We agree with today’s narrative: AI promises to revolutionize the economy and our lives. Because Nvidia has emerged as the cornerstone company designing chips for the AI revolution, investors are understandably euphoric about the prospects for its stock price. We
A common error of earnings aggregation from stocks to the market persists. The aggregation fallacy is at its most extreme during recessions. Consider AIG. During the market lows of 2009, the share price fell briefly below $6 and GAAP (Generally
Over the last two years, the world has witnessed a parabolic strengthening of the US dollar compared to its developed-market counterparts. Dollar strengthening actually started just after the global financial crisis as a slow methodical slog higher marked by both
In 2016, we published a controversial paper titled “How Can ‘Smart Beta’ Go Horribly Wrong?”, the first in a series of papers we would publish over the next 18 months on the future of factor investing and other forms of
Bad news: History tells us that once the inflation genie is out of the bottle, it can take far longer to return to normal levels than most people realize. Indeed, when Federal Reserve Chair Paul Volker took office in 1979,
When I started my career in the early ’80s, many countries around the world were infected with a miserable inflation disease. Diagnosing the cause of double-digit inflation and administering a cure was the key problem for economists and central bankers.
In June and July 2021, Research Affiliates surveyed 131 financial advisors and wealth managers from 13 countries to gather the industry sector’s latest thinking about, and approaches to, ESG investing. Respondents answered 46 questions via an anonymous online questionnaire. Most
Value’s Travails and Recent Partial Recovery In mid-March 2020, we wrote in “This Too Shall Pass” that disruptions such as the Covid-19 pandemic are not permanent and that investors can look beyond immediate travails to an eventual return to normalcy.
Key Points 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? We propose two new investment
Conversations in the investment industry have been dominated by predictions about the path of the inflation rate and its implications for capital markets. In this article, we aim to turn these conversations upside-down. We propose two new investment signals, which
We have observed that additions and deletions to the S&P 500 Index follow a dependable pattern: additions underperform and deletions overperform overthe subsequent12-month period. The December 2020 rebalance out of AIV and into TSLA lived up to this pattern rather
Big markets have a special allure for investors. They offer the promise of another Apple, Google, or Microsoft. But big markets also bring with them the threat of what Cornell and Damodaran (2020) call “the big market delusion.” Big market delusions generally begin with …
In 1952, Harry Markowitz published “Portfolio Selection” and helped usher in the era of modern portfolio theory. Harry’s work showed us that a portfolio’s risk is not defined by the riskiness of its individual assets, but by the extent the portfolio’s assets’ price movements …
Increasingly, investors are asking if ESG is a factor. We answer this question using the criteria set forth by our Research Affiliates colleagues in their 2016 Graham and Dodd Scroll–winning article, “Will Your Factor Deliver? An Examination of Factor Robustness
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 …
Over the last roughly 13 years, and exacerbated by the severe market downturn in the first quarter of 2020, US value stocks have experienced their longest and deepest drawdown since 1963. Prior to 2020, Australian value stocks were spared the
Now is too soon to worry about inflation from a public policy perspective given the immediate humanitarian need for disaster relief. Many millions of newly unemployed people need cash now to pay bills and just to buy food for themselves
Now is too soon to worry about inflation from a public policy perspective given the immediate humanitarian need for disaster relief. Many millions of newly unemployed people need cash now to pay bills and just to buy food for themselves
As we face the serious and stressful challenge of the COVID-19 humanitarian crisis, we are forced to conduct business in unfamiliar ways. Prime among these is that we are working from home, where we must adapt to social distancing, new
We’ve all heard the maxim “when the US sneezes, the world catches a cold.” In the last few weeks, the truth in this saying has made itself evident, although in this case, China did more than sneeze. In our interconnected
KEY POINTS – ESG ratings vary markedly by ESG ratings provider because each provider has a unique methodology for assigning company-specific ratings. Investors, therefore, must ensure the approach taken by the ratings provider they rely on is consistent with their
• ESG ratings vary markedly by ESG ratings provider because each provider has a unique methodology for assigning company-specific ratings. Investors, therefore, must ensure the approach taken by the ratings provider they rely on is consistent with their ESG preferences
Key Points Performance backtests are often used as evidence to “prove” a smart beta strategy is “better” than its competitors. In our view, careful attention must be given to these claims because backtested results are easily data mined. The historical
The current value–growth cycle has been particularly daunting for anyone with a value orientation. Value has been out of favor for approximately 12 years at this point. In this prolonged phase of growth dominance, the patience of investors in RAFI™
Smart beta direct indexing is an increasingly accessible implementation route that accommodates tax-loss harvesting and customizations based on client preferences and circumstances. Advisors are uniquely positioned to assess whether this approach fits into their clients’ portfolios, and if so, to
Nobel Laureate Robert Shiller, interviewed by Rob Arnott, expounds on the importance of narratives in driving economic events.
Kelly Shue’s research challenges the conventional wisdom that size is the fundamental determinant of volatility and offers investors a window on an under-appreciated driver of asset price movements.
In April 2018, we published our most-downloaded article ever, “Yes. It’s a Bubble. So What?” Our key purpose was not to make the observation that “Yes, it’s a bubble,” but to offer a formal definition of bubble, which is perhaps
Juhani Linnainmaa cautions investors to be wary of alpha decay in newly discovered factors. Using fresh, pre-discovery data, his out-of-sample analysis shows about half of the many factors tested were not robust.
David Laibson discusses his findings on what types of strategies work best to encourage investors to exert selfcontrol, whether it may be saving more for retirement or resisting the impulse to sell into a falling market.
ESG and SRI strategies filter companies on metrics that often measure intangibles. Alex Edmans finds that employee satisfaction does correlate with corporate outcomes, but the market is not yet adequately valuing this intangible.
1. Modern Monetary Theory (MMT) argues that governments with fiat currencies should coordinate treasury and central bank actions to fund government programs by directly printing money, unconstrained by tax receipts or borrowing capacity. 2. Progressive politicians embrace MMT because the
1. Our analysis examines combinations of six factors (value, low beta, profitability, investment, momentum, and size) in simple long-only, investable portfolios that reflect real-world strategies. Based on our research, these six factors produce a substantial diversification benefit across return drivers.
At Research Affiliates, our winning formula focuses on mission, culture, and team. We believe a corporate culture that supports the development of its employees will in turn contribute to the long-term success of clients, partners, and the firm itself. We
We define and study the alternative risk premia (ARP) universe through four distinct core strategy types: equity neutral, volatility, trend, and macro. We believe that a host of underlying drivers, which include rising price volatility, individual factor investing risks, and
Both academic research and our own experience indicate that the business case for corporate diversity is compelling as a result of higher collective intelligence. Testing the investment case for greater diversity faces two major challenges: insufficient historical data and difficulty
What Matters in Multi-Factor Investing? Ignored Risks of Factor Investing Multifactor Design, Part 1 – Mixing vs. Integrating Multifactor Design, Part 2 – Keep a Handle on Trading Costs Issues in ESG Integration
The negative gap between investor returns and fund returns is the biggest failure in investment management. Alpha is only a sideshow. If we extrapolate the investor returns gap to smart beta strategies, poor client timing will completely negate the potential
Factor investing Factor investing, an investment approach which targets specific stock characteristics such as value or momentum, is becoming a stronghold of investor portfolios.1 Many factor-investing strategies are popular for good reason: they are transparent, offer exposure to widely agreed-upon
Valuable Benefits for Traditional Portfolios For most investors, earning less than a 5% annualized total return above inflation means they will likely fall short of meeting their financial needs in retirement. A couple of years ago, our colleagues West and
Investors are wise to look at more granular classifications of the business cycle and not just relatively infrequent NBER recessions. Yield-curve slopes and equity market returns can be used as nowcasting signals to identify turning points of the business cycle.
Key Points Systematic rebalancing raises the likelihood of improving long-term risk-adjusted investment returns. The benefits of rebalancing result from opportunistically capitalizing on human behavioral tendencies and long-horizon mean reversion in asset class prices. Investors who “institutionalize contrarian investment behavior” by
We both recently moved and bought homeowners’ insurance, once again. Like most Americans,1 for our most valuable assets—our homes typically being the most valuable asset—we willingly pay for protection against a variety of natural disasters such as earthquakes, hurricanes, tornados,
As in aviation, the questions “Why is it doing that?” and “Where are we?” also happen to be very commonly posed by economists and market watchers. For the most part, we never truly know where we are in an economic
… and Other Misconceptions about Treasury Bonds In the frantic months following the fall of Lehman Brothers in 2008, the US Federal Reserve embarked on an unprecedented program of unconventional monetary policy easing. This program included purchases of mortgage-backed securities as
Key Points With EM stock prices plummeting and investors fleeing EM funds, the fear of emerging markets is palpable. Our examination of three key metrics—external debt, foreign exchange reserves, and current account balance—shows, however, that EM countries have low risk
With EM stock prices plummeting and investors fleeing EM funds, the fear of emerging markets is palpable. Our examination of three key metrics—external debt, foreign exchange reserves, and current account balance—shows, however, that EM countries have low risk of a
Advisor Symposium Presentation
Arguments in favor of traditional passive index funds seem compelling. They offer low fees, limitless liquidity, and broad market participation. They match market performance and have negligible trading costs and tracking error—and they beat most active managers, most of the
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
