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Que Nguyen, Reasearch Affiliates

Portfolio > Portfolio Construction > Investment Strategies

Research Affiliates CIO Raises Private Credit Concerns

By Dinah Wisenberg Brin

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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?

Longer term, we continue to believe in mean reversion, and that makes me bullish on value investing, both in small cap and large cap. The valuation dispersion between value and growth is now on par with the tech bubble. This gives investors an opportunity to buy some quality companies at cheap valuations.

What’s your biggest bearish view or concern and why?

I am joining the chorus of voices raising concern about the private credit boom. There has been a huge amount of money raised for private credit, creating competition in lending markets, which has resulted in private lending with lower quality and few covenants. Sound familiar? 

Some of these private funds are also levered, so the risk of capital impairment multiplies. While the risks are unlikely to be systemic, the risk of investors receiving subpar returns or negative returns is material.

What’s your top advice to advisors on helping clients now? Anything specific regarding market moves, repositioning or moving cash? Any strategic or tactical thoughts on portfolios and investing that you’d like to share?

The classic, proven, best practices in investing still hold — diversify and rebalance. 

Diversifying means that you own a little bit of everything, from the Nvidias and Microsoft to the Dillards and Allison Transmissions. It also means that you don’t have too much concentration in a stock or type of stock, and that you will own some investments that seem unexciting, such as bonds or TIPS.  

But each has a role to play in a portfolio by adding attractive diversification features. Rebalancing is just the discipline of selling high and buying low. While this practice may feel uncomfortable at times — “Why would I sell Nvidia to buy Wells Fargo?” — it keeps the portfolio risks managed and prevents investors from getting out over their risk-taking skis.

Who and what are you watching now, whether a key indicator, policy move or particular person?

Like everyone else, I’m watching the Fed and the other central banks around the world. Right now, I think the [Bank of Japan] is particularly interesting as they navigate a path out of 20 years of zero, or even negative, interest rates. 

Dinah Wisenberg Brin

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