Smart beta strategies have endured a prolonged stretch of disappointing results, falling short of investor expectations. This article explores the underlying causes of that performance and outlines why the conditions ahead could be more favorable.
Passive capitalization-weighted index funds now surpass active management in aggregate investor allocations.
Despite strong year-to-date performance, developed ex-U.S. large-cap equities continue to trade at far more attractive valuations than their U.S. counterparts.
Common sense and economic theory often collide. Take the stubborn belief that government stimulus spending and debt issuance reliably boost economic growth. It is a simple and seductive idea—when the economy falters, the government can step in, inject capital, and jumpstart growth.
Trend-following strategies can offer attractive, positively skewed returns, with large positive outperformance often coinciding with large equity selloffs, thereby offering tail protection.
While gold has offered some protection during stock market downturns by either rising or declining by less than equities, its current high price levels and historical patterns suggest that future returns may be limited.
Simply stated, the U.S. doesn’t save and invest enough. As a result, we pay for too many of our imports by borrowing from our trading partners.
In an era when a select group of tech behemoths has dominated market returns, investors are growing increasingly wary of the concentration risk it poses.
Lost in the focus on the bludgeoning that tariff policy has had on equity markets, is the impact on global currencies. From the end of February through April 3rd, the U.S. Dollar is down 5.1% relative to other developed market currencies (DXY). In addition, we’ve also seen a violent unwinding of the popular currency carry trade.
The parallels between the AI narrative driving the current market and the dot-com bubble of a quarter century ago raise important concerns for investors.
The EV shakeout is underway. When the dust settles, only a few players will remain. Many more will be relegated to the scrapyard of failed ambitions.
According to Research Affiliates’ Asset Allocation Interactive (AAI) online capital market expectations tool, U.S. large-cap equities are expected to yield 3.4% annually over the next 10 years compared to 9.1% for EM equities and 7% for REITs. This left many webinar participants wondering, How does this extra return square with these assets having similar betas?
Dean LeBaron’s name may not be familiar to many readers, especially those who only began their careers in the 21st century. But all of us should know who he is. Before there was even a term for it, Dean was the first truly successful quant.
The article introduces CC CAPE, a modified version of Shiller CAPE, which corrects index biases for improved forecasting. While both measure market valuations for long-term return forecasting, the CAPE Spread helps gauge sentiment for medium-term predictions.
Deregulation is among President Donald Trump’s most enduring policy themes. In his 2016 campaign, he called for widespread deregulation and made it a central plank in both his economic and energy platforms.
Ten years ago, Research Affiliates launched the Asset Allocation Interactive online tool, making our CMEs freely available to the public. With one full cycle complete, we can see what has worked well and where we can improve.
Index funds emerged in the early 1970s and were designed to match rather than beat the market. For decades, they were associated with the capitalization-weighted (CW) market indexes that defined their investment approach.
We are all familiar with this SEC-required warning that “past performance does not predict future performance.”
Many of the myths and controversies surrounding the equity risk premium (ERP) are rooted in semantics: The same term is used for multiple purposes.
Much of modern finance falls into one of two camps, neoclassical finance and behavioral finance. The former posits efficient markets, the latter posits the opposite.
Accumulating inconsistencies in the prevailing paradigm then trigger a crisis, leading to the emergence of new theories and ideas, resulting in a paradigm shift where the old framework is rapidly replaced by a new one.
The latest AI-driven euphoria, led by big tech names that include NVIDIA, has dominated investment sentiment in the post-COVID era. Of course, many investors know that this has driven the U.S. equity market to an all-time high, stretching valuations to an extreme level (U.S. CAPE is at the 98th percentile of historical observations!).
The 2022 broad market downturn across major asset classes came as a nasty surprise to investors. Historically, such an event is very rare, and no one was expecting to see almost all asset classes down for the year. Yet, even though it might seem as if diversification was of no help in 2022, the story changes if we look beyond the major headline asset classes.
News of that day included rioting in northern England, apparently in response to misinformation spread online claiming the person who stabbed to death three children and injured eight others in Southport was a Muslim immigrant.
How an election affects stock market performance depends more on how close and contentious it is than on whether the winner is Republican or Democrat, liberal or conservative.
No one enjoys getting dumped. This holds true in finance and investing as much as it does in romantic relationships. When companies are dumped from the major indexes, their managers and shareholders may feel jilted and their stock may flounder post-breakup.
Following Russia's invasion of Ukraine in the early months of 2022, and the subsequent sanctions imposed by the U.S., some investors were forced to liquidate their Russian investments. Many investors, uncertain about the potential scope of the coming war, also took the opportunity to liquidate their investments in all of Eastern Europe.
First-generation low carbon equity benchmark indices were developed almost a decade ago with the goals of mitigating climate risk and preparing for the transition to a low carbon economy.
While governments responsibly issue debt to fund public investment and dampen the business cycle, the US federal government has borrowed at an increasingly prolificate pace over recent decades.
These are only some of the exciting new applications on everyone’s lips at business gatherings these days, where the conversation often veers to artificial intelligence, which has become the latest “new new thing.”
Over recent decades, the hot tech trends (from search to cellphones to social media to the digital economy and now to AI) have been a predominantly American story.
Nobel laureate Harry Markowitz famously asserted that diversification is the only free lunch in investing. His insight was simple yet profound: by diversifying across assets, investors can achieve higher returns without necessarily increasing risk.
After a decade in the wilderness, value investing roared back to life in 2022, led by long-forsaken sectors such as energy, industrials and even certain retailers. Many portfolios had either intentionally or unintentionally migrated heavily towards “growth at any price” exposures and were caught wrong-footed that year.
It is certainly a confusing economic environment. Jobs growth is strong yet there are constant reports of high-profile company layoffs. The yield curve is inverted suggesting a recession yet the stock market is at a record high.
As the calendar closed on 2023, investors were once again treated to magnificent returns in their stock and bond portfolio.
Following a period of relatively calm asset markets from 2013-2019, in which the CBOE Volatility Index (VIX) averaged just below 15, volatility in asset markets has returned1 and investors have been looking for ways to protect themselves.
“The current fiscal path is unsustainable”. This stark warning comes from the US Treasury Department’s Bureau of the Fiscal Service’s fiscal year-end projections1. Based on current appropriations and tax law, these projections display steadily rising federal spending and flat tax receipts, as a percentage of GDP.
Trench warfare in the early 20th century has been described as long periods of boredom punctuated by moments of terror.
Higher interest rates and inflation are likely to usher in a decade of policy restraint, limited liquidity and macro volatility, pressuring equities and motivating investors to reconsider tactical asset allocation and embrace real assets.
As with most new expressions, “smart beta” is in the process of seeking an established meaning. It is fast becoming one of the most overused, ill-defined, and controversial terms in the modern financial lexicon.
In smart beta, we find that factor returns—net of changes in valuation levels—are much lower than recent performance suggests. In fact, many of the most popular new factors (some 458 at last count) have succeeded solely because they have become more expensive.
With artificial intelligence, systematic investing is entering a new era of disciplined decision-making. Yet, firms face many snags. Rigorous implementation requires collaboration among skillful investment, technology, and quantitative capabilities.
With negligible incremental risk, a RAFI Global Index hypothetically outperformed a Cap-Weighted Global Index by 40 bps per annum and a Cap-Weighted Global Value Index by 2.2% from 2007 to 2022—a 16-year period covering the long value rout and its aftermath.
Research Affiliates explain why their long-term return forecasts have risen across asset classes and the implications of their near-term outlook for U.S. recession.
While inflation dipping below 3% has been welcome news for investors, it’s still early to claim that inflation has been reined in. Our simple analysis shows that inflation rising in the latter half of 2023 would not be surprising.
The Fed’s refusal to pause rates through the first five months of 2023 raises the odds of a hard landing. The magnitude of the yield-curve inversion has increased the risk inherent in the US banking and financial systems. The impending recession is unnecessary and self-inflicted.
US dollar cycles are long.
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.
Tesla’s shares fell by more than 14% on Tuesday, after plunging by 65% in 2022.
