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RAFI Rocks!! Taking Smart Beta Back to Basics
RAFI™, the genesis of the term smart beta, has produced consistently strong performance over the last 35 years when measured against a style-equivalent, or value, benchmark. It’s time to take a fresh look at an extraordinary idea!

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

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Featured Insights

RAFI™ Fundamental Index: Why Now?
RAFI Fundamental Index strategies are poised to outperform... Currently trading at low valuation levels, RAFI Fundamental Index strategies have a history of outperformance during periods of heightened inflation, bear markets, and recessions.
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.
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.

Featured Journal Articles

Mitigating the Hidden Risks of Factor Investing

Although hidden risks of factor investing can lead to investor disappointment, a variety of techniques can improve the risk-adjusted returns of individual factors and factor portfolios. Specifically, a new two-step volatility management approach, coupled with an optimization technique that captures volatility and correlation information, leads to improved risk-adjusted performance, lower volatility of volatility, and improved kurtosis and drawdown characteristics. 

Published in the Journal of Portfolio Management by Rob Arnott, Vitali Kalesnik, Lillian Wu
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.

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RA Papers On SSRN

March 07, 2023
September 30, 2022
May 25, 2022
May 5, 2022
November 1, 2021
March 22, 2021
December 11, 2020
December 11, 2020
Bernstein Fabozzi/Jacobs Levy Award Winner
April 11, 2019
November 24, 2018