Research Affiliates examines whether investors can improve smart beta returns by leaning into cheaper factors and avoiding crowded ones. The paper argues valuations matter more than recent performance, noting many popular strategies traded near historical top decile valuations before weaker out of sample results followed.
Timing “Smart Beta” Strategies? Of Course! Buy Low, Sell High!
Research Affiliates
Rob Arnott
Research
20 Pages
Key Takeaways
Contrarian Timing Works: Selecting the three cheapest factors annually outperformed expensive factors by 3.7% per year from 1977–2016 while also producing higher Sharpe ratios.
Trend Chasing Hurts: Factor trend chasers saw Sharpe ratios fall from 0.52 to 0.14, showing how performance chasing can erode diversification and long term returns.
Post Discovery Decay: Average factor excess returns dropped from 5.8% before publication to 2.4% after publication, suggesting crowded trades may dilute future alpha opportunities.
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