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? We recommend four actions investors can take in response to the current bubble conditions, which should actually allow investors to benefit from the bubble.
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.
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.
[Webinar Replay] CAPE Fear: Why CAPE Naysayers are Wrong
Rob Arnott on Bloomberg TV (January 11, 2018)
ADVISOR SERIES
[Event Recap] The 2018 Research Affiliates Advisor Symposium As we reflect on the successes of the 2018 Advisor Symposium, we'd like to take a moment to say thank you to all of our attendees, speakers, and staff who made the whole event possible. Featuring: Rob Arnott, Josh Brown, Cam Harvey, Terry Odean, Ben Johnson & others.
[Part 6] 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”
[Part 5] 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.
[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 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.
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 Bonds A 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.
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.
Diversification Strikes Again: Evidence from Global Equity Factors Our research shows that the benefits of international diversification extend to equity factor strategies. Investors can reduce portfolio risk by diversifying into foreign markets. Moreover, unlike for asset classes, diversification benefits have not declined over time. Investors should be brave, and look beyond their borders.
The Folly of Hiring Winners and Firing Losers Performance chasing in manager selection is a reliable path to poor results. But by combining factor valuation with past performance, investors gain a richer toolkit for making well-informed allocation decisions among smart beta managers.
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.
RECENTLY PUBLISHED JOURNAL PAPERS
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.
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.
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.
2016 GRAHAM & DODD SCROLL AWARD OF EXCELLENCE
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. 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.
OTHER JOURNAL PAPER AWARD WINNERS
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 2015 Bernstein Fabozzi/Jacobs Levy Award for Outstanding Article: "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 Institutional Investor Journals 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.
INTERACTIVE TOOLS
AAI
Asset Allocation Interactive Navigate long-term forecasts for over 130 assets and model portfolios
SBI
Smart Beta Interactive Explore expected returns and valuations for smart beta and factor strategies
OUR STRATEGIES
RAFI Strategies
RAFI™ Strategies RAFI strategies aim to generate excess returns versus the market benchmark through a systematic, contrarian rebalancing approach.
Performance Summaries
All Asset
All Asset All Asset strategies are global tactical asset allocation (GTAA) solutions that aim to deliver real returns, diversification, and inflation protection via tactical long-only exposures.
RAE
RAE RAE systematic active equity strategies seek to generate superior risk-adjusted returns.
Systematic Alternative Risk Premia
Systematic Alternative Risk Premia The Systematic Alternative Risk Premia strategy aims to deliver uncorrelated absolute returns through leveraged long–short exposures to liquid derivatives contracts.
WEBINAR REPLAYS
CAPE Fear: Why CAPE Naysayers are Wrong
CAPE Fear: Why CAPE Naysayers are Wrong
Diversification: Is the Free Lunch Worth the Heartburn?
Diversification: Is the Free Lunch Worth the Heartburn?
Getting Multi-Factor Investing Right Using Robust Factors and Contrarian Timing
Getting Multi-Factor Investing Right Using Robust Factors and Contrarian Timing
Forecasting Asset and Portfolio Expected Returns
Forecasting Asset and Portfolio Expected Returns
Forecasting Smart Beta and Factors: History Is Worse than Useless
Forecasting Smart Beta and Factors: History Is Worse than Useless
Timing Smart Beta - Presentation
Timing Smart Beta - Presentation
How Can Smart Beta Go Horribly Wrong
How Can Smart Beta Go Horribly Wrong
SPEAKING ENGAGEMENTS
Morningstar Investment Conf, Feifei Li Chicago: June 12, 2018
FTSE World Investment Forum, Rob Arnott Utah: May 20-23, 2018
Financial Investigator, Vitali Kalesnik Amsterdam: May 29, 2018
Inside ETFs Smart Beta, Rob Arnott NYC: June 6, 2018
RA WORKING PAPERS ON SSRN
Factor Momentum
Factor Momentum January 31, 2018
Smart Beta Multi-Factor Construction Methodology: Mixing vs. Integrating
Smart Beta Multi-Factor Construction Methodology: Mixing vs. Integrating September 21, 2017
Diversification Strikes Again: Evidence from Global Equity Factors
Diversification Strikes Again: Evidence from Global Equity Factors September 15, 2017
The Natural Rate of Interest and Bond Returns
The Natural Rate of Interest and Bond Returns August 9, 2017
Survey of Quality Investing
Survey of Quality Investing May 19, 2017
In the News
Research Affiliates Expands European Footprint as Head of Equity Research Moves to the Firm’s London Office April 20, 2018
Barron's: Research Affiliates Bets ESG and Smart Beta Are Two Great Tastes That Go Great Together April 12, 2018
Research Affiliates Launches New RAFI ESG Strategy April 12, 2018
InvestmentNews: 2018 Icons & Innovators: Rob Arnott December 18, 2017
Wall Street Journal: The No-America Portfolio: Two Big Investors Make a Case December 3, 2017
Barron's: Why 'Smart' Funds Can Underperform the Market November 28, 2017
Bloomberg Briefs: Q&A: Chasing Factors Can Destroy Returns: Chris Brightman of Research Affiliates November 27, 2017
Institutional Investor: Quants Spar in Factor Fight November 10, 2017
MarketWatch: Why U.S. Stocks Don't Belong in a Global Portfolio--Now, Say Strategists November 8, 2017
Noted Economist Campbell Harvey Joins Research Affiliates as Partner and Senior Advisor November 6, 2017
Bloomberg News Online: Momentum Investing Has a Place in Portfolios October 24, 2017
Bloomberg News Online: Wall Street Is the New Fantasy Island October 11, 2017
Bloomberg News: Video: Rob Arnott on Smart Beta October 5, 2017
CityWire: Beware of Backtesting! Research Affiliates Issues Smart Beta Warning September 19, 2017
Wall Street Journal: Weighty Questions on Indexing Strategies September 19, 2017
WealthManagement.com: Beware of Backtesting in Smart Beta August 28, 2017
Rob Arnott on Bloomberg TV (August 25, 2017)
Institutional Investor Online: Research Affiliates: Beware of Backtesting August 24, 2017
Barron's Next: Factors to Favor: What The Technicals Say August 23, 2017
Barron's: Rob Arnott: Dump U.S. Stocks, Buy Emerging Markets August 22, 2017
WealthManagement.com: Arnott: Performance Chasing Is Investors' Greatest Sin August 8, 2017
Financial Times: Billionaire Quants Intensify Their 'Smart Factor' Smackdown July 19, 2017
Financial Times: Authers' Note: Factor Fanaticism July 18, 2017
Barron's: Multifactor ETFs: Too Much of a Good Thing? July 8, 2017