Rob Arnott Questions Use of the Smart Beta Strategies He Pioneered

Rob Arnott, founder of Research Affiliates LLC, published a paper earlier this month in which he questions the use of some “smart beta” investment strategies he pioneered, according to a recent article in The Wall Street Journal. Arnott, known by many as the “godfather of smart beta,” says the popularity of some passive-investing strategies are making them expensive, and has “built tools that he says will help investors determine which strategies are overpriced.” In the paper, titled “How Can ‘Smart Bet’ Go Horribly Wrong?” Arnott singles out low-volatility funds, saying that inflows have driven up valuations which, in turn, are […]

The Math of Stock Picking Works Against Active Managers

The concentration of gains in a minority of index fund holdings—a statistical concept called positive skew—makes it extremely difficult for active managers to beat benchmarks, according to a recent Bloomberg article. Research conducted in 2015 found that “the distribution of returns in the stock market is bizarrely lopsided,” the article argues. “It’s a pattern of returns that virtually ensures everyone outside of an indexer owns mostly deadbeat stocks.” According to Rob Arnott of Research Affiliates: “The focus is often on the random walk and the coin toss analogy, and the impact of skewness is overlooked.” In a coin toss, there’s a 50% […]

Asness versus Arnott: The Factor Timing Debate Continues

AQR Management founder Cliff Asness continues to argue that factor timing is “deceptively difficult,” contrary to what Rob Arnott of Research Affiliates would have you believe, says a recent article in Institutional Investor. Asness’ issue, the article says, is with Arnott’s contention that risk premia factors such as value, momentum, growth and volatility have become “overvalued as a result of the rising popularity of smart beta and factor investing strategies” and that investors should “time their exposures to buy low and sell high.” Asness, on the other hand, argues that “diversification, not timing, is the best way to achieve returns […]

Rob Arnott Says Clock is Ticking on Smart Beta ETFs

A smart-beta pioneer, Rob Arnott of Research Affiliates warns that these investment vehicles are in a bubble, says an article in last week’s Bloomberg. Smart-beta ETFs organize securities based on quantitative factors like volatility or “cheapness”, and the article explains that Arnott’s position is nothing new (he publicly battled with Cliff Asness on the topic a year ago). In fact, his firm’s website (Research Affiliates specializes in “cheap-stock” ETFs) offers investors a tool to gauge which funds are “about to pop” and has created a line of indexes that adjust holdings based on variables such as valuation. According to the […]

Arnott: Emerging Markets Hold Promise

Although EM stocks have taken a beating in recent years, things may be looking up, writes Validea CEO John Reese in this week’s TheStreet. Reese offers insight from Research Affiliate’s Rob Arnott, who thinks that, notwithstanding swelled valuations (based on Shiller PE ratios), “emerging-market stocks offer an attractive combination of depressed currencies, low valuations and strong momentum.” Using his guru-based stock screening models, Reese identifies the following five picks that could be poised for growth: Companhia Paranaense De Energia (ELP) generates, transmits, distributes and sells electricity in the Brazilian state of Parana, and scores highly based on its favorable revenue […]