Value fund manager AJO to shut down after losses

Quantitative fund manager AJO Partners, which manages $10bn, says it plans to shut down at the end of the year and will return money to clients after suffering steep losses in several of its value funds.

Ted Aronson, founder of the group that manages money for public pension plans in Florida and Oregon, told investors that AJO would stop trading on November 30 before winding down the business on December 31, according to an investor letter seen by the Financial Times.

The money manager’s AJO large-cap absolute fund, which was its largest with some $5.1bn of assets, was down 15.5 per cent through to the end of September, trailing its benchmark. At its peak in 2007, AJO managed $31bn across several funds, Mr Aronson said on Wednesday.

The decision to close was driven by “market forces” and Mr Aronson pointed to the underperformance of value funds, which search out stocks that appear to be underpriced.

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

Line chart of Year-to-date performance (%) showing Value investing has lagged growth dramatically this year

Value investors like AJO have suffered a long period of disappointing performance. Investors have instead been rewarded by owning companies with faster growing sales and profits.

The stronger performance by so-called growth stocks has been in part due to falling interest rates. Facing low returns on fixed-income instruments, investors have been willing to pay higher premiums for shares in fast-growing companies like Facebook and Amazon.

The decision by central banks to cut interest rates during the coronavirus pandemic has only exacerbated the divergence between growth and value stocks.

“We are in uncharted waters with such low interest rates and that has been humbling for value investors,” said Mr Aronson. “When cycles return, and they will, there will be a case for US value stocks.”

The Russell 1000 value index has declined 10 per cent this year, even after a 44 per cent bounce from its low in March. By contrast, the Russell growth index has climbed nearly 30 per cent in 2020 and is up nearly three-quarters from its March nadir.

Gina Moore, co-chief executive of the group, said the underperformance of value stocks had become more painful to stomach than during the dotcom boom two decades ago, when many high-profile value investors struggled to explain poor performance before the rally in technology shares collapsed.

“The duration of that was so much shorter and while perhaps it was at a greater magnitude . . . you could survive that,” she said. “Doing this for the last decade has tried our patience [and] it has certainly tried the patience of our clients.”

The company counted 44 employees and has offices in Philadelphia and Boston. Mr Aronson, who owned more than 40 per cent of the asset manager, said he planned to retire after the company’s closure.

Mr Aronson, 68, started his investment career in 1974 at Drexel Burnham Lambert.


Leave a Reply