Research Affiliates launched a new suite of benchmarks in late January that purport to do a better job of predicting future returns with valuation inputs. If that’s not enough to re-up the conversation, the firm is also launching a public website on Thursday that will let users tinker with different factors to see which will deteriorate due to inflated valuations. It can also be adjusted to include variables like trading costs.
“The consultant community brings forward to their clients rosters of managers and strategies with great three, five, 10-year performance, and not one of them pairs that with whether the strategy is trading rich or cheap,” Arnott said. “Our website will put it on the front burner, it will make it so obvious that this is a very basic question.”
For example, low-volatility and even the Research Affiliates RAFI low-volatility index look historically expensive according to Arnott’s new tool, a signal that investors should reduce their weight. Meanwhile, quality and value look like good buys.
Arnott says he doesn’t advocate completely selling out of expensive strategies. Factors like low vol can be important portfolio building blocks and offer other benefits like diversification. Still, investors could juice their returns by adjusting their portfolios based on valuations, he said.
“It’s hard to beat a process in which you maintain steady tilts,” Arnott said. “The way you beat it is by making modest tilts, like fading what’s expensive.”
This article was provided by Bloomberg News.