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Paper finds that valuations matter in smart beta

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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.

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