DUMB “SMART BETA” INVESTING: ONE OF ITS PIONEERS SAYS IF THE PRICE IS WRONG IT CAN BE REALLY DUMB. ROBERT ARNOTT WEIGHS IN
When ‘smart beta’ investing can be dumb! Financial innovator and thought leader, Research Affiliates’ Robert Arnott warns about pitfalls with the popular strategy he helped create.
WEALTHTRACK Episode #1325; Originally Broadcast on December 09, 2016
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- Guest Info
- Action Point
- One Investment
- Stock Mentions
- Video Archive
- Web Extra
- Chairman, CEO
- Research Affiliates
Shared from Research Affiliates:
- Timing “Smart Beta” Strategies? Of Course! Buy Low, Sell High!
- To Win with “Smart Beta” Ask If the Price Is Right
- How Can “Smart Beta” Go Horribly Wrong?
Another day, another stock market rally, and yes, more records being set. The Dow Industrials, the S&P 500 and the Nasdaq Composite all finished at new peaks.
Since the November 8th presidential election, the bull market has accelerated, adding to the rationale that passive index investing is a better choice than investing with traditional active managers.
Since 2009, passively managed funds, based on market indexes like the S&P 500, have exploded, from 11% of global assets under management to 19% last year, a 73% gain, with no slowdown in sight.
Investors are switching for two reasons. The most important being that market based index funds have been outperforming the vast majority of actively managed funds for the last decade.
According to the investment classic, Winning The Loser’s Game: Timeless Strategies For Successful Investing” by financial thought leader and frequent WEALTHTRACK guest, Charles Ellis:
“In round numbers, over one year, 70 percent of mutual funds under perform their chosen benchmarks. Over 10 years, 80 percent under perform.”
The other major reason: index fund fees are much lower than actively managed ones, and they are falling rapidly. Many of them now charge just 0.05%, or 5/100ths of a percent!
This week’s guest has been critical of traditional index funds because they are based on what’s known as market capitalization weighted indexes, which means the index is dominated by the companies with the largest stock market value. The top 10 companies by market weight in the S&P 500 for instance account for nearly 20% of the index. They include three of the so called FANG stocks: Facebook, Amazon and Google parent Alphabet, as well as blue chip giants like Microsoft, Exxon Mobil and Johnson & Johnson.
Critics of these traditional market cap weighted indexes say that’s the problem. Investors end up owning the most expensive stocks, whereas smaller companies, or those not appreciating as much, or declining more, have much less of a share.
This week’s guest is Robert Arnott, Chairman and CEO of Research Affiliates, which he founded in 2002 as a self-described “research intensive asset management firm that focuses on innovative products.” Among the innovations that he has pioneered is what he calls fundamental indexation, building indexes with stocks based on the size of their fundamentals, such as sales, profits, cash flow, book value and dividends -not their stock price.
His firm Research Affiliates has created a series of fundamental indexes for a variety of markets and asset classes around the world. The RAFI Indexes were early entries in an approach to investing that has become extremely popular called smart beta.
Smart beta is an umbrella term for multiple index strategies based on characteristics other than market price. As the Financial Times defines it: “Smart beta strategies attempt to deliver a better risk and return trade-off than conventional market cap weighted indices…”
But have they and will they in the future? We will address that question among others in the interview.
In addition, Arnott and his team have recently published a series of research articles on the future of smart beta which he is sharing with us.
If you’d like to see the show before it airs, it is available to our PREMIUM subscribers right now. We also have an EXTRA interview with Arnott exclusively on our website about his unusual hobby of chasing solar eclipses!
Plus, WEALTHTRACK is available on a YouTube Channel. So if you are unable to join us for the show on television, you can watch it on our website, WealthTrack.com, or by subscribing to our YouTube Channel.
Thanks for watching. Have a great weekend and make the week ahead a profitable and a productive one.
ACT LIKE A CONTRARIAN AND SYSTEMATICALLY REBALANCE YOUR PORTFOLIO
- Periodically adjust back to pre-determined allocations
- Trim big winners
- Add to substantial laggards
No Bookshelf titles this week.
PIMCO Emerging Markets Currency Fund Price: $8.56 on 12/5/16
More information regarding WEALTHTRACK transcripts can be found here
What does a successful financial innovator, fund manager and founder of a pioneering research and investment firm do in his spare time? Research Affiliates’ Chairman and CEO Robert Arnott explains what he calls one of his stranger hobbies, chasing solar eclipses wherever they are occurring around the world.
FINANCIAL CRISIS DANGER: ROBERT ALIBER & NICHOLAS SARGEN IDENTIFY WHAT INVESTORS CAN DO TO PROTECT THEMSELVES
Much has been written since the presidential election about the new world political order. As Taegan Goddard, founder and Publisher of the influential political website, Political Wire told me this week Donald Trump upended both the Democratic and Republican parties with his unconventional social media campaign and in the process became the first “independent” elected President. Goddard has shared his analysis of Trump’s groundbreaking campaign with us. Download the article [.pdf] here.
As it is currently the fund-raising season on public television, on air this week, we are revisiting a popular recent program. Where is the next financial crisis developing? How can investors protect themselves? Answers from two crisis experts, Robert Aliber, Editor, Manias, Panics, and Crashes and Global Shocks author, Nicholas Sargen. Watch the episode here.
Professor of Economics Emeritus
Stern School of Business, New York University
Chief Investment Strategist
Strategas Research Partners
On this week’s Thanksgiving episode, we are revisiting our recent program about the impact of the election. Lessons from the past and strategies for the future with noted financial historian Richard Sylla and leading investment strategist Jason Trennert.
You can watch the episode here.
The impact of the election. Lessons from the past and strategies for the future with noted financial historian Richard Sylla and leading investment strategist Jason Trennert.