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Just Published

Are You a Climate Investor or Growth Investor?
By Ari Polychronopoulos, Joe Steidl
Not all climate transition benchmarks are the same and investors should be aware of unintended factor exposures, notably growth tilts, in many strategies. An index integrating climate reduction with balanced factor exposure is a compelling alternative.

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A Stealth Tax on Prosperity
By Chris Brightman, Alex Pickard
Federal budget deficits are on an unsustainable path that has crowded out saving, depressed investment, and diminished real economic growth. Without fiscal reform, which is economically easy but politically difficult, growth will become anemic.
Learn from Last Tech Bubble to Embrace GenAI Mania
By Que Nguyen
While enthusiasm about GenAI’s growth may cause a bubble, lessons from the 1990s internet boom can help today’s investors cope with tech mania. A fundamental approach with disciplined rebalancing will provide exposure and mitigate risks.
Alternative to a Manic AI Market: RAFI vs Equal-Weight
By Xi Liu, Matt Lundberg, Thomas Verghese
With soaring valuations driven by AI mania, major tech stocks, including the Magnificent Seven, are at historically high concentration levels in cap-weighted indices. To mitigate concentration risk, investors need a broad-market strategy superior to naïve equal-weight indices.
Active Value Investing: Avoiding Value Traps
By Mario Albuquerque, Xi Liu, Que Nguyen
Value traps erode returns for value investors. A strategy that actively screens out value traps using quality and momentum signals can provide better upside potential through more concentrated, yet less risky exposure to the least expensive stocks.
The Fed’s Wait, Wait, Wait, Then Drip, Drip, Drip Strategy. Can We Achieve a Soft Landing?
By Campbell Harvey
With the economy likely to slow near term, excess labor demand, a sound housing market and risk impacts from an inverted yield curve should dampen any recession. Moreover, Fed rate cuts to reverse an earlier overshoot are key to achieving a soft landing.

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Featured Journal & Working Papers

Smart Rebalancing
By Rob Arnott, Feifei Li, Juhani Linnainmaa

Implementation shortfall, whether from trading costs, discontinuous trading, or other frictions, erodes the performance of any investment strategy. These frictions, along with asset management fees, are the main sources of the sometimes-vast gap between live results and paper portfolio performance. Smart beta and factor strategies are not exceptions. In this paper, we investigate how smart rebalancing methods can capture most of the factor premia for a long-only paper portfolio, while cutting turnover and trading costs relative to a fully rebalanced portfolio. We demonstrate the efficacy of prioritizing trades to the stocks with the most attractive signals and of focusing portfolio turnover on the trades that offer the highest potential performance impact. 

Published in Financial Analysts Journal.
Breaking Bad Trends
By Christian Goulding, Campbell Harvey, Michele Mazzoleni
Trend breaks—turning points in the trajectory of asset prices—have increased in recent years. Trend-following strategies can be repaired by exploiting the return-forecasting properties of market corrections and rebounds. Published in Financial Analysts Journal.
Published in Financial Analysts Journal.
Reimagining Index Funds
By Rob Arnott, Chris Brightman, Xi Liu, Que Nguyen

“Gold-standard” cap-weighted indices have a buy-high and sell-low dynamic that causes a structural long-term performance drag. Of course, relative to itself, no index can underperform, which is the reason it goes unnoticed. If we use a company’s fundamentals to choose stocks—and then cap-weights them – improves the risk-adjusted returns of gold-standard cap-weighted indices. This index, which we call Fundamental-selection Cap-weighted (FS-CW), has outperformed the most popular cap-weighted equity indices around the world over the last 30 years, while reducing risk, and with additional benefits of slightly lower turnover and transaction costs. Live results further support its merits. Building a better index fund that can earn a superior risk-adjusted return versus other cap-weighted indices is not only possible—it is a reality! 

Published in the Journal of Investment Management
Is Sector Neutrality in Factor Investing a Mistake?
By Sina Ehsani, Campbell Harvey, Feifei Li

We show analytically and empirically that the long–short investor is more likely to benefit from hedging out sector bets, whereas the long-only investor is more likely to benefit from investing in the factor as it stands. 

Published in Financial Analysts Journal
How Transitory is Inflation?
By Rob Arnott, Omid Shakernia

Across 14 developed-economy countries over the past half-century, the authors 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. 

Published in the Journal of Portfolio Management

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