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Hasn't inflation already come down faster than expected? What does history suggest about the length of time it takes inflation to recede to 2%? What are Research Affiliates’ long-term inflation expectations across the globe? Join a conversation with Rob Arnott and Omid Shakernia as they discuss these very questions and share their latest research findings on what history informs us about our current and prospective inflationary environment.
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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.
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.
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