The value factor is the only form of smart beta currently
trading at an attractive valuation, according to Research Affiliates.
“Valuations of many of the most popular factors and smart beta strategies are well above historical norms.”Pricing of factor indexes relative to history matters to
investors “every bit as much as they matter when choosing managers, funds, and
individual stocks,” wrote Chairman Rob Arnott, Quantitative Researcher Noah
Beck, and Head of Equity Research Vitali Kalesnik.
of many of the most popular factors and smart beta strategies are well above
historical norms,” the authors stated, citing their own analysis of historical
valuations of eight factor indexes and eight strategies. “We have demonstrated
that these high valuations are indicative of lower future returns, even if they
are not able to provide any prescience on picking peaks or troughs.”
strategies are currently unpopular with investors and as such are “considerably
cheaper than historical norms,” the authors wrote.
illiquidity, and low-beta strategies are all trading near their historic peak
valuations, Research Affiliates’ analysis found. Equal-weighted and quality
indexes are also near all-time highs outside of the US markets.
These are among the
factors attracting the most money from investors, Arnott, Beck, and Kalesnik
said, which they argued was “dangerous.”
In addition, the
authors warned against reading too much into their findings.
“We would offer a word of caution
to those who wish to use these findings to aggressively time strategies,” Arnott,
Back, and Kalesnik wrote. “Timing strategies leads to greater concentration of
risk, so lacks diversification. A noisy signal and weak ability to diversify is
a recipe for disappointment.”
Read the Research Affiliates paper, “To Win With Smart Beta, Ask If the Price Is Right.”
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