Description
FUNDAMENTALS
Endnotes
6.
1.
Poincaré (1913, p. 10).
2.
If it fails to eventually outperform, it’s not undervalued!
3. http:/
/www.researchaffiliates.com/assetallocation.
4.
Although measuring the R2 of our models is possible, the result is not
very useful because samples overlap over long-term horizons. Take U.S.
equities for which data are readily available since the late 1800s, roughly
150 years. We analyze 10-year returns, calculated monthly.
As a result, we have only 15 unique samples. Any regression using monthly data points for 10-year returns will show misrepresented R2 values, because each data point shares 119 of its 120 months with the next data point. Going to non-overlapping returns means we don’t have enough samples for robust results. For example, imagine the same test for the Barclays U.S.
Aggregate Bond Index, which started in 1976—four samples anyone? 5. January 2016 Indices were added as data became available: 8/1971, Russell 2000; 12/1988, MSCI EAFE; 1/1990, Barclays Corporate High Yield; 1/1992, Barclays U.S. Treasury Long; 5/1992, Barclays U.S. Aggregate; 5/1992, JPMorgan EMBI+ (Hard Currency); 4/1994, Barclays U.S.
Treasury 1–3yr; 1/1997, Bloomberg Commodity Index; 3/1997, JPMorgan ELMI+; 1/2001, Barclays U.S. Treasury TIPS; 7/2003, FTSE NAREIT. Analysis is monthly and ends in 2005, the most recent date for which 10-year subsequent returns can be calculated. The range for each of the bars in the chart should be interpreted as including the lower bound but not the upper bound of the range.
For example, the range −2% to 0% includes returns from, and including, −2% up to, but not including, 0%. This standard also applies to the charts in Figures 3–5. 7. These forecasted returns represent return expectations that our methodology would have delivered in past decades. The core elements of the methodology were first described by Arnott and Von Germeten (1983); thus, the methodology is not a data-mining exercise of fitting past market returns. 8. Marks (2013, p.
45). 9. The 4% to 6% bucket is an outlier here; however, this result only occurred in 13 months of the entire 34-year period. 10. http://www.researchaffiliates.com/Production%20content%20library/ AA-Asset-Class-Risk.pdf?print=1. 11. Graham (2006, p. 477) . References Arnott, Robert, and James Von Germeten. 1983.
“Systematic Asset Allocation.” Financial Analysts Journal, vol. 39, no. 6 (November/December): 31–38. Graham, Benjamin.
2006 (1973). The Intelligent Investor—Fourth Revised Edition, with new commentary by Jason Zweig. New York: HarperCollins Publisher. Marks, Howard.
2013. The Most Important Thing Illuminated. New York: Columbia University Press. Poincaré, Henri.
1913. The Foundations of Science. New York City and Garrison, NY: The Science Press. Disclosures The material contained in this document is for general information purposes only.
It is not intended as an offer or a solicitation for the purchase and/or sale of any security, derivative, commodity, or financial instrument, nor is it advice or a recommendation to enter into any transaction. Research results relate only to a hypothetical model of past performance (i.e., a simulation) and not to an asset management product. No allowance has been made for trading costs or management fees, which would reduce investment performance.
Actual results may differ. Index returns represent back-tested performance based on rules used in the creation of the index, are not a guarantee of future performance, and are not indicative of any specific investment. Indexes are not managed investment products and cannot be invested in directly.
This material is based on information that is considered to be reliable, but Research Affiliates™ and its related entities (collectively “Research Affiliates”) make this information available on an “as is” basis without a duty to update, make warranties, express or implied, regarding the accuracy of the information contained herein. Research Affiliates is not responsible for any errors or omissions or for results obtained from the use of this information. Nothing contained in this material is intended to constitute legal, tax, securities, financial or investment advice, nor an opinion regarding the appropriateness of any investment.
The information contained in this material should not be acted upon without obtaining advice from a licensed professional. Research Affiliates, LLC, is an investment adviser registered under the Investment Advisors Act of 1940 with the U.S. Securities and Exchange Commission (SEC).
Our registration as an investment adviser does not imply a certain level of skill or training. Investors should be aware of the risks associated with data sources and quantitative processes used in our investment management process. Errors may exist in data acquired from third party vendors, the construction of model portfolios, and in coding related to the index and portfolio construction process. While Research Affiliates takes steps to identify data and process errors so as to minimize the potential impact of such errors on index and portfolio performance, we cannot guarantee that such errors will not occur. The trademarks Fundamental Index™, RAFI™, Research Affiliates Equity™, RAE™, and the Research Affiliates™ trademark and corporate name and all related logos are the exclusive intellectual property of Research Affiliates, LLC and in some cases are registered trademarks in the U.S. and other countries. Various features of the Fundamental Index™ methodology, including an accounting data-based non-capitalization data processing system and method for creating and weighting an index of securities, are protected by various patents, and patent-pending intellectual property of Research Affiliates, LLC.
(See all applicable US Patents, Patent Publications, Patent Pending intellectual property and protected trademarks located at http:/ /www.researchaffiliates.com/ Pages/ legal.aspx#d, which are fully incorporated herein.) Any use of these trademarks, logos, patented or patent pending methodologies without the prior written permission of Research Affiliates, LLC, is expressly prohibited. Research Affiliates, LLC, reserves the right to take any and all necessary action to preserve all of its rights, title, and interest in and to these marks, patents or pending patents. The views and opinions expressed are those of the author and not necessarily those of Research Affiliates, LLC. The opinions are subject to change without notice. ©2016 Research Affiliates, LLC.
All rights reserved. 620 Newport Center Drive, Suite 900 | Newport Beach, CA 92660 | + 1 (949) 325 - 8700 | www.researchaffiliates.com Page 7 .
As a result, we have only 15 unique samples. Any regression using monthly data points for 10-year returns will show misrepresented R2 values, because each data point shares 119 of its 120 months with the next data point. Going to non-overlapping returns means we don’t have enough samples for robust results. For example, imagine the same test for the Barclays U.S.
Aggregate Bond Index, which started in 1976—four samples anyone? 5. January 2016 Indices were added as data became available: 8/1971, Russell 2000; 12/1988, MSCI EAFE; 1/1990, Barclays Corporate High Yield; 1/1992, Barclays U.S. Treasury Long; 5/1992, Barclays U.S. Aggregate; 5/1992, JPMorgan EMBI+ (Hard Currency); 4/1994, Barclays U.S.
Treasury 1–3yr; 1/1997, Bloomberg Commodity Index; 3/1997, JPMorgan ELMI+; 1/2001, Barclays U.S. Treasury TIPS; 7/2003, FTSE NAREIT. Analysis is monthly and ends in 2005, the most recent date for which 10-year subsequent returns can be calculated. The range for each of the bars in the chart should be interpreted as including the lower bound but not the upper bound of the range.
For example, the range −2% to 0% includes returns from, and including, −2% up to, but not including, 0%. This standard also applies to the charts in Figures 3–5. 7. These forecasted returns represent return expectations that our methodology would have delivered in past decades. The core elements of the methodology were first described by Arnott and Von Germeten (1983); thus, the methodology is not a data-mining exercise of fitting past market returns. 8. Marks (2013, p.
45). 9. The 4% to 6% bucket is an outlier here; however, this result only occurred in 13 months of the entire 34-year period. 10. http://www.researchaffiliates.com/Production%20content%20library/ AA-Asset-Class-Risk.pdf?print=1. 11. Graham (2006, p. 477) . References Arnott, Robert, and James Von Germeten. 1983.
“Systematic Asset Allocation.” Financial Analysts Journal, vol. 39, no. 6 (November/December): 31–38. Graham, Benjamin.
2006 (1973). The Intelligent Investor—Fourth Revised Edition, with new commentary by Jason Zweig. New York: HarperCollins Publisher. Marks, Howard.
2013. The Most Important Thing Illuminated. New York: Columbia University Press. Poincaré, Henri.
1913. The Foundations of Science. New York City and Garrison, NY: The Science Press. Disclosures The material contained in this document is for general information purposes only.
It is not intended as an offer or a solicitation for the purchase and/or sale of any security, derivative, commodity, or financial instrument, nor is it advice or a recommendation to enter into any transaction. Research results relate only to a hypothetical model of past performance (i.e., a simulation) and not to an asset management product. No allowance has been made for trading costs or management fees, which would reduce investment performance.
Actual results may differ. Index returns represent back-tested performance based on rules used in the creation of the index, are not a guarantee of future performance, and are not indicative of any specific investment. Indexes are not managed investment products and cannot be invested in directly.
This material is based on information that is considered to be reliable, but Research Affiliates™ and its related entities (collectively “Research Affiliates”) make this information available on an “as is” basis without a duty to update, make warranties, express or implied, regarding the accuracy of the information contained herein. Research Affiliates is not responsible for any errors or omissions or for results obtained from the use of this information. Nothing contained in this material is intended to constitute legal, tax, securities, financial or investment advice, nor an opinion regarding the appropriateness of any investment.
The information contained in this material should not be acted upon without obtaining advice from a licensed professional. Research Affiliates, LLC, is an investment adviser registered under the Investment Advisors Act of 1940 with the U.S. Securities and Exchange Commission (SEC).
Our registration as an investment adviser does not imply a certain level of skill or training. Investors should be aware of the risks associated with data sources and quantitative processes used in our investment management process. Errors may exist in data acquired from third party vendors, the construction of model portfolios, and in coding related to the index and portfolio construction process. While Research Affiliates takes steps to identify data and process errors so as to minimize the potential impact of such errors on index and portfolio performance, we cannot guarantee that such errors will not occur. The trademarks Fundamental Index™, RAFI™, Research Affiliates Equity™, RAE™, and the Research Affiliates™ trademark and corporate name and all related logos are the exclusive intellectual property of Research Affiliates, LLC and in some cases are registered trademarks in the U.S. and other countries. Various features of the Fundamental Index™ methodology, including an accounting data-based non-capitalization data processing system and method for creating and weighting an index of securities, are protected by various patents, and patent-pending intellectual property of Research Affiliates, LLC.
(See all applicable US Patents, Patent Publications, Patent Pending intellectual property and protected trademarks located at http:/ /www.researchaffiliates.com/ Pages/ legal.aspx#d, which are fully incorporated herein.) Any use of these trademarks, logos, patented or patent pending methodologies without the prior written permission of Research Affiliates, LLC, is expressly prohibited. Research Affiliates, LLC, reserves the right to take any and all necessary action to preserve all of its rights, title, and interest in and to these marks, patents or pending patents. The views and opinions expressed are those of the author and not necessarily those of Research Affiliates, LLC. The opinions are subject to change without notice. ©2016 Research Affiliates, LLC.
All rights reserved. 620 Newport Center Drive, Suite 900 | Newport Beach, CA 92660 | + 1 (949) 325 - 8700 | www.researchaffiliates.com Page 7 .
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