2002—2022
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View long-term expected returns and volatilities for 130 core asset classes.
Which factors have the highest return prospects or lowest transaction costs?
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Rob Arnott, Chair, and Que Nguyen, Head of Product Management, discuss how the RAFI strategy has performed through the first quarter of 2022 and how they anticipate changing market conditions to impact future RAFI performance.
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.
The value rebound that started in September 2020 gave up nearly half its gains by mid-May 2021 as the recovery faltered with the onslaught of the highly contagious Delta variant. But vaccination has proven highly effective, and as the unvaccinated around the world become vaccinated, the prospect of a reinvigorated economy is good. Is now a second chance to rebalance into value stocks?
What ESG theme is most important to clients? What size allocation do adopters make to ESG investing in their managed portfolios? Do adopters prefer active or passive ESG investing strategies? How important is ESG investing to the value proposition advisors and wealth managers offer their clients? Get the answers to these questions and more in the 2021 Research Affiliates ESG Survey Report of financial advisors and wealth managers.
Insights From Senior Leadership
In late 2020, UK stocks, and notably UK value, reached very cheap levels relative to value stocks in other developed economies. 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 particular UK value stocks, making this sector of the market a “trade of the decade.”
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
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.
Factor investing has failed to live up to its many promises. Its success is compromised by three problems that are often underappreciated by investors.
Unlike standard factors, such as value, momentum, and size, “quality” lacks a commonly accepted definition. Practitioners, however, are increasingly gravitating to this style factor.
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.
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.
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.
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