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Replay this insightful webinar on Exploring the Effect of Deletions on Index Performance. Rob Arnott and Brent Leadbetter examine the deletion effect in popular indices and explore ways to mitigate this effect through thoughtful portfolio construction.
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How an election affects stock market performance depends more on how close and contentious it is than on whether the winner is Republican or Democrat, liberal or conservative.
Deletions, the stocks dropped by major indexes, have impressive upside. While on average they lag their benchmarks in the year preceding their deletion, they beat them for at least five years post-breakup.
Learn about an innovative way to manage your downside risk, which could enable more consistent performance and potentially enhance returns. Watch the exclusive webinar where we'll introduce you to the Research Affiliates Downside Tracking Error Control framework.
When evaluated against a benchmark, portfolio risk is usually defined as the standard deviation of the excess return to the benchmark. However, investors shouldn't only care about the negative deviations – periods of underperformance. Investment practitioners need a practical tool for managing downside risk. The RADTEC framework is designed to reduce downside volatility and aims to produce higher expected returns.
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The Journal of Portfolio Management (JPM), launched in 1974, has provided key insights into the evolving capital markets over the past 50 years. Through periods of economic uncertainty, JPM has chronicled the rise and fall of financial ideas, shaping the field of portfolio management and influencing modern finance with groundbreaking research.
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.
“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!
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.
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.
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