Market Extra: ‘Our return sucks over the past few years…and we’ve just run out of time,’ says $10 billion value investor calling it quits

Wall Street won’t have Ted Aronson to kick around anymore.

After a punishing stretch for the investment fund that he helped start nearly four decades ago, AJO Partners, with offices in Philadelphia and Boston, is calling it quits.

Aronson put the reasoning behind the planned closure of the $10 billion investment manager at the end of the year simply and unabashedly in an interview with MarketWatch on Thursday afternoon: “Our return sucks over the past few years.”

Pulling no punches, he added: “Our shit is so bad it’s unbelievable compared to our peers.”

AJO, which was founded in 1984 by Aronson, Martha Ortiz and Kevin Johnson, manages money for public pension plans in Florida and Oregon.

Aronson took a break from calling clients on Thursday, after his closure announcement on Wednesday, to explain the challenges the firm has faced over past five years.

He said that the investment outfit’s own “secret sauce,” or its proprietary method of achieving alpha for its clients, or returns above a benchmark, were at odds with “forces driving the market,” reiterating comments he made a letter to clients.

“Our twist to [investing], our secret sauce, it worked sometimes –and it worked for about 30 years of our existence—and in the tail-end it didn’t,” he said.

The Financial Times reported that the money manager’s large-capitalization absolute fund, its largest with some $5.1 billion, was down 15.5% through to the end of September, trailing its benchmark, which Aronson explained to MarketWatch was the Russell 1000 Value Index RLV, +25.00%.

The Russell 100 Value Index was down 13.4% on Thursday, through the end of September, according to FactSet data. Meanwhile, its growth counterpart, the Russell 1000 Growth index RLG, -2.64% is up a whopping 23.4% over the same period.

Over a five-year stretch we are “behind by our benchmark by 2 whole percentage points,” he said. “It makes it look like we’re morons,” he added, “like, we’ve been buying our selling list and selling our buy list.”

Aronson said that in its heyday, AJO managed $31 billion before the 2008 financial crisis ushered in an unprecedent retrenchment of returns for value stocks versus growth plays, turning a traditional investment tenet on its ear. Investors who sought to find stocks that were undervalued by some metric launched a more-than-decade long stretch of underperformance against investments in growth stocks like e-commerce, software, and other tech-related ventures.

“The drought in value — the longest on record — is at the heart of our challenge,” he wrote the Wednesday letter to clients that he shared with MarketWatch. “The length and the severity of the headwinds have led to lingering viability concerns among clients, consultants, and employees.

AJO employees some 44 staffers and the company has about a year left in its Boston lease and about five years left in his offices in Philadelphia, which Aronson intends to keep.

The unwind of the value firm comes as the global coronavirus pandemic that has stricken nearly 40 million people globally has hastened a turn to growth companies whose revenues or profits are expected to continue to appreciate. Such bets have increased as consumers increasingly adjust their lifestyles in the face of the viral outbreak that began in earnest in March in the U.S.

Value stocks have moved higher in fits and starts but have lagged behind other sectors which include large-capitalization companies like Facebook Inc. FB, -1.82%, Apple Inc. AAPL, -0.18%, Amazon.com AMZN, -0.50%, Netflix NFLX, +0.04% and Google parent Alphabet GOOG, -0.25% GOOGL, -0.17%, a collective informally known as FAANG and which sometimes includes popular stocks like Microsoft MSFT, -0.40% and Tesla TSLA, -2.58%.

The Nasdaq-100 index NDX, -0.58%, which comprises many of those large-cap names, has gained almost 36% so far in 2020, the technology-laden Nasdaq Composite Index COMP, -0.33% has risen by about 30% thus far in the year. Meanwhile, the broader-market S&P 500 index SPX, -0.09% is up a more pedestrian 7.5% and the Dow Jones Industrial Average DJIA, -0.03% is off 0.2% in 2020 after a series of declines this week.

Aronson said that the current state of the market, eager for technology growth companies, reminds him of the exuberance in 2000, around the time of the dot-com bubble, which also led to big disparities between growth and value.

He said that he thinks that investors have been emboldened by “technology and free trading,” which has become standard at many Wall Street retail brokerage platforms.

“When the market goes to extremes, people go to extremes and this is going to go down in history as a big one,” he said.

So is the AJO founder done with value? Not by a long shot.

“I am not giving up on value investing…whatever rises from the ashes of this will be value in nature,” he said. He declined to elaborate on what the his next steps might be, however, he added. “Stay tuned.”

As for his so-called retirement at the ripe age of 68, he said that he won’t run any new venture that emerges from this current unwind but said he still planned to stay active.

“AJO’s closing will mark the end of my career, While I am hanging up my spurs, my partners and colleagues are not. I plan to support them as they prepare to ride again.”

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