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The Buck Stops Here
As we start 2023, the US dollar has pulled back 12% from its high in September 2022, but remains 25% elevated from its lows at the start of the last decade. The US dollar’s long march upward may be ending, squeezed by an expected shrinking interest rate differential with other developed nations that must keep hiking rates to fight inflation. The Fed, however, as US inflation appears to moderate, can also moderate its rate hikes. Our research shows that in a weakening dollar environment, unhedged foreign stocks and bonds should outperform.

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

Which factors have the highest return prospects or lowest transaction costs?

Featured Insights

Revisiting Our “Horribly Wrong” Paper: That Was Then, This Is Now
Five years after the publication of our controversial 2016 paper “How Can ‘Smart Beta’ Go Horribly Wrong?” we analyze how the factors did perform from June 2017 through June 2022. Most fell far short of expectations. Today, we are bullish for the mirror image of the reasons we were cautious in 2016 and 2017. Of the 19 factors we study, 11 are now trading in the cheapest quintile of their historical relative valuation. Now is a promising time to embrace multi-factor investing.
Price-to-Fantasy Ratio: Self-Deception with Forward Operating Earnings
The common error of aggregating individual stocks’ earnings to the market reliably overstates aggregate future market earnings and understates the aggregate market P/E ratio. We analyze the impact this practice may have on earnings estimates for 2023.
History Lessons: How “Transitory” Is Inflation?
Across 14 developed-economy countries over the last half-century, we analyze the behavior of inflation once a country’s inflation rate surges past various thresholds and study how long a burst of inflation typically lingers. If history is a guide, inflation can take far longer to return to normal levels than most people realize. “Transitory” inflation is certainly possible, but it is hardly a sensible central expectation. Messaging and policy response from the US Federal Reserve Bank should reflect the relatively high empirical risk that inflation may persist.
The Silver Lining of Unexpected Inflation
We demonstrate the benefits of an inflation cycle signal that dynamically tilts portfolio allocations during periods when inflation veers from expectations. The signal can be used in both rising and falling inflationary environments.
Necessary Trade-Offs: Climate vs. Investment Objectives for Value Strategies
At certain times, client mandates encompass competing objectives. Today, the competition is frequently between social and investment objectives. We examine the trade-offs investors must be prepared to make if they seek to construct a deep-value strategy concurrently with applying a carbon reduction constraint.
Quantifying the Impact of Direct Indexing
Portfolio customization requires trade-offs. To better understand what those trade-offs entail, we apply five levels of customization to four developed-market equity strategies, ranging from a broad cap-weighted strategy to a deep-value portfolio. Our findings can help frame investors’ expectations about the impacts of direct indexing on their portfolios.
Carbon Intensity for Climate Mitigation: Clearing Up “Scaling” Confusion
Investors can choose one of two popular scaling methods for carbon emissions’ comparisons across companies. Our analysis guides investors in making this important decision.
No Excuses: Plan Now for Recession
The signs of a recession are building. Now is the time to engage in risk management to retain your competitive advantage once the economy emerges from the slowdown.
Rising Risk of Stagflation
Trillions of dollars of deficit spending financed by money creation constrains the Fed’s freedom to raise interest rates enough to tame inflation. The jittery capital markets are reflecting this reality. How can investors reposition their portfolios to protect themselves?
Cam Harvey: Which Yield Curve Inversion Matters?

Recession fears were recently stoked after a brief inversion of the US 10Y/2Y curve. Cam Harvey, RA partner and senior advisor, responsible for the pioneering research on the predictive ability of yield-curve inversions, cautions the relevant inversion is the US 10Y/3M curve. We are not seeing that yet. Bottomline? No code red for recession. Cam explained his research and its implications to Jim Masturzo, CIO of Multi-Asset Strategies, in this evergreen RA Conversation recorded a few years ago.

Cryptocurrencies: The Power of Memes
Cryptocurrency has morphed into a permanently speculative investment vehicle, for which disruption lives forever in the future.
ESG Is a Preference, Not a Strategy
We believe the term ESG strategy is a mischaracterization. The underlying investment process drives the return of the chosen investment strategy, while the ESG preferences reflected in the securities selected for the portfolio do not. We make this distinction not to disparage ESG investing, because we actually view this trait as a benefit and value the ability to align our portfolios’ composition with our beliefs without a meaningful impact on performance.

Insights From Senior Leadership

Predicting Equity Returns with Inflation
Recent conversations in the investment industry are dominated by predictions about the path of the inflation rate and its implications for capital markets. Rather than predicting what will happen to inflation in the future—a particularly arduous and humbling task—we ask a simple question: What can past inflation dynamics tell us about the equity market’s future returns? We find they can tell us a lot.
Revisiting Tesla’s Addition to the S&P 500: What’s the Cost, Before and After?
Tesla entered the S&P 500 Index on December 21, 2020. Over the next six months, AIV, the stock deleted to make way for TSLA, outperformed TSLA by a stupendous margin—exactly as we expected, based on our research. Index rebalances impose a variety of costs on investors. Smarter index design could go far to mitigate these costs.
The Time Is Now: Climate Transition Investing for US Investors
Europe is a step ahead of the United States in climate-related regulation, but we expect a similar regulatory structure will be enacted soon in the United States. US investors have an opportunity now in planning how to align investment decision making with the provisions already outlined by EU regulators.
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.

Featured Journal Articles

Reports of Value's Death May Be Greatly Exaggerated
Winner of the 2021 Graham & Dodd Scroll Award

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 by Rob Arnott, Campbell Harvey, Vitali Kalesnik, and Juhani Linnainmaa.
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. 

Published in the Journal of Portfolio Management by Rob Arnott, Vitali Kalesnik, Campbell Harvey, and Juhani Linnainmaa.
What Is Quality?
Winner of the 2019 Graham and Dodd Top Award

Unlike standard factors, such as value, momentum, and size, “quality” lacks a commonly accepted definition. Practitioners, however, are increasingly gravitating to this style factor. 

Published in the Financial Analysts Journal by Vitali Kalesnik, Jason Hsu, and Engin Kose.
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 by Rob Arnott, Tzee Chow, and Denis Chaves.
Will Your Factor Deliver? An Examination of Factor Robustness and Implementation Costs
Winner of the 2016 Graham & Dodd Scroll Award

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.
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 by Feifei Li, Tzee Chow, Alex Pickard, and Yadwinder Garg.

In The News

Wall Street Journal
January 2023
IPE Magazine
January 2023
November 13, 2022
Institutional Money
October 3, 2022
Bloomberg Markets
September 20, 2022
Yahoo Finance
August 22, 2022

RA Papers On SSRN

September 30, 2022
May 25, 2022
May 5, 2022
January 24, 2022
November 1, 2021
April 29, 2021
March 22, 2021
December 11, 2020
December 11, 2020
Bernstein Fabozzi/Jacobs Levy Award Winner
April 11, 2019
November 24, 2018