(Bloomberg) -- AQR Capital Management LLC, the quant fund founded by billionaire Cliff Asness, is doubling down on a call for emerging-market equities to beat the US even as that trade has failed to work for years.

While AQR reaped a benchmark-beating 17% gain in its main emerging-market equity fund last year, according to a person familiar with the matter, even that performance trailed what an investor would have made simply by putting their money into the S&P 500, which rallied 24%. It was the sixth consecutive year that investors calling for the end of US stock dominance were disappointed.

Even if it doesn’t happen this year or the next, though, emerging markets are almost certain to outperform the US over the longer term, according to Dan Villalon, co-head of AQR’s portfolio solutions group, who made a similar call in June of last year. AQR has about $8 billion of its $99 billion under management in an emerging-market equities portfolio, which is team-managed like its other funds.

“Emerging markets have the highest expected return over the next five to 10 years,” he said in an interview earlier this month. “Developed ex-US is higher than US, but a little less than emerging. And then US has the lowest.”

The call for the end of US stocks’ dominance puts the Greenwich, Connecticut-based quant fund in line with some other big names in the business, including Morgan Stanley Investment Management, which has about $1.3 trillion under management. Emerging-market stocks have extended their underperformance in the first weeks of 2024, losing 3.9% as of early Tuesday in London, while the S&P 500 has gained 0.3%.

Read more: Morgan Stanley IM Won’t Give Up on ‘Decade of Emerging Markets’

AQR’s founder, Asness, is best known for investment strategies based on value and momentum, and value is currently the best determinant for emerging markets, according to Villalon.

Value stocks outperformed growth stocks in emerging markets for a third consecutive year in 2023. And by some measures they’ve only become more attractive, with a price-to-earnings discount to US stocks of 42%, up from 30% around this time last year. 

To be sure, US stocks have defied many previous calls, including AQR’s, for the tide to turn, outperforming emerging markets every year since 2017. But the period of US exceptionalism has lasted longer than it should, and is now bound to come to a close, Villalon said.

“So many investors are underweight on emerging markets,” he said. “These are markets that a lot of investors have just sort of left behind because of the US dominance over the past decade.”

According to AQR, that’s a mistake.

For US stocks to continue beating the developing-world counterparts, “valuations of US equities would have to increase into tech-bubble land,” he said. “We think this is a risky proposition to say the least. We still think that there’s a case to be made for diversification outside the US.”

(Updates with EM vs US performance YTD in fifth paragraph. A previous version corrected the spelling of Villalon on second mention.)

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