Description
FUNDAMENTALS
Endnotes
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January 2015
Expected inflation is based on the U.S. 10-year break-even inflation rate
as of November 2014. Foreign exchange returns are assumed to be zero,
a parsimonious approach indeed.
9. The institutional portfolio is 30% U.S. Large Cap Equity, 24% EAFE
Equity, 6% EM Equity, 5% Commodities, 5% TIPS, 4% High Yield, 3%
Bank Loans, 3% EM Local Bonds, 10% U.S.
Core Bonds, 5% Long Treasuries, and 5% Foreign Developed Debt. 10. www.researchaffiliates.com/AssetAllocation. 8. We leave it up to you to decide if there is any causation between Mr. Clinton’s election as president (or, indeed, Al Gore’s as vice president) and the subsequent Internet revolution. Fans of the “Back to the Future” movies will recall the “flux capacitor” as the piece of technology that makes time travel possible. In this case the 60/40 portfolio contains 60% S&P 500 Index (total return) and 40% 10-year constant maturity U.S. Treasuries because the more commonly used Barclays U.S. Aggregate Index did not exist until the 1970s. Although we hold out hope that in the next 50 years someone figures out how to upload human consciousness or discovers the Fountain of Youth, we’re not holding our breath. A slightly more complicated model could include an average of dividend yield and Adjusted Funds from Operations (AFFO), but let’s keep things basic for now. The scatter plot we display for bonds is nominal because bonds provide nominal returns: Nominal bond yields correspond to nominal returns. The scatter plot we show for equities is real because equities are real assets: Equity yields correspond to real returns. References Bernstein, William J., and Robert D.
Arnott. 2003. “Earnings Growth: The Two Percent Dilution,” Financial Analysts Journal, vol.
59, no. 5 (September/ October):47–55. Brightman, Chris. 2014.
“The Profits Bubble.” Research Affiliates (January). Garland, James P. 2004. “The Fecundity of Endowments and Long-Duration Trusts,” Economics and Portfolio Strategy (September 15). Masturzo, James, and Michele Mazzoleni.
2015. “GDP Growth: Cutting Through the Noise.” Research Affiliates (January). 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™ 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. ©2015 Research Affiliates, LLC. All rights reserved. 620 Newport Center Drive, Suite 900 | Newport Beach, CA 92660 | + 1 (949) 325 - 8700 | www.researchaffiliates.com Page 6 .
Core Bonds, 5% Long Treasuries, and 5% Foreign Developed Debt. 10. www.researchaffiliates.com/AssetAllocation. 8. We leave it up to you to decide if there is any causation between Mr. Clinton’s election as president (or, indeed, Al Gore’s as vice president) and the subsequent Internet revolution. Fans of the “Back to the Future” movies will recall the “flux capacitor” as the piece of technology that makes time travel possible. In this case the 60/40 portfolio contains 60% S&P 500 Index (total return) and 40% 10-year constant maturity U.S. Treasuries because the more commonly used Barclays U.S. Aggregate Index did not exist until the 1970s. Although we hold out hope that in the next 50 years someone figures out how to upload human consciousness or discovers the Fountain of Youth, we’re not holding our breath. A slightly more complicated model could include an average of dividend yield and Adjusted Funds from Operations (AFFO), but let’s keep things basic for now. The scatter plot we display for bonds is nominal because bonds provide nominal returns: Nominal bond yields correspond to nominal returns. The scatter plot we show for equities is real because equities are real assets: Equity yields correspond to real returns. References Bernstein, William J., and Robert D.
Arnott. 2003. “Earnings Growth: The Two Percent Dilution,” Financial Analysts Journal, vol.
59, no. 5 (September/ October):47–55. Brightman, Chris. 2014.
“The Profits Bubble.” Research Affiliates (January). Garland, James P. 2004. “The Fecundity of Endowments and Long-Duration Trusts,” Economics and Portfolio Strategy (September 15). Masturzo, James, and Michele Mazzoleni.
2015. “GDP Growth: Cutting Through the Noise.” Research Affiliates (January). 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™ 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. ©2015 Research Affiliates, LLC. All rights reserved. 620 Newport Center Drive, Suite 900 | Newport Beach, CA 92660 | + 1 (949) 325 - 8700 | www.researchaffiliates.com Page 6 .
