To win with ‘Smart Beta’, ask if the price is right is the suggestion of Rob Arnott, Noah Beck, and Vitali Kalesnik, Ph.D in their latest paper on the subject for Research Affiliates.
The paper reveals that over the past half-century, almost all of the eight factors and eight smart beta strategies they have studied exhibit a negative relationship between starting valuation and subsequent five-year performance.
“Today, valuations of many of the most popular factors and smart beta strategies are well above their historical norms, forecasting lower future returns,” the paper says. “Our findings are robust for both factors and smart beta strategies across horizons out to five years, using both a simple price-to-book ratio and an aggregate valuation measure, in US, developed ex-US, and emerging markets.
The practical implication for investors is simple: valuations matter, the authors conclude.
The paper can be found here: Research Affiliates.