The first half of 2017 is shaping up to be unequivocally brutal for value-oriented rebalancing strategies. Wired to avoid pain, we humans know it’s very tempting to ask whether a model or philosophy is broken, especially the moment it dashes expectations.
When investors rely on any particular model all the time—and CAPE is often that model—fatigue inevitably sets in. We believe that a better approach for meeting future spending needs is to blend portfolios based on different models of return expectations.
The Trump bump reveals market expectations of continuing public policies prioritizing stability, inhibiting creative destruction, depressing yields and wage growth, and inflating a profits bubble. If instead, the Administration delivers reforms that allow creative destruction, invigorate growth and raise returns to capital and wages, then the lofty profits of corporate incumbents will be at risk.
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.
Macroeconomic volatility is a useful tool for contrarian investors who are seeking fair value in an equity market characterized by continually rising valuations.
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.
It may not be my money, but it is my job. — Charles Ellis in Investment Policy: How to Win the Loser's Game