Research Affiliates

2019 Advisor Symposium

Video: Are Valuations Irrelevant?

With US stock market valuations exceeding all historical valuation levels—except for those hit at the peak of the dot-com craze—Rob Arnott examines the subsequent performance of companies, which were at one time the largest companies in the world.

Article

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.

Publications

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. Chris Brightman expects mainstream stocks and bonds to fare poorly in the high and volatile inflation and interest rate environment that would likely accompany adoption of MMT.

2019 Advisor Symposium

Video: The Business Case for Purposeful Business

Based on his research, Alex Edmans shows how a corporation treats its employees and how closely it follows governance-related best practices is indicative of positive long-term outcomes for investors.

Click here to watch the full video

RA Conversations

RA Conversations: 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.

See more RA Conversations

Understanding Factor Investing Webinar Series

Webinar Replay

Part 4: Multi-Factor Design, Part 2—Keep a Handle on Trading Costs

Poor index design can lead to high trading costs for investors. Thoughtful implementation can mitigate these costs by using weighting schemes that promote liquidity, employing turnover-control mechanisms, and applying staggered rebalancing.

Webinar Replay

Part 1: What Matters in Multi-Factor Investing?

Webinar Replay

Part 2: Ignored Risks of Factor Investing

Webinar Replay

Part 3: Multi Factor Mixing vs. Integrating

multi-factor-design-part-1-mixing-vs-integrating

Alice’s Adventures in Factorland

Over the last 15 years, factor returns have not delivered on investors’ expectations. Are factors broken or far riskier than investors believe? Investors could dismiss the approach based on recent poor performance, but perhaps a better path would be to gain an understanding of three risks associated with factor investing. Doing so can help investors form more realistic return expectations.

Rob Arnott on Bloomberg

Rob Arnott explains why Research Affiliates expects US equities to return only 1% above inflation over the next decade—but emerging markets offer more promising long-term returns.
February 5, 2019

The Winning Formula: Mission + Culture + Team

CEO transitions are a great time to focus on refining the enduring formula of a firm’s success. At Research Affiliates that formula has three equally important elements: mission, culture, and team. The result are win-win-win outcomes—that is, a win for our end investors, a win for our distribution partners, and a win for ourselves.

Further Reading
CFA Institute Online: How Culture Improves Outcomes: Cognitive Diversity

Chris Brightman on CNBC

Hear Chris Brightman, Research Affiliates’ CIO, discuss his 10-year outlook for real equity returns. While he foresees the price of the S&P higher than where it is today, he expects US equity returns to be in the low single digits.
January 9, 2019

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.

Further Reading
Unlocking the Performance Potential in ESG Investing

704-alternative-risk-premia-a-crisis-or-opportunity-1.png

Alternative Risk Premia:
Crisis or Opportunity?

We believe a solid understanding of the specific underlying return drivers of ARP strategies can improve investors’ odds of maximizing the long-run investment opportunity of ARP investing.

Further Reading
Alternative Risk Premia: Valuable Benefits for Traditional Portfolios

Campbell R. Harvey discusses his latest research paper

“A Research Protocol in the Era of Machine Learning”

Backtesting Machine Learning keyart (email)

Backtesting Protocol in the Era of Machine Learning

Machine learning provides the investment industry with a new set of tools. However, investors need to be cautious. Machine learning is being hyped and sometimes misapplied.

Feifei Li at the Morningstar Investment Conference

Feifei Li discusses RAFI Multi-Factor, a strategy that offers diversified exposures to robust equity factors.
June 12, 2018

Vitali Kalesnik on
Bloomberg TV

Vitali Kalesnik discusses factor investing and how the ETF landscape has changed the way we talk about markets, value, and growth.
October 18, 2018

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.

Rob Arnott on
Bloomberg TV Asia

“Is China a bargain now?” Rob explains why China is “getting there,” and expands his commentary to include US and emerging-market stocks, and a potential US recession.
October 18, 2018

Chris Brightman on
CNBC’s Squawk Box

Listen to Chris explain why he is worried about slowing US economic momentum as a result of fading fiscal stimulus. Chris believes emerging market equities remain a good bargain for investors.
October 11, 2018

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.

Rob Arnott on Bloomberg TV

July 16, 2018

Bloomberg TV, August 17, 2018

Rob Arnott on Short-Termism
in the Stock Market

Bloomberg TV, August 17, 2018

Rob Arnott on Turkey
and Emerging Markets

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?

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.

Recently Published Journal Papers

Is Your Alpha Big Enough to Cover Its Taxes? A Quarter-Century Retrospective

Recognizing 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 Integrating

All 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 Benchmarks

Many 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.

Award-Winning Journal Papers

Winner of the 2018 Bernstein Fabozzi/Jacobs Levy Award for Best Article

King of the Mountain-The Shiller P/E and Macroeconomic Conditions

Valuation, always an effective tool for long-term investors, can also be useful for assessing short-term market prospects. The authors demonstrate that conditioning CAPE on current inflation and real yields substantially improves its accuracy in forecasting returns for periods from one month to one year.

Published in the Journal of Portfolio Management by Rob Arnott, Tzee Chow, and Denis Chaves.

Winner of the 2016 Graham & Dodd Scroll Award Of Excellence Paper

Will Your Factor Deliver? An Examination of Factor Robustness and Implementation Costs

Not 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.

Published in the Financial Analysts Journal by Jason Hsu, Vitali Kalesnik, Noah Beck, and Helge Kostka.

Winner of the 2015 William F. Sharpe Award for ETF/Indexing Paper of the Year

A Framework for Assessing Factors and Implementing Smart Beta Strategies

Investors might apply advanced techniques of quantitative analysis to discriminate between genuine premium-bearing factors and the spurious products of data-mining—but here’s a three-step heuristic.

Published in the Journal of Index Investing by Jason Hsu, Vitali Kalesnik, and Vivek Viswanathan.

Winner of the 2012 William F. Sharpe Indexing Achievement Award for Paper of the Year

A Study of Low-Volatility
Portfolio Construction Methods

Long-term simulations in U.S., global developed, and emerging markets confirm that low-volatility strategies can potentially access risk-diversifying sources of excess return. However, portfolio construction methods should be sensitive to investibility and valuations.

Published in the Journal of Portfolio Management by Jason Hsu, Tzee Chow, Feifei Li, and Li-Lan Kuo.

Winner of the 2012 William F. Sharpe Indexing Achievement Award for Paper of the Year

Rebalancing and the Value Effect

Value stocks typically enjoy higher dividends than growth stocks. Growth stocks, on the other hand, typically enjoy faster dividend growth. What most investors miss is that a portfolio of value stocks generates faster growth in dividends than a portfolio of growth stocks.

Published in the Journal of Portfolio Management by Rob Arnott and Denis Chaves.