Research Affiliates CIO Raises Private Credit Concerns

Que Nguyen, partner and chief investment officer, equity strategies, at Research Affiliates, joined the firm in 2021 after seven years as a managing director of portfolio strategy and analytics at Willett Advisors.

Nguyen leads cross-sectional equity research and strategy design at Research Affiliates, working with the firm’s academic advisors and with the PIMCO subadvisor’s portfolio managers. Her work supports Research Affiliates’ systematic active portfolios and smart beta indexes.

Nguyen’s career also includes several years as managing director, strategy, in the University of Chicago’s investment office, and leadership posts at other financial services firms.

In May, she wrote a post on the Research Affiliates website noting that the firm believes that generative artificial intelligence has transformative potential and could be in the early stages of becoming an investment bubble.

Nguyen recently responded by email to several questions from ThinkAdvisor about her market insights.

THINKADVISOR: What is your current take on the markets, a segment or sector that you think is really interesting now, and why? What does this mean in terms of specific holdings?

QUE NGUYEN: U.S. exceptionalism has been the mainstay of markets in the last few years, and especially so in the technology ecosystem. As a result, valuation dispersion in U.S. stocks are extremely wide. Even though the cap-weighted U.S. market index appears richly priced, there are many interesting areas of attractive valuation. 

One of the most obvious is small-cap and small-cap value stocks. The S&P 500 trades at a P/E of ~25, while small caps trade at ~16x. I tend to favor active funds or smart beta approaches in small cap, particularly those with a quality component. 

For example, the small-cap fund that we subadvise at PIMCO, the Pimco RAE US Small Fund (PMJAX), explicitly takes into account a variety of quality metrics, such as financial health, capital efficiency and profitability, in selecting companies. 

A smart beta approach that we take is the Fundamental Index (RAFI), where we take into account quality-related metrics such as cash flow, dividends and buybacks in how we weight companies. There are a couple of ETFs that follow the RAFI small-cap indices, including the Schwab Fundamental U.S. Small Company ETF (FNDA) and the Invesco FTSE RAFI US 1500 Small-Mid ETF (PRFZ).

What is your biggest bullish feeling now and why?