Research Affiliates is warning advisors that past is not prologue and manager selection may not be worth the effort at this late stage of the economic cycle and bull market.
“We can’t find anything in the data in academic circles that indicates that manager selection is a high value add activity for financial advisors, especially because their clients more than institutional investors have a tendency to emphasize recent performance,” John West, the firm’s head of client strategies, told ThinkAdvisor.
Advisors who go along with such performance-chasing are catering to clients when there are many other things they can and should do to add more value, says West.
“Past long-term returns of US equities are negatively correlated with their future long-term returns, whether we use a horizon of 10, 20 or 30 years,” writes West in his piece, “The Most Dangerous (and Ubiquitous) Shortcut in Financial Planning,” part of a series of articles on the firm’s website directed at advisors.
“Your clients’ experience in the capital markets (i.e., relatively high past returns), irrespective of the client’s age, is unlikely to be duplicated in the future.”
A better and easier way to add value for asset selection, says West, is to choose a transparent strategy that emphasizes those factors that drive returns over the long term, such as portfolio turnover, transaction costs, liquidity and certain factors such as value investing.
Research Affiliates is a value-focused firm whose founder and current chairman, Rob Arnott, is considered the “godfather of smart beta.” It doesn’t manage most money directly but designs smart beta indexes and mutual products and ETFs for asset management clients such as Pimco and PowerShares.