‘Our return has sucked for the past few years…and we’re running out of time,’ says quitting $10 billion value investor

Wall Street will no longer have Ted Aronson to play.

After a tough time for the investment fund he helped start nearly four decades ago, AJO Partners, with offices in Philadelphia and Boston, is stepping down.

Aronson laid out the reasoning behind the $10 billion investment manager’s planned closure at the end of the year simply and unapologetically in an interview with MarketWatch on Thursday afternoon: “Our performance has sucked for the past few years. .”

Without taking a beating, he added, “Our shit is so bad it’s unbelievable compared to our peers.”

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

Aronson took a break from calling customers Thursday, following its closure announcement on Wednesday, to explain the challenges the company has faced over the past five years.

He said the investment firm’s ‘secret sauce’ or proprietary method of delivering alpha for its clients, or returns above a benchmark, was at odds with ‘market driving forces’ , reiterating comments he made in a letter to customers.

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

The The Financial Times reported that the fund manager’s absolute large-cap fund, the largest at some $5.1 billion, was down 15.5% through the end of September, lagging its benchmark, which, according to Aronson at MarketWatch, was the Russell 1000 Value Index RLV,
+0.94%.

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 RLG Index,
+0.55%
is up 23.4% over the same period.

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

Aronson said that at its peak, LAO was managing $31 billion before the 2008 financial crisis led to an unprecedented decline in value stock returns relative to growth plays, upending a traditional investment principle. Investors looking to find stocks that were undervalued by certain metrics kicked off a decade-plus period of underperformance relative to investments in growth stocks like e-commerce, software and other related businesses to technology.

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

AJO employs some 44 people and the company has about a year left in its Boston lease and about five years in its Philadelphia office, which Aronson intends to keep.

The unwinding of the value business comes as the global coronavirus pandemic which has affected nearly 40 million people worldwide has accelerated the reliance on growth companies whose revenues or profits are expected to continue to appreciate. Those bets have increased as consumers increasingly adapt their lifestyles in the face of the viral outbreak that began in earnest in March in the United States.

Value stocks rose in spurts, but lagged other sectors, including large-cap companies like Facebook Inc. FB,
Apple Inc.AAPL,
-0.96%,
Amazon.com AMZN,
+0.26%,
NetflixNFLX,
-0.66%
and Alphabet GOOG, parent of Google,
-0.96%

GOOGL,
-0.98%,
a collective informally known as FAANG and which sometimes includes grassroots stocks like Microsoft MSFT,
+0.17%
and Tesla TSLA,
+1.96%.

The Nasdaq-100 NDX index,
+0.50%,
which includes many of these large-cap names, has gained nearly 36% so far in 2020, the tech-laden Nasdaq Composite Index COMP,
+0.60%
increased by around 30% since the start of the year. Meanwhile, the broader market S&P 500 index SPX,
+0.66%
is up 7.5% more pedestrian and the Dow Jones Industrial Average DJIA,
+0.61%
is down 0.2% in 2020 after a series of declines this week.

Aronson said the current state of the market, hungry for technology growth companies, reminds him of the exuberance in 2000, the era of the dot-com bubble, which also led to large disparities between growth and value.

He said he thinks investors have been emboldened by “technology and free trade,” which have become the norm on many Wall Street retail brokerage platforms.

“When the market goes to extremes, people go to extremes and that will go down in history as a big deal,” he said.

So, is LAO’s founder done with value? Not by far.

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

As for his so-called retirement at the ripe old age of 68, he said he would not run any new businesses that emerged from this current ending, but said he still plans to remain active.

“LAO’s closure will mark the end of my career, as I hang up my spurs, my partners and colleagues are not. I plan to support them as they prepare to ride again.

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