Research Affiliates

AgPa #69: Rebalancing Luck

Fundamental Indexation: Rebalancing Assumptions and Performance (2010)
David Blitz, Bart van der Grient, Pim van Vliet
The Journal of Index Investing Fall 2010, 1(2), URL/SSRN

This week’s AGNOSTIC Paper is already more than 10 years old, but still carries a very important message. The core idea is very simple. If you design an investment strategy, you must make decisions about rebalancing. There are two aspects to consider. How much and when. This week’s authors examine the when at the example of fundamental indices. They show that choosing arbitrary rebalancing date(s) introduces substantial luck or bad luck to a strategy. Even more important, this luck or bad luck doesn’t seem to cancel out over time and thus permanently affects real-world returns. Fortunately, however, there are ways to make yourself less dependent from rebalancing luck…

  • Different rebalancing dates lead to different outcomes
  • Rebalancing luck (or bad luck) is relevant and persistent
  • There is a solution: stretch rebalancing over the year

Read the Full Post

AgPa #63: Fire the Winners and Hire the Losers

The Folly of Hiring Winners and Firing Losers (2018)
Rob Arnott, Vitali Kalesnik, Lillian Wu
The Journal of Portfolio Management Fall 2018, 45 (1), URL/research affiliates

I am still in my research on manager selection, so apologies to everyone who doesn’t find that too interesting. We already touched the question on what to do with underperforming managers in AgPa #59 and #60. This week’s AGNOSTIC Paper, however, examines this problem somewhat more generally and delivers some really simple (but psychologically hard-to-execute) common-sense conclusions.

  • Current winners tend to be future losers
  • High fees are the most reliable way to underperform
  • Investors should use factor exposures and valuations to evaluate fund managers

Read the Full Post

AgPa #55: Backtests in the Age of Machine Learning

A Backtesting Protocol in the Era of Machine Learning (2019)
Rob Arnott, Campbell R. Harvey, Harry Markowitz
The Journal of Financial Data Science Winter 2019, URL/SSRN/PDF

I have already written about the pitfalls of research in asset management and the importance of good research practices for the application of machine learning. This week’s AGNOSTIC Paper takes this idea even further and provides a seven-point protocol for empirical research in finance.

Exhibit 2 of Arnott et al. (2019).

Read the Full Post

AgPa #54: Transitory Inflation

How Transitory Is Inflation? (2023)
Rob Arnott, Omid Shakernia
The Journal of Portfolio Management April 2023, URL/Research Affiliates/SSRN

Full disclosure: I am generally skeptic about macro forecasts and I don’t think statements like “We had the same situation in 1980 and therefore things will develop like XYZ.” are much helpful. In economics, two situations are never exactly the same and we humans are very good when it comes to finding patterns in essentially random data. However, given how important the topic over the last years was and still is, I couldn’t resist the temptation. This week’s AGNOSTIC Paper is a little scenario analysis how “transitory” inflation actually was in the past.

  • Transitory inflation would be a historical best-quintile outcome
  • Historically, it took >5 years to get >8% inflation down to 3%

Read the Full Post

AgPa #50: Should We Trust Asset Management Research?

The Pitfalls of Asset Management Research (2022)
Campbell R. Harvey
Journal of Systematic Investing Volume II Issue 1, URL/SSRN

Can we trust the results of academic and practitioner research in asset management? For a blog focusing on summaries of research papers, this is of course a very important question. But even without such an obvious bias, this is a very interesting issue for all who use some form of research for their investment decisions. The author of this week’s AGNOSTIC Paper presents several concerning facts and strongly recommends to not take all research insights at face value…

  • Some concerning facts about finance research
  • Research incentives and multiple testing
  • Practitioner research in asset management

Read the Full Post