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Big Market Delusion: Electric Vehicles

The siren song of a “big market”—opened through innovation or disruption, such as the newly beloved electric vehicles market—lures investors to enthusiastically push up prices of all firms in the industry as if each will be a major winner. The reality is that as competitors in an evolving industry, some will fail. Pricing each company’s stock without regard to this fact is the “big market delusion.”

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View long-term expected returns and volatilities for 130 core asset classes.

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Featured Insights

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. The added tailwinds from a final Brexit deal and rapid rates of UK COVID vaccination should lead to a vigorous bounce back in UK stocks in general and UK value stocks in particular, making this sector of the market a “trade of the decade.”
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 and show that an equally weighted portfolio of 16 assets has relentlessly outperformed a 60/40 blend since 1975, supporting the theoretical arguments that underlie the benefits from diversification.
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, 2020, 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.
Green Data or Greenwashing? Do Corporate Carbon Emissions Data Enable Investors to Mitigate Climate Change?

Absent mandatory reporting, much of corporate emissions data are estimated by data providers. The authors find that data on estimated emissions are at least 2.4 times less effective than reported data in identifying the worst emitters and provide little information to identify green companies in brown sectors.

Is ESG a Factor?
Applying the definition of factor robustness established by our Research Affiliates colleagues in their 2016 award-winning paper, we determine that 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.

Insights From Senior Leadership

New Research Insights

Learn more about the latest findings from the Research Affiliates' research team and how we are incorporating these insights into our strategies.

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?
The COVID-19 Crash and the Abandonment of the Pensioner
The COVID-induced crash—notably the crash in interest rates—has boosted the (marked-to-market) unfunded pension obligation for most pension funds by roughly 20% in a single quarter. If we are unable to remedy this problem in relatively short order, how will we close an underfunding gap that has been growing for a generation? By not addressing this shortfall, we are abandoning our pensioners and reneging on the pension promise made by the ERISA legislation passed in 1974.
Leading in Uncertain Times
Leadership is about establishing direction while also improving, aligning, and motivating the team. In good times, these goals are challenging enough, but in times of uncertainty, where we find ourselves now, it demands flexibility, curiosity about alternative routes, and willingness to solicit input from the diverse perspectives of the team.
What a Difference an ESG Ratings Provider Makes!
The need for ESG ratings to help investors construct portfolios in line with their ESG preferences is acute. Unfortunately, both quality and consistency of ratings can hamper the process. We compare the ratings of two well-known ESG ratings providers to highlight why investors need to have a solid understanding of their provider’s methodology.

Featured Journal Papers

Reports of Value's Death May Be Greatly Exaggerated
Value investing has underperformed growth investing for the last 13.5 years. The drawdown is the longest and deepest since 1963 and is explained by value becoming unusually cheap relative to growth. As of June 30, 2020, the relative valuation of the HML value factor fell to the 100th percentile of the historical distribution. Published in the Financial Analysts Journal.
Published in the Financial Analysts Journal by Rob Arnott, Campbell Harvey, Vitali Kalesnik, and Juhani Linnainmaa.
Transaction Costs of Factor-Investing Strategies
Although hidden, the implicit market impact costs of factor investing may substantially erode a strategy’s expected excess returns. The rebalancing data of a suite of large and long-standing factor-investing indexes are used in this study to model these market impact costs. Published in the Financial Analysts Journal.
Published in the Financial Analysts Journal by Feifei Li, Tzee Chow, Alex Pickard, and Yadwinder Garg.
Alice’s Adventures in Factorland: Three Blunders That Plague Factor Investing
Winner of the 2020 Bernstein Fabozzi/Jacobs Award for Outstanding Article
Factor investing has failed to live up to its many promises. Its success is compromised by three problems that are often underappreciated by investors. Winner of the 2020 Bernstein Fabozzi/Jacobs Levy Award for Outstanding Article.
Published in the Journal of Portfolio Management by Rob Arnott, Vitali Kalesnik, Campbell Harvey, and Juhani Linnainmaa.
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.

Published in the Hournal of Portfolio Management by Rob Arnott, Vitali Kalesnik, and Trevor Schuesler.
Will Your Factor Deliver? An Examination of Factor Robustness and Implementation Costs
Winner of the 2016 Graham & Dodd Scroll Award Of Excellence Paper

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.
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. Published in the Journal of Portfolio Management.
Published in the Journal of Portfolio Management by Rob Arnott, Omid Shakernia, Jonathan Treussard, and Michael Aked.
King of the Mountain: The Shiller P/E and Macroeconomic Conditions
Winner of the 2018 Bernstein Fabozzi/Jacobs Award for Best Article
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. Winner of the 2018 Bernstein Fabozzi/Jacobs Levy Award for Best Article.
Published in the Journal of Portfolio Management by Rob Arnott, Tzee Chow, and Denis Chaves.

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RA Papers On SSRN

January 11, 2021
November 2, 2020
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August 25, 2020
June 11, 2020
December 10, 2019
Bernstein Fabozzi/Jacobs Levy Award Winner
April 11, 2019
February 5, 2019
November 24, 2018