ASNESS: SMART APPROACHES

May 8, 2015

According to this week’s guest, both stocks and bonds are more expensive now than they have been in 90% of market history. How do you invest if both markets are historically expensive? On this week’s WEALTHTRACK, AQR Capital’s Great Investor and Financial Thought Leader Cliff Asness describes some smart approaches.

WEALTHTRACK Episode #1146; Originally Broadcast on May 08, 2015
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CLIFFORD ASNESS

Consuelo Mack

Federal Reserve Chairwoman Janet Yellen caused a bit of a stir in an interview Wednesday when she commented that “equity market valuations at this point generally are quite high.”

It wasn’t exactly an “irrational exuberance” speech a la Alan Greenspan in 1996, but pundits were quick to point out that his observation was about four years early as the markets continued to rally until the March 2000 peak.

The market is expensive historically, based on several 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 for the S&P 500 divided by the average of S&P earnings over the last ten years, adjusted for inflation, is currently around 27. That is well above its 20th century average of 15..

Fed Chairman Yellen isn’t the only one concerned 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 and would if they had a more attractive alternative. Talk about conflicted!

Plus, 57% expect a market correction of between 10 and 20% in the next 12 months!

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

According to this week’s guest, Clifford Asness, both stocks and bonds are more expensive now than they have been in 90% of market history.  Asness is 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 asked Asness how unusual it was for both stocks and bonds to be this expensive at the same time and what investors should be doing in response.    

If you’d like to see the show before it airs, it is available to our PREMIUM subscribers right now.  We also have an EXTRA interview with Asness, about his new venture with London Business School, available exclusively on our website.

If you have comments or questions, please connect with us via Facebook or Twitter

Have a great weekend and make the week ahead a profitable and productive one.

Best Regards,

Consuelo

Mathews Asia

CONSIDER ADDING SOME COMMODITY EXPOSURE TO YOUR PORTFOLIO

COMMODITIES ARE:

  • Currently unpopular
  • Cheap
  • “Only asset class to make money in an inflation shock”

Credit Suisse Commodity Return Strategy (CRSOX): “…Morningstar’s sole actively managed medalist fund in the commodities broad-basket category…” CRSOX Chart

CRSOX data by YCharts

Greenhaven Continuous Commodity ETF (GCC) “…it equally weights various commodities, resulting in a much lower allocation to energy stocks than its peers.” GCC Chart

GCC data by YCharts

No Bookshelf titles this week.

ASNESS: DIVERSIFICATION VEHICLE

OWN SOME BONDS

  • Equal weights to equities
  • Smaller but positive long-term returns
  • Diversification role
No stock mentions in this episode.
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CLIFF ASNESS: LEVERAGE. DERIVATIVES. SHORTING.

1017_Asness_nameThe three “dirty words” of finance became taboo after the 2008 financial crisis, but this week’s guest says investors need them to boost their portfolios and “clean up” in the market. Our Financial Thought Leader this week is Cliff Asness, Managing and Founding Principal of AQR Capital Management, a global investment management firm which runs hedge funds, mutual funds, and a diversified collection of investment strategies. In this rare interview, he’ll discuss the tools we can use to diversify our portfolios.

WATCH NOW…

FROM THE WEALTHTRACK ARCHIVES:

ADVANCING RESEARCH

One third of AQR Capital Management’s professional staff, including Cliff Asness hold PhD’s, but even they are constantly challenged by the financial markets. AQR and the London Business School recently announced the creation of the AQR Institute of Asset Management, a ten year partnership aimed at advancing research and best practices in the global asset management community. Cliff Asness explains the thinking behind the project.


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