Nearly seven years have passed since the publication of our 2016 paper “How Can ‘Smart Beta’ Go Horribly Wrong?”

A common error of earnings aggregation from stocks to the market persists.

The US Federal Reserve Bank’s expectations for the speed of reverting to 2% inflation levels remains dangerously optimistic.

In the 1980s there was a famous TV ad for Wendy’s with the tagline “Where’s the beef?”.

Now is the time to engage in risk management to retain your competitive advantage once the economy emerges from the slowdown.

Research Affiliates discusses the outlook for U.S. inflation expectations, and explains their business cycle model and how it informs portfolio positions.

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?

Value has its day in the sun. But are investors learning the right lessons from it?

We have observed that additions and deletions to the S&P 500 Index follow a dependable pattern: additions underperform and deletions overperform over the subsequent 12-month period.

The “big market delusion” is when all firms in an evolving industry rise together, although as competitors ultimately some will win and some will lose.

In late 2020, a new kid emerged on the bargain-of-the-decade block. UK stocks, and notably UK value, reached very cheap levels relative to value stocks in other developed economies. Today, UK value remains at remarkably low valuations relative to most of its fundamentals.

Over the last dozen years, investors holding the classic US 60/40 portfolio were substantially better off than their diversified peers, yet now is not the time to abandon diversification and diversifying asset classes. We believe it is imprudent to trust that escalation in valuations will continue unabated into the next decade...

On December 21, Tesla will be the largest company ever to enter the S&P 500 Index. Tesla’s skyhigh valuation, which meets our real-time definition of a bubble, conforms to the observation that market-cap-weighted indices buy high and sell low—the antithesis of prudent investing.

Between mid-February and late March 2020, we saw a “take no prisoners” market crash. Anything with a whiff of perceived risk crashed, in direct proportion to its perceived risk. The only assets that soared—because of tumbling interest rates—were long Treasury bonds, and with them, the net present value of pension obligations.

The Fama–French value factor, and value investing in general, has suffered an extraordinarily long 13.3 years of underperformance relative to the growth investing style. The current drawdown has been by far the longest as well as the largest since July 1963. Arnott, Harvey, Kalesnik, and Linnainmaa examine the potential causes of value’s underperformance and provide estimates of value’s performance relative to growth’s performance under different revaluation scenarios over the next decade.

My guest, Rob Arnott, is here to discuss the big questions that should concern all advisors and their clients. How deep and how prolonged will the expected recession be? Have we reached a tipping point where we have passed the maximum level of fear? If so, how should advisors allocate their clients’ assets? What is in store for the capital markets over next decade

Uncertainty continues to dominate global securities markets and heightened volatility is the result. Feifei Li, partner and head of equities, asks Rob Arnott, the founder and chairman of Research Affiliates, about the implications of increased volatility on investment strategies and where investors can find the best opportunities.

Rob Arnott shares his perspective on the ongoing market crisis in a Q&A with Jonathan Treussard. He suggests the time to buy is when investors are at “peak fear.” In the weeks ahead, that point will come and bargains will make themselves self-evident to the disciplined investor. The window of opportunity will be short, but highly rewarding over the longer term.

The current drawdown has been by far the longest as well as the second largest since July 1963, eclipsed only by the tech bubble from 1997 to 2000. Arnott, Harvey, Kalesnik, and Linnainmaa examine the potential causes of value’s underperformance and provide estimates of value’s performance relative to growth’s performance under different revaluation scenarios over the next decade.

Now is the season for forecasting as one decade turns into the next. Pundits and market prognosticators too often treat nowcasts as true market forecasts, which can be very dangerous for investors’ financial health. Our forecasts for the decade ahead rely on empirically driven quantitative models.

Key Points

• In a prolonged anti-value momentum-driven rally, it’s easy and natural to forget the long-term value proposition of a rebalancing discipline.
• The evidence and intuition underlying a contrarian value investing discipline has proven merit in cycle after cycle across history.
• By steadily rebalancing against the market’s most extravagant bets, RAFI strategies are positioned to recoup accumulated shortfall at the cycle’s turn, delivering meaningful long-term value-add.
• The continued outperformance of today’s most dominant companies is unlikely to be sustainable in the long run.

Looking back over the last 15 months, the authors assess their success at identifying asset bubbles and anti-bubbles in April 2018. The scorecard is in their favor. More importantly, however, they review how their definitions of a bubble and an anti-bubble continue to provide useful insights for where investors can find value in today’s global markets.

Traditional index funds match market performance and have negligible trading costs with low tracking error—or do they? Not actually—they routinely buy after high price appreciation and sell after high price depreciation. They also have significant trading costs from adding and deleting stocks. We show how index providers can construct better-performing indices that are less prone to performance chasing and have lower turnover.

Investors and their advisors must be alert to managing both pre-tax and after-tax alpha in order for investors to realize the highest possible return from their taxable portfolios. Increasingly, the opportunities to accomplish both goals are within reach of investors through, for example, tax-advantaged smart beta strategies and tax-efficient vehicles such as ETFs.

It may be time for U.S. investors to challenge their home-country equity biases.

With sky-high valuations in the US stock market, and what we believe is a tech bubble that has dangerous implications for other areas of the market, we suggest four actions investors can take now to avoid the inevitable bursting of the bubble, and which will likely benefit their portfolios’ long-term performance potential.

Beware the consequences of assuming that elevated CAPE ratios are here to stay, but if they are the "new normal," low future returns are likely to be the "new normal" as well.

Momentum is one of the most compelling factors in theoretical long–short paper portfolios, but live results of momentum strategies fall short of theoretical returns. Thoughtful implementation, a careful sell discipline, and an avoidance of stocks with stale momentum can narrow the gap between paper and live results.

An analysis of five international stock markets indicates that published findings of a correlation between US stock returns and the political party in the White House are spurious, highlighting the importance of caution in interpreting historical investment data.

Our analysis of three first-generation smart beta strategies shows factor-replicated portfolios are ineffective substitutes for their smart beta counterparts, exhibiting poorer performance, high turnover, and low capacity.

In 2016, Research Affiliates published a series of articles challenging the “smart beta” revolution. We pointed out that, while there is merit in many factor tilt and smart beta strategies, performance chasing in these strategies—buying the popular outperforming strategies whose relative valuations are at extremely high levels—can be just as dangerous as performance chasing in other realms of asset management.

In a series of articles we published in 2016, we show that relative valuations predict subsequent returns for both factors and smart beta strategies in exactly the same way price matters in stock selection and asset allocation.

In their latest piece, Rob Arnott and Brandon Kunz of Research Affiliates take a look at how the rare combination of exceptional valuation levels, depressed currencies, and powerful price and economic momentum should encourage long-term investors to “throw their hats” into the emerging markets rink.