. It can make for MEGO — you know, My Eyes Glaze Over. But they have a real story to tell us.
After Aronson announced Oct. 15 he’s closing AJO at the end of the year, I started looking more closely at the Value and Growth numbers (which are subsets of the S&P 500) and found something that helps explain why Aronson is calling it quits.
It also helps explain why any number of well-known Value-oriented funds — some of which I own, and some of which you may own or are thinking of owning — have underperformed the market.
With one exception — the month of October — Growth has outperformed Value for every period in AJO’s statistics from three months to 45 years.
What’s more, except for last month, Value has also underperformed the S&P 500 index, the most common market benchmark, during all these periods.
Value hasn’t done better than Growth since 2007. This means that for the past 13 years, value-oriented investors and money managers — whose goal is to outperform the markets — have faced daunting odds, while Growth-oriented investors and managers have had the wind at their backs.
That’s why many Value managers are frustrated. And why many of their investors are frustrated, too, and taking their money back.
It also explains why AJO’s assets under management, once $31 billion, were down to about $10 billion when Aronson announced he would close the firm.
“Our secret sauce wasn’t performing,” Aronson said. For the past five years, he had underperformed AJO’s performance benchmark, the Russell 1000 Value Index. “With the handwriting on the wall, we decided to hold our head high, return the capital and shutter the business.”
Aronson, who opened his firm in 1984, says that his age (68) has nothing to do with his decision to close. It’s about the numbers. “Even if we shot the lights out, it would take us five years to get back to showing some decent historical returns,” he said.
“The latest Value drought is about 13 years,” he told me. “It’s made Value investors look like idiots.” Indeed. For both this year and for the 12 months ended in October, the spread between Growth’s gains and Value’s losses have totaled more than 30 percent. A staggering difference.
If you’ve studied history — or financial markets — you know that nothing lasts forever. Is Ted Aronson abandoning ship just as the tide is beginning to turn in Value’s favor? If that’s the case, he quips, “We’re willing to take one for the [Value] team.”
Given these strange and uncertain times in both our society and the financial markets, it would be fitting if AJO’s closing turns out to mark the bottom of Value’s long slide against Growth. And it would sure make for fascinating numbers for us to kick around in the future.