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Advisor Series: Part 7
Is Your Alpha Big Enough to Cover Its Taxes? A Quarter-Century RetrospectiveInvestors 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.
Pundits Predicting Panic in Emerging MarketsA 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.
Food for Thought: Integrating vs. MixingAlthough 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?The relentless rise in the US stock market since its low in 2009 has been dramatic. US stock market valuations now exceed all historical valuation levels, except for those hit at the peak of the dot-com craze. This raises an obvious question for investors: Today, in early 2018, and has been the case over the last year, is the US stock market in another bubble? Yes. The more important question then becomes: How should investors react?
Unlocking the Performance Potential in ESG InvestingBy 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.
CAPE Fear: Why CAPE Naysayers Are WrongBeware 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 6] Performance Measurement: How to Do It If We MustAssessing 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”
[Part 5] Craftsmanship in Smart BetaWhile 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.
[Part 4] Is Manager Selection Worth the Effort for Financial Advisors?The most commonly marketed service by financial advisors is manager selection. We look at the evidence to see if the resources financial advisors are allocating to this endeavor add value to their clients’ and their own bottom lines.
FEATURED
When Value Goes GlobalWhen 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.
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.
Pricing Stocks and BondsA look at a simple, robust framework for estimating long-term asset-class forecasts, and its underlying assumptions, offers insights as to how asset managers can build a portfolio to meet investors’ future financial needs.
RECENTLY PUBLISHED JOURNAL PAPERS
Is Your Alpha Big Enough to Cover Its Taxes? A Quarter-Century RetrospectiveRecognizing that the management of taxable portfolios has advanced in the past 25 years, the authors of the present paper update a seminal 1993 study in which Robert H. Jeffrey and Robert D. Arnott introduced the concept of a normally negative “tax alpha” and formulated tactics to reduce its detrimental impact on investment results.
Smart Beta Multifactor Construction Methodology: Mixing versus IntegratingAll of the well-established factors to which investors gain exposure in low-cost smart beta funds are expected to deliver a premium in the long run, but none is guaranteed to outperform at all times. Seeking diversification, many investors have turned to strategies that exploit multiple factors. Published in the Journal of Index Investing.
Hobbled by BenchmarksMany investment organizations benchmark their funds’ performance against the classic 60/40 mix of domestic stocks and bonds, but this posture limits their ability to earn superior risk-adjusted returns. The authors argue that investors can fully realize the well-established benefits of asset-class diversification only if they are seriously willing to revisit their policy portfolios, investment guidelines, and benchmarks.
2016 GRAHAM & DODD SCROLL AWARD OF EXCELLENCE
Will Your Factor Deliver? An Examination of Factor Robustness and Implementation CostsNot every factor profits investors when implemented through a passive strategy. Size and quality show weak robustness, and liquidity-demanding factors, such as illiquidity and momentum, are associated with high trading costs. Investors may be better off accessing these factors through active management rather than indexation. Published in the Financial Analysts Journal by Jason Hsu, Vitali Kalesnik, Noah Beck, and Helge Kostka.
All AssetAll Asset strategies are global tactical asset allocation (GTAA) solutions that aim to deliver real returns, diversification, and inflation protection via tactical long-only exposures.
RAERAE systematic active equity strategies seek to generate superior risk-adjusted returns.
Systematic Alternative Risk PremiaThe Systematic Alternative Risk Premia strategy aims to deliver uncorrelated absolute returns through leveraged long–short exposures to liquid derivatives contracts.
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