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A Stealth Tax on Prosperity
By Chris Brightman, Alex Pickard
Federal budget deficits are on an unsustainable path that has crowded out saving, depressed investment, and diminished real economic growth. Without fiscal reform, which is economically easy but politically difficult, growth will become anemic.

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Learn from Last Tech Bubble to Embrace GenAI Mania
By Que Nguyen
While enthusiasm about GenAI’s growth may cause a bubble, lessons from the 1990s internet boom can help today’s investors cope with tech mania. A fundamental approach with disciplined rebalancing will provide exposure and mitigate risks.
Alternative to a Manic AI Market: RAFI vs Equal-Weight
By Xi Liu, Matt Lundberg, Thomas Verghese
With soaring valuations driven by AI mania, major tech stocks, including the Magnificent Seven, are at historically high concentration levels in cap-weighted indices. To mitigate concentration risk, investors need a broad-market strategy superior to naïve equal-weight indices.
Active Value Investing: Avoiding Value Traps
By Mario Albuquerque, Xi Liu, Que Nguyen
Value traps erode returns for value investors. A strategy that actively screens out value traps using quality and momentum signals can provide better upside potential through more concentrated, yet less risky exposure to the least expensive stocks.
The Fed’s Wait, Wait, Wait, Then Drip, Drip, Drip Strategy. Can We Achieve a Soft Landing?
By Campbell Harvey
With the economy likely to slow near term, excess labor demand, a sound housing market and risk impacts from an inverted yield curve should dampen any recession. Moreover, Fed rate cuts to reverse an earlier overshoot are key to achieving a soft landing.
Know the Strike Zone and Keep Swinging!
By Jim Masturzo
January 2024
Despite being ineffective in 2022, diversifying asset classes, such as a 3-asset portfolio of TIPS, REITS and commodities, are a straightforward and powerful way to manage macro exposures and elevated equity volatility in a core 60/40 portfolio.
Harnessing Volatility Targeting in Multi-Asset Portfolios
By Jim Masturzo, Ari Polychronopoulos
January 2024
Volatility targeting, adjusting portfolio leverage to keep volatility close to target, seeks a more stable ride for investors over time. Applied to multi-asset class portfolios, the approach can enhance diversification and risk-adjusted returns.
The Current Fiscal Path is Unsustainable. Will We Do the Right Thing?
By Chris Brightman
Soaring deficit spending, occurring in a period of tepid GDP growth and rising real interest rates, continues to push federal debt as a percentage of GDP to higher levels, making the current fiscal path unsustainable and the need for reform urgent.
Yield Curve, Banking Risk, and Recessions
By Campbell Harvey
In the 1980s, Cam Harvey developed a model for predicting future economic growth based on the slope of the term structure. Since its inception, his model has accurately predicted every recession without any false signals. In this video, Cam provides insight into the model's origins. He also delves into the present economic landscape, touching upon inflation, the potential impact of an inverted yield curve triggering a wider banking crisis, and shares his perspective on the likelihood of an impending recession.
Long Periods of Boredom
By Que Nguyen
Equities are not overextended from a valuation, earnings or sentiment perspective, relative to recent history. Yet market concentration poses a meaningful risk for investors that can be addressed by considering fundamentally weighted indexes in place of cap weighted benchmarks.
From Abundance to Austerity: Why the Next Decade Won’t Be Like the Last
By Jim Masturzo
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.
We are All Quants. The New Era of Systematic Investing
By Campbell Harvey
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.
Rocking with RAFI: International Evidence
By Rob Arnott, Brent Leadbetter, Que Nguyen
From 2007 to 2022, a hypothetical RAFI index, whose constituents are weighted based on their economic footprint, outperformed cap-weighted broad market and value indices not only in the US but also in Developed, Developed ex US, and Emerging Markets.
The NVIDIA/AI Singularity: Breakthrough, Bubble, or Both
By Rob Arnott, Chris Brightman, Thomas Verghese
Nvidia is a key player in the AI revolution. Expectations, however, are truly astronomical and draw to mind past technology giants like Qualcomm and Cisco who grew into market leaders but offered disappointing returns to investors who bought at the peak.

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Featured Journal & Working Papers

Reimagining Index Funds
By Rob Arnott, Chris Brightman, Xi Liu, Que Nguyen

“Gold-standard” cap-weighted indices have a buy-high and sell-low dynamic that causes a structural long-term performance drag. Of course, relative to itself, no index can underperform, which is the reason it goes unnoticed. If we use a company’s fundamentals to choose stocks—and then cap-weights them – improves the risk-adjusted returns of gold-standard cap-weighted indices. This index, which we call Fundamental-selection Cap-weighted (FS-CW), has outperformed the most popular cap-weighted equity indices around the world over the last 30 years, while reducing risk, and with additional benefits of slightly lower turnover and transaction costs. Live results further support its merits. Building a better index fund that can earn a superior risk-adjusted return versus other cap-weighted indices is not only possible—it is a reality! 

Published in the Journal of Investment Management
Is Sector Neutrality in Factor Investing a Mistake?
By Sina Ehsani, Campbell Harvey, Feifei Li

We show analytically and empirically that the long–short investor is more likely to benefit from hedging out sector bets, whereas the long-only investor is more likely to benefit from investing in the factor as it stands. 

Published in Financial Analysts Journal
How Transitory is Inflation?
By Rob Arnott, Omid Shakernia

Across 14 developed-economy countries over the past half-century, the authors analyze the behavior of inflation once a country’s inflation rate surges past various thresholds and study how long a burst of inflation typically lingers. If history is a guide, inflation can take far longer to return to normal levels than most people realize. Transitory inflation is certainly possible, but it is hardly a sensible central expectation. Messaging and policy response from the US Federal Reserve Bank should reflect the relatively high empirical risk that inflation may persist. 

Published in the Journal of Portfolio Management
Earning Alpha by Avoiding the Index Rebalancing Crowd
By Rob Arnott, Chris Brightman, Vitali Kalesnik, Lillian Wu
Traditional capitalization-weighted indices generally add stocks with high valuation multiples after persistent outperformance and sell stocks at low valuation multiples after persistent underperformance. It is well known that the price impact of these changes can be large once a change is announced. The subsequent reversal is less well known. For example, in the year after a change in the S&P 500 Index, discretionary deletions beat additions by 22%, on average. Simple rules, such as trading ahead of index funds or delaying reconstitution trades by 3 to 12 months, can add up to 23 basis points a year. This benefit roughly doubles when we cap-weight a portfolio selected based on the fundamental size of a company’s business or on its multi-year average market-cap.
Published in the Financial Analysts Journal
Smart Rebalancing
By Rob Arnott, Feifei Li, Juhani Linnainmaa

Implementation shortfall, whether from trading costs, discontinuous trading, or other frictions, erodes the performance of any investment strategy. These frictions, along with asset management fees, are the main sources of the sometimes-vast gap between live results and paper portfolio performance. Smart beta and factor strategies are not exceptions. In this paper, we investigate how smart rebalancing methods can capture most of the factor premia for a long-only paper portfolio, while cutting turnover and trading costs relative to a fully rebalanced portfolio. We demonstrate the efficacy of prioritizing trades to the stocks with the most attractive signals and of focusing portfolio turnover on the trades that offer the highest potential performance impact. 

Published in Financial Analysts Journal.
Mitigating the Hidden Risks of Factor Investing
By Rob Arnott, Vitali Kalesnik, Lillian Wu

Although hidden risks of factor investing can lead to investor disappointment, a variety of techniques can improve the risk-adjusted returns of individual factors and factor portfolios. Specifically, a new two-step volatility management approach, coupled with an optimization technique that captures volatility and correlation information, leads to improved risk-adjusted performance, lower volatility of volatility, and improved kurtosis and drawdown characteristics. 

Published in the Journal of Portfolio Management
The Avoidable Costs of Index Rebalancing
By Rob Arnott, Chris Brightman, Vitali Kalesnik, Lillian Wu

Traditional cap-weighted indices generally add stocks with high valuation multiples and sell stocks at low valuation multiples. For the S&P 500 Index, in the year after a change in the index, additions lose relative to discretionary deletions by about 22%. Simple rules, such as trading ahead of index funds or delaying reconstitution trades by 3 to 12 months, can add up to 23 bps. This benefit doubles when a portfolio selected based on the fundamental size of a business or its multi-year average market cap is then cap-weighted. 

Published on SSRN

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