The Buck Stops Here
US dollar cycles are long.
Revisiting Our “Horribly Wrong” Paper: That Was Then, This Is Now
Nearly seven years have passed since the publication of our 2016 paper “How Can ‘Smart Beta’ Go Horribly Wrong?”
Price-to-Fantasy Ratio: Self-Deception with Forward Operating Earnings
A common error of earnings aggregation from stocks to the market persists.
Tesla - Has the Time of Reckoning Come?
Tesla’s shares fell by more than 14% on Tuesday, after plunging by 65% in 2022.
History Lessons: How “Transitory” Is Inflation?
The US Federal Reserve Bank’s expectations for the speed of reverting to 2% inflation levels remains dangerously optimistic.
Where’s the Beef?
In the 1980s there was a famous TV ad for Wendy’s with the tagline “Where’s the beef?”.
Quantifying the Impact of Direct Indexing
We apply five levels of customization to four developed-market equity strategies to quantify the impact of customization (or direct indexing).
Carbon Intensity for Climate Mitigation: Clearing Up “Scaling” Confusion
Investors can choose one of two popular scaling methods for carbon emissions comparisons across companies. Our analysis guides investors in making this important decision.
No Excuses: Plan Now for Recession
Now is the time to engage in risk management to retain your competitive advantage once the economy emerges from the slowdown.
Rising Risk of Stagflation
Trillions of dollars of deficit spending financed by money creation over the past two years caused today’s soaring inflation.
Duration Management for the Next 40 Years
Traditional long-only fixed income managers had one of the worst quarters on record in Q1 2022 as higher interest rates left “bottom up” portfolios overweight duration.
ESG Is a Preference, Not a Strategy
A portfolio’s return is driven by its investment strategy—a set of decisions that governs allocation and timing of capital among the portfolio’s positions.
Inflation Is Here! What Now?
Inflation is rising rapidly, not an unexpected outcome given governments’ pandemic policy response of ballooning deficits and soaring government debt.
Did I Miss the Value Turn?
The value rebound that started in September 2020 gave up nearly half its gains by mid-May 2021 as the recovery faltered with the onslaught of the highly contagious Delta variant. But vaccination has proven highly effective, and as the unvaccinated around the world become vaccinated, the prospect of a reinvigorated economy is good. Is now a second chance to rebalance into value stocks?
Predicting Equity Returns with Inflation
Rather than predicting what will happen to inflation in the future—a particularly arduous and humbling task—we ask a simple question: What can past inflation dynamics tell us about the equity market’s future returns?
Revisiting Tesla’s Addition to the S&P 500: What’s the Cost, Before and After?
We have observed that additions and deletions to the S&P 500 Index follow a dependable pattern: additions underperform and deletions overperform over the subsequent 12-month period.
The Fall of the Titans!
The performance of a market-cap-weighted index is driven by a handful of stocks with the largest capitalizations, but these stocks do not remain at the top for long. A smart beta multi-factor strategy is a good solution for investors concerned about the concentration risk of a passive market-cap tracker.
The Time Is Now: Climate Transition Investing for US Investors
Climate research informs us that in 2017 anthropogenic global warming reached1.0° C above pre-industrial levels (IPCC, 2018).
Factor Timing: Keep It Simple
Factor timing is the ability to add value to an investment strategy by altering the exposure to various factors through time.
Big Market Delusion: Electric Vehicles
The “big market delusion” is when all firms in an evolving industry rise together, although as competitors ultimately some will win and some will lose.
As Duration Dies, Equities Rise
We compare the current value of bonds versus stocks within the context of the equity risk premium. We couple this analysis with an evaluation of possible Fed policy direction. Our conclusion is that risk assets, such as US equities and corporate bonds, are poised to benefit as are gold and other commodities due to tumbling real yields and dollar weakening.
How COVID-19 Vaccines and Brexit Create the Trade of the 2020s
In late 2020, a new kid emerged on the bargain-of-the-decade block. UK stocks, and notably UK value, reached very cheap levels relative to value stocks in other developed economies. Today, UK value remains at remarkably low valuations relative to most of its fundamentals.
Reports of Value's Death May Be Greatly Exaggerated
Rob Arnott: “There hasn’t been a better time to be a value investor at any other time in my career. I look back at the tech bubble and I never thought I would see valuations stretched the way they were then. We're back to that, and then some." We invite you to revisit “Reports of Value’s Death Have Been Greatly Exaggerated” now published in the Financial Analysts Journal.
Surprise! Factor Betas Don’t Deliver Factor Alphas
By buying or overweighting characteristics-based factor exposure and selling or underweighting beta-based factor exposure, investors can position their portfolios to reap the rewards of factor investing while bearing less risk.
Beware the Shocks in the Road
Massive growth in central bank balance sheets via quantitative easing, debt monetization, and firing of “big bazooka” stimulus packages brings renewed focus to potential shocks in the business cycle. An awareness of the macroeconomic “shocks” and their impact on asset prices should be incorporated in investors’ tactical asset-allocation decisions.
Is Diversification Dead?
Over the last dozen years, investors holding the classic US 60/40 portfolio were substantially better off than their diversified peers, yet now is not the time to abandon diversification and diversifying asset classes. We believe it is imprudent to trust that escalation in valuations will continue unabated into the next decade...
Bitcoin: Magic Internet Money
The sage advice to “know what you are investing in” is being dangerously overlooked by both novice and seasoned investors when it comes to bitcoin. A former bitcoin miner explains why the price of BTC is nearly certainly a bubble and likely manipulated. Investors should proceed with extreme caution.
Tesla, the Largest-Cap Stock Ever to Enter S&P 500: A Buy Signal or a Bubble?
On December 21, Tesla will be the largest company ever to enter the S&P 500 Index. Tesla’s skyhigh valuation, which meets our real-time definition of a bubble, conforms to the observation that market-cap-weighted indices buy high and sell low—the antithesis of prudent investing.
Book Value Is an Incomplete Measure of Firm Size
Adding intangible assets to book value provides a more robust measure of firm capital. But, just as a home buyer considers a host of variables when evaluating the price of a new house, we prefer to use multiple metrics, not book value alone, to get the most complete picture possible of a firm’s valuation.
The Risks to a Robust Recovery
Cam Harvey outlines seven risks that have the potential to derail the economic path forward. He believes in the possibility of a robust recovery, but prudence dictates going through the exercise of listing the risks to the recovery and assessing their economic and financial implications.
Is ESG a Factor?
Applying the definition of factor robustness that was established by our Research Affiliates colleagues in a 2016 award-winning paper, we determine ESG is not a factor. Nevertheless, the importance of ESG as an investing strategy is undeniable. We explore how greater clarity around defining ESG can quicken the pace of ESG integration in equity portfolios.
A Quick Survey of "Broken" Asset Classes
Pundits, prognosticators, and even investment boards often make misleading declarations that an asset class is broken, that its prospects for earning investors a reasonable future return are very dim. These proclamations can lead to investors’ abandoning these assets to chase recent winners.
The COVID-19 Crash and the Abandonment of the Pensioner
Between mid-February and late March 2020, we saw a “take no prisoners” market crash. Anything with a whiff of perceived risk crashed, in direct proportion to its perceived risk. The only assets that soared—because of tumbling interest rates—were long Treasury bonds, and with them, the net present value of pension obligations.
Reports of Value's Death May Be Greatly Exaggerated
The Fama–French value factor, and value investing in general, has suffered an extraordinarily long 13.3 years of underperformance relative to the growth investing style. The current drawdown has been by far the longest as well as the largest since July 1963. Arnott, Harvey, Kalesnik, and Linnainmaa examine the potential causes of value’s underperformance and provide estimates of value’s performance relative to growth’s performance under different revaluation scenarios over the next decade.
FOMO vs. Fundamentals
Unlike most macro investors who are event-driven, RBA has always strictly followed fundamentals. Our models and indicators have been time-tested in multiple cycles over the past 30 years, and a deliberate and disciplined approach has so far served us well in the current unprecedented environment.
Too Soon? Pandemic Policy Response Raises Risk of Inflation
The Fed’s $5 trillion bazooka, helicopter drops of cash, and a tripling of deficits over the next two years imply a future bout of high and volatile inflation unless fiscal policy nimbly pivots to help prevent the toxic side effect of a spike in inflation. Is that expectation realistic?
As Markets Burn
Major adjustments in capital markets around the globe have changed our long-term expected return forecasts for the 100+ assets we model. Before the corona crash we forecast long-term real returns for US equities to be only 1% a year. Now new, lower valuations suggest higher returns.
Leading in Uncertain Times
In times of uncertainty, good leaders lean into crisis and are able to fully engage, motivate, and inspire their team. The serious and stressful challenge of the COVID-19 crisis demands that leaders embrace flexibility, curiosity, and openness to diverse perspectives.
The Distinction between a Company and Its Stock Price
We at Research Affiliates recently conducted our first virtual All Hands meeting after finding ourselves working from home in the wake of the COVID-19 crisis. As CIO, I responded to questions about our investment strategy. Katy Sherrerd, CEO, and Jeff Wilson, Head of Distribution, asked me to elaborate more broadly on my response to one of the questions submitted by email the day prior.
With Volatility Comes Opportunity
Uncertainty continues to dominate global securities markets and heightened volatility is the result. Feifei Li, partner and head of equities, asks Rob Arnott, the founder and chairman of Research Affiliates, about the implications of increased volatility on investment strategies and where investors can find the best opportunities.
This Too Shall Pass
Rob Arnott shares his perspective on the ongoing market crisis in a Q&A with Jonathan Treussard. He suggests the time to buy is when investors are at “peak fear.” In the weeks ahead, that point will come and bargains will make themselves self-evident to the disciplined investor. The window of opportunity will be short, but highly rewarding over the longer term.
Oh My! What’s This Stuff Really Worth?
What impact will coronavirus and market volatility have on your portfolio?
Reports of Value's Death May Be Greatly Exaggerated
The current drawdown has been by far the longest as well as the second largest since July 1963, eclipsed only by the tech bubble from 1997 to 2000. Arnott, Harvey, Kalesnik, and Linnainmaa examine the potential causes of value’s underperformance and provide estimates of value’s performance relative to growth’s performance under different revaluation scenarios over the next decade.
Forecasts or Nowcasts? What’s on the Horizon for the 2020s
Now is the season for forecasting as one decade turns into the next. Pundits and market prognosticators too often treat nowcasts as true market forecasts, which can be very dangerous for investors’ financial health. Our forecasts for the decade ahead rely on empirically driven quantitative models.
Plausible Performance: Have Smart Beta Return Claims Jumped the Shark?
To get the attention of smart beta investors in a crowded marketplace, some smart beta providers are laying claim to performance that appears implausible. So what is plausible? We look at historical live performance to answer this important question.
Standing Alone Against the Crowd: Abandon Value? Now?!?
- In a prolonged anti-value momentum-driven rally, it’s easy and natural to forget the long-term value proposition of a rebalancing discipline.
- The evidence and intuition underlying a contrarian value investing discipline has proven merit in cycle after cycle across history.
- By steadily rebalancing against the market’s most extravagant bets, RAFI strategies are positioned to recoup accumulated shortfall at the cycle’s turn, delivering meaningful long-term value-add.
- The continued outperformance of today’s most dominant companies is unlikely to be sustainable in the long run.
The Advisor’s Case for Smart Beta Direct Indexing
Smart beta direct indexing is an increasingly accessible implementation route that accommodates tax-loss harvesting and customizations based on client preferences and circumstances.
Bubble, Bubble, Toil and Trouble
Looking back over the last 15 months, the authors assess their success at identifying asset bubbles and anti-bubbles in April 2018. The scorecard is in their favor. More importantly, however, they review how their definitions of a bubble and an anti-bubble continue to provide useful insights for where investors can find value in today’s global markets.
Dismiss MMT at Your Peril
Modern Monetary Theory (MMT) informs today’s progressive policy agenda, even though many prominent economists consider it flawed, nonsense, or just plain wrong.
The Inverted Yield Curve
Cam Harvey speaks to the currently inverted yield curve as an indicator of a slowing economy, further expounding on his Conversations of January 2019.
Strike the Right Balance in Multi-Factor Strategy Design
One thing is for sure, investing means buying and selling, and these two activities aren’t free. Regardless of how promising the strategy looks on paper, its benefits will be reduced to some degree through its implementation. A worthy goal, therefore, is to limit the toll implementation takes on a strategy’s execution.
The Flattening Yield Curve
Cam Harvey looks at the yield curve today through the lens of his 1986 pioneering work on yield-curve inversions and their foreshadowing of economic downturns.
The Challenges of Diversity Investing
The business case for diversity is compelling, but the investment case for diversity is less clear-cut. We suggest, therefore, that investors who seek to promote diversity and its business benefits combine diversity with known drivers of excess returns.
The Biggest Failure in Investment Management: How Smart Beta Can Make It Better or Worse
The biggest failure in investment management—the gap between the returns realized by the investor and the returns earned by the strategy or fund the investor owns—typically remains in the shadows with the glare of the spotlights focused on alpha. Smart beta is no exception. We propose two ways to reframe the client performance review that we believe will result in better long-term outcomes.
Ignored Risks of Factor Investing
Factor investing, an investment approach which targets specific stock characteristics such as value or momentum, is becoming a stronghold of investor portfolios.
Alternative Risk Premia: Valuable Benefits for Traditional Portfolios
An alternative risk premia strategy that relies on robust factors within a liquid, transparent, and disciplined framework has the potential to improve the long-term return prospects of traditional portfolios and to reduce their downside risk.
Rebalance or Rush Hour?
Embracing a disciplined approach to rebalancing can lead to better long-term investment outcomes. Overcoming the natural tendency to wait-and-see before repositioning our portfolios can be a difficult, but worthy, goal for investors to pursue. Advisors can help investors surmount this and other behavioral hurdles by adopting a systematic rebalancing approach that effectively institutionalizes contrarian investment behavior.
Where Is the Global Economy Going?
Evidence shows that the yield-curve slope and equity returns provide signals of similar direction in the economy, allowing investors to nowcast with relative confidence. Today, those signals indicate that several developed markets—in particular, Japan, Germany, and the United States—are ominously close to entering a correction phase.
Pundits Predicting Panic in Emerging Markets
A rational analysis of the emerging markets affirms our belief that now is the time to buy, not sell. The panic being peddled by pundits today is simply not justified.
Buy High and Sell Low with Index Funds!
Traditional index funds match market performance and have negligible trading costs with low tracking error—or do they? Not actually—they routinely buy after high price appreciation and sell after high price depreciation. They also have significant trading costs from adding and deleting stocks. We show how index providers can construct better-performing indices that are less prone to performance chasing and have lower turnover.
Is Your Alpha Big Enough to Cover Its Taxes? A Quarter-Century Retrospective
Investors and their advisors must be alert to managing both pre-tax and after-tax alpha in order for investors to realize the highest possible return from their taxable portfolios. Increasingly, the opportunities to accomplish both goals are within reach of investors through, for example, tax-advantaged smart beta strategies and tax-efficient vehicles such as ETFs.
Food for Thought: Integrating vs. Mixing
Although a naïve comparison appears to favor the integrating approach to multi-factor strategy construction, after taking into account both quantitative and qualitative considerations, many investors—those seeking transparency, diversification, minimal governance oversight, and low fees—may find mixing is a more sensible choice.
Yes. It's a Bubble. So What?
With sky-high valuations in the US stock market, and what we believe is a tech bubble that has dangerous implications for other areas of the market, we suggest four actions investors can take now to avoid the inevitable bursting of the bubble, and which will likely benefit their portfolios’ long-term performance potential.
Unlocking the Performance Potential in ESG Investing
By combining a tilt toward companies that display financial discipline and that embrace corporate diversity with the return engine of a fundamentally weighted portfolio, we believe investors in environmental, social, and governance (ESG)–related strategies have the opportunity to earn superior long-term risk-adjusted returns.
Performance Measurement: How to Do It If We Must
Assessing our portfolios’ performance is a necessary activity, but by being aware that measurement over shorter time horizons is dominated by noise, we can better resist the natural human instinct to “do something”—typically selling the underperforming investment at exactly the wrong time—if near-term performance falls below expectations.
When Value Goes Global
When the value trade goes global, investors are poised to benefit. Evidence from the international equity, bond, currency, and commodity markets indicates that the value premium is a global phenomenon that can offer important portfolio diversification. However, the devil is in the details: we argue that the successful implementation of global value strategies critically depends on an economically motivated design.
Craftsmanship in Smart Beta
While somewhat at odds with today’s big-data, warp-speed approach to life and work, thoughtful craftsmanship—the product design and implementation elements that are tangible, measurable, and impactful—can create positive, persistent results in portfolio performance.
CAPE Fear: Why CAPE Naysayers Are Wrong
Beware the consequences of assuming that elevated CAPE ratios are here to stay, but if they are the "new normal," low future returns are likely to be the "new normal" as well.
Part 3 Building Portfolios: Diversification without the Heartburn
Part 3 Building Portfolios: Diversification without the Heartburn The wisdom of diversifying investor portfolios across a wide range of asset classes is indisputable. But diversifying client portfolios beyond mainstream stocks and bonds comes with challenges, starting with clients’ unfamiliarity with diversifying asset classes and a propensity for clients to regret diversifying when results disappoint.
The Bubble That Never Came (and Other Misconceptions about Treasury Bonds)
A 10-year US Treasury note yielding just little above 2% does feel expensive. Yet we should not be misled by appearances. Our research shows that, contrary to common wisdom, Treasury bonds are only moderately overvalued. All in all, bonds are not as unattractive as a simple historical comparison of their yields may suggest.
Can Momentum Investing Be Saved?
Momentum is one of the most compelling factors in theoretical long–short paper portfolios, but live results of momentum strategies fall short of theoretical returns. Thoughtful implementation, a careful sell discipline, and an avoidance of stocks with stale momentum can narrow the gap between paper and live results.
Part 2 Risk: Preparing Clients for an Uncertain Journey
If we think of expected return as the likeliest long-term “destination” of our investment portfolio, we can then think of risk as the uncertainty in the “journey” to that destination. Advisors serve their clients well by helping them understand the many paths that journey can take, and by establishing a plan of action (or inaction!) for when shortfalls inevitably occur.
Ignoring Starting Yields—Nabbing This “Usual Suspect” in Poor Investment Outcomes
Starting conditions matter. Today’s investment yields impact future realized returns. But many still rely on past returns to estimate future returns. Our online Asset Allocation Interactive tool gives you the information you need to look ahead, not just back.
Live from Newport Beach. It's Smart Beta!
Our headquarters in Newport Beach is only 50 miles from the Hollywood studios, although the drive can take up to two hours in rush-hour traffic. But far more than traffic separates the studios’ world from ours.
A Smart Beta for Sustainable Growth
We demonstrate a smart beta that produces positive excess returns from sustainably faster growth in EPS. This simple, systematic strategy represents a significant improvement from today’s growth indices that fail to produce faster growth in EPS and have provided negative excess returns.
Are You Underweight FANMAG? Chillax!
The first half of 2017 is shaping up to be unequivocally brutal for value-oriented rebalancing strategies. Wired to avoid pain, we humans know it’s very tempting to ask whether a model or philosophy is broken, especially the moment it dashes expectations.
When investors rely on any particular model all the time—and CAPE is often that model—fatigue inevitably sets in. We believe that a better approach for meeting future spending needs is to blend portfolios based on different models of return expectations.
Public Policy, Profits, and Populism
The Trump bump reveals market expectations of continuing public policies prioritizing stability, inhibiting creative destruction, depressing yields and wage growth, and inflating a profits bubble. If instead, the Administration delivers reforms that allow creative destruction, invigorate growth and raise returns to capital and wages, then the lofty profits of corporate incumbents will be at risk.
Presidential Politics and Stock Returns: Is the Relation Real or Spurious?
An analysis of five international stock markets indicates that published findings of a correlation between US stock returns and the political party in the White House are spurious, highlighting the importance of caution in interpreting historical investment data.
Why Factor Tilts Are Not Smart "Smart Beta"
Our analysis of three first-generation smart beta strategies shows factor-replicated portfolios are ineffective substitutes for their smart beta counterparts, exhibiting poorer performance, high turnover, and low capacity.
The Incredible Shrinking Factor Return
In 2016, Research Affiliates published a series of articles challenging the “smart beta” revolution. We pointed out that, while there is merit in many factor tilt and smart beta strategies, performance chasing in these strategies—buying the popular outperforming strategies whose relative valuations are at extremely high levels—can be just as dangerous as performance chasing in other realms of asset management.
Quest for the Holy Grail: The Fair Value of the Equity Market
Macroeconomic volatility is a useful tool for contrarian investors who are seeking fair value in an equity market characterized by continually rising valuations.
Forecasting Factor and Smart Beta Returns (Hint: History Is Worse than Useless)
In a series of articles we published in 2016, we show that relative valuations predict subsequent returns for both factors and smart beta strategies in exactly the same way price matters in stock selection and asset allocation.
A Smoother Path to Outperformance with Multi-Factor Smart Beta Investing
|You can outperform the market with substantially lower relative risk by diversifying across simple smart beta strategies based on a half dozen robust factors. Dynamically rebalancing these factor-based smart betas significantly improves returns.|
How Not to Get Fired with Smart Beta Investing
It may not be my money, but it is my job. — Charles Ellis in Investment Policy: How to Win the Loser's Game
Systematic Global Macro
A quarter-century before Brexit came “Black Wednesday.” On Wednesday evening, September 16, 1992, the British government announced its exit from the European Exchange Rate Mechanism, prompting a dramatic devaluation of the British pound. Renowned hedge fund manager George Soros’ legendary bet against the pound in 1992 and his $1 billion profit on Black Wednesday defines for many the swashbuckling style of a global macro trader.
The Emerging Markets Hat Trick: Time to Throw Your Hat In?
In their latest piece, Rob Arnott and Brandon Kunz of Research Affiliates take a look at how the rare combination of exceptional valuation levels, depressed currencies, and powerful price and economic momentum should encourage long-term investors to “throw their hats” into the emerging markets rink.
Record Low Costs to Trade!
Mean reversion is as applicable to trading costs as it is to valuation. Today’s costs to trade are at 56-year historical lows; they are due to rise soon. Now is the time to position your portfolio ahead of expected higher costs to trade and lower equity prices.
Take the 5% Challenge! (or The “Lloyd Christmas” Lesson)
Now’s the time to get real. Now’s the time, in a world of paltry bond yields and meager dividends, to make an honest assessment of your portfolio’s long-term expected return.