ASNESS: SMART APPROACHES TRANSCRIPT

May 8, 2015

CONSUELO MACK: This week on WEALTHTRACK, with both stock and bond markets trading near historic highs alternative investments’ master, Cliff Asness shows how he juggles market risks with the search for better returns by keeping lots of investment balls in the air. AQR Capital Management’s Cliff Asness is next on Consuelo Mack WEALTHTRACK.

Hello and welcome to this edition of WEALTHTRACK, I’m Consuelo Mack. We all know that the stock market is pricey after a six year bull run. It’s not just that the NASDAQ recently hit a new high – finally – after 15 years of trading below its old tech bubble peak.

The market is expensive historically, based on much longer term measures, including one of our favorites. The CAPE ratio, or Cyclically Adjusted Price-Earnings ratio, created by frequent WEALTHTRACK guest, Nobel Prize winning economist Robert Shiller.

The CAPE, which is figured by taking the current price of the S&P 500 and dividing it by the average of S&P earnings over the last ten years, adjusted for inflation, is currently at around 27. That is well above its twentieth century average of 15 times earnings.

Individual investors aren’t the only ones worried about stock market levels. Professional investors are too.

According to a recent survey from State Street Global Advisors, of over 400 institutional investors worldwide, 63% of them increased their stock exposure over the last six months. But 53% wish they could decrease it instead, and would if they had a more attractive alternative. Talk about conflicted!

And 57% expect a market correction of between 10 and 20% in the next 12 months.

Well normally investors could turn to bonds for income and protection, but with bond yields at or near record lows, they are no longer a viable option.

According to this week’s guest, both stocks and bonds are more expensive now than they have been in 90% of market history. He is Clifford Asness, Founder, Managing Principal and Chief Investment Officer at AQR Capital Management. AQR stands for Applied Quantitative Research, which they use in a number of strategies.

Founded in 1998 AQR now a global investment management firm oversees more than 130 billion dollars in hedge funds, mutual funds and a diversified collection of investment strategies from traditional long-only ones to multiple alternative approaches.

I began the conversation by asking Asness how unusual it was for both stocks and bonds to be this expensive at the same time.

CLIFF ASNESS: That is the really unusual part. Again, roughly the 90th percentile more expensive than history for stocks, roughly 90th percentile for 100-some-odd years. So only 10 percent of the time have bonds or stocks been more expensive individually.

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