Research Affiliates

FEATURED

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.

Live from Newport Beach. It's Smart Beta! Investors don’t have the luxury of re-takes—investing committed capital is “live.” But all too often smart beta investors must make decisions based on backtests. We point out a few things investors can do to get the benefits they expect.

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.

(Video) A Smart Beta for Sustainable Growth Chris Brightman, Vitali Kalesnik, and Mark Clements explain why a systematic smart beta strategy that invests in profitable companies with conservative investment can diversify value exposures while also delivering strong positive excess return from sustainably faster growth in EPS.

Cost and Capacity: Comparing Smart Beta Strategies The significant growth in smart beta investing leads to potential alpha erosion when trading volume affects security prices. Our research shows how market impact costs due to rebalancing affect the capacities of popular strategies.

Time Diversification Redux Understanding how a common and simple definition of risk, such as the standard deviation of returns, differs over various time horizons has important implications for investors. We discuss why the relationship between investment horizon and risk matters.

CAPE Fatigue When investors rely on any particular model all the time-and CAPE is often that model-fatigue inevitably sets in. We believe that a better approach for meeting future spending needs is to blend portfolios based on different models of return expectations.

Underweight FANMAG? Chillax! If it seems everyone's portfolios—except yours—are overweight the FANMAG stocks, chillax! We're here to remind you not to forget the long–term value proposition of contra–trading: trimming pricey stocks and rebalancing into unloved stocks, exactly what the RAFI strategies are designed to do.

I Was Blind, But Now I See: Bubbles in Academe Academia is just as susceptible to bubbles in theories, insights, and models as is the financial and investment industry in following market pricing trends. Clear-eyed skepticism and a commitment to the scientific method can help us all avoid the bubble's forming in the first place.

Presidential Politics and Stock Returns: Is the Relation Real or Spurious? An analysis of five international stock markets indicates that published findings of a correlation between US stock returns and the political party in the White House are spurious, highlighting the importance of caution in interpreting historical investment data.

Public Policy, Profits, and Populism The Trump bump reveals market expectations of continuing public policies prioritizing stability, inhibiting creative destruction, depressing yields and wage growth, and inflating a profits bubble. If instead the Administration delivers reforms that allow creative destruction, invigorate growth, and raise returns to capital and wages, then the lofty profits of corporate incumbents will be at risk.

Which RAFI Index Strategy Is Right for You? RAFI and RAFI Dynamic Multi-Factor have different risk and return characteristics. The choice between the two strategies should be determined by an investor’s objectives and their institutional governance mechanism.

Why Factor Tilts Are Not Smart “Smart Beta” Our analysis of three first-generation smart beta strategies shows factor-replicated portfolios are ineffective substitutes for their smart beta counterparts, exhibiting poorer performance, high turnover, and low capacity.

The Incredible Shrinking Factor Return Managers who favor high factor loadings on market beta, value, or momentum generally do not derive nearly as much incremental return as theoretical factor return histories would suggest, and the culprit appears to be the real-world costs of implementation.

MULTI-FACTOR

RAFI Multi-Factor RAFI Multi-Factor is a smart beta equity strategy that offers diversified factor exposures through allocations to value, low volatility, quality, momentum, and size.

A Smoother Path to Outperformance with Multi-Factor Smart Beta Investing You can outperform the market with substantially lower relative risk by diversifying across simple smart beta strategies based on a half dozen robust factors. Dynamically rebalancing these factor-based smart betas significantly improves returns.

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

A Framework for Assessing Factors and Implementing Smart Beta Strategies

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.

SMART BETA

Forecasting Smart Beta and Factors: History Is Worse than Useless Past is NOT prologue. With the proliferation of smart beta and factor strategies, investors should be vigilant to the pitfalls of data mining and performance chasing. Relative valuations can predict the long-term future returns of strategies and factors —not with any short-term precision— but well enough to add material value. Useful forecasting models should furthermore address implementation costs.

How Not to Get Fired with Smart Beta Investing Lengthening the evaluation horizon, combining robust strategies, codifying investment beliefs, and improving communication can strengthen—and prolong—the principal–agent relationship.

Charting the Journey in Smart Beta Historical factor returns—net of changes in valuation levels—are much lower than recent performance suggests. In fact, many of the most popular new factors (some 458 at last count) have succeeded solely because they have become more expensive. This trend matters to investors because rising valuation levels inflate past performance, reduce potential future performance, and amplify the risk of mean reversion to historical valuations.

Rethinking Conventional Wisdom: Why NOT a Value Bias? Not all long-term sources of excess return are treated equally in portfolios, frustrating investors’ ability to meet their financial goals. Asset owners and their agents need to act now to address the primary sources of this disconnect: cognitive bias and principal–agent conflict.

ASSET ALLOCATION

Quest for the Holy Grail: The Fair Value of the Equity Market Macroeconomic volatility is a useful tool for contrarian investors who are seeking fair value in an equity market characterized by continually rising valuations.

Record Low Costs to Trade! Mean reversion is as applicable to trading costs as it is to valuation. Today’s costs to trade are at 56-year historical lows; they are due to rise soon. Now is the time to position your portfolio ahead of expected higher costs to trade and lower equity prices.

Next Season’s Meager Harvest in Commercial Real Estate US commercial property investors reaped high real returns over the last five years, but the climate is changing. Property prices are high, yields are low, and future expected returns portend a scantier harvest over the coming decade.

ACTIVE STRATEGIES

Systematic Global Macro The alternative factor premia of carry, momentum, and value may be combined to produce an attractive and diversifying source of investment return relative to the low yields and low returns of mainstream stocks and bonds.

VIDEOS

(Video) Why Factor Tilts Are Not Smart “Smart Beta” We challenge the common view that “smart beta” strategies and factor tilts are the same. In fact, factor-replicated portfolios are poor substitutes for their smart beta counterparts. Performance is poor, turnover is high, and capacity is terrible. Why? Implementation details matter—both for performance and for trading costs.

Alice in Factorland and the Incredible Shrinking Factor Return Research by Rob Arnott, Vitali Kalesnik, and Lillian Wu shows that factor-tilt strategies suffer from substantial return slippage (vs. factor long–short paper portfolios) due to the real-world costs of implementation.

INTERACTIVE TOOLS

OUR STRATEGIES

RAFI™ Strategies RAFI strategies aim to generate excess returns versus the market benchmark through a systematic, contrarian rebalancing approach.

Click here for the Strategy Performance
Summaries.

All Asset All Asset strategies are global tactical asset allocation (GTAA) solutions that aim to deliver attractive real returns, equity diversification, and inflation protection via tactical long-only exposures.

RAE™ RAE systematic active equity strategies seek to generate superior risk-adjusted returns.

Global Macro The Global Macro strategy aims to deliver uncorrelated absolute returns through leveraged long–short exposures to liquid derivatives contracts.

RA Working Papers on SSRN