Rob Arnott

DUMB “SMART BETA” INVESTING: ONE OF ITS PIONEERS SAYS IF THE PRICE IS WRONG IT CAN BE REALLY DUMB. ROBERT ARNOTT WEIGHS IN

December 9, 2016

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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ROBERT ARNOTT

Shared from Research Affiliates:

 

Consuelo Mack

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 Investingby 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.

Best regards,

Consuelo

Mathews Asia

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.

CHEAP CURRENCIES

PIMCO Emerging Markets Currency Fund
Price: $8.56 on 12/5/16
No stock mentions in this episode.

WEALTHTRACK PREMIUM subscribers can access your copy here, otherwise this transcript is available here for purchase.

More information regarding WEALTHTRACK transcripts can be found here

Previous appearances by Robert Arnott from the WEALTHTRACK Archives:

ECLIPSE CHASER

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.

ROBERT ARNOTT: Celestial Chase

April 11, 2014

ROBERT ARNOTT: Celestial Chase





What does Financial Thought Leader and portfolio manager Arnott do to unwind from his intensive schedule of research, investing and financial innovation? He describes his “geeky hobby.”

Watch the related WEALTHTRACK Episode.

ROBERT ARNOTT: A BETTER MOUSETRAP?

April 11, 2014

Is there such a thing as a better mouse trap? This week’s Financial Thought Leader guest has created an alternative to traditional index funds. Instead of being based on market capitalization or stock price, his Fundamental Index® approach measures fundamentals such as sales, profits, and dividends to determine the weight securities have in his indexes. Research Affiliates Chairman and CEO Robert Arnott explains why fundamentals can make a big difference. Continue Reading »

PREMIUM: ROBERT ARNOTT

April 10, 2014

A Better Mousetrap?

Is there such a thing as a better mouse trap? This week’s Financial Thought Leader guest has created an alternative to traditional index funds. Instead of being based on market capitalization or stock price, his Fundamental Index® approach measures fundamentals such as sales, profits, and dividends to determine the weight securities have in his indexes. Research Affiliates Chairman and CEO Robert Arnott explains why fundamentals can make a big difference.





WEALTHTRACK Episode #1042; Originally Broadcast on April 11, 2014

Listen to the audio only version here:
Robert Arnott

Explore This Episode

We have compiled additional information and content related to this episode.

ROBERT ARNOTT

Chairman

Research Affiliates
Consuelo MackOne of our goals on WEALTHTRACK is to help our audience become better investors.  Put simply we want you to get more bang for your hard earned buck.  Every once in a while a new idea or innovation comes along that helps you do just that.  I would count John Bogle’s creation of the index fund as one of them.

Jack, as he is known to many of his colleagues created the first index fund at his firm Vanguard in 1975.  His concept was to allow the average investor to invest in the broad market at a very low cost. It took years to catch on, but has it ever!

Equity index funds, including the newer exchange traded funds or ETFs now account for 31% of total equity fund assets- $2.7 trillion worth versus the $6.1 trillion in actively managed funds.  The amount of money going into them is also accelerating.   Since the financial crisis in 2008 investors have put nearly a trillion dollars into stock index funds and taken more than $300 billion out of actively managed equity funds. As Bogle points out, that is a cumulative shift in investor preference of more than $1.2 trillion dollars!

My issue with index funds has always been, why do we have to settle for market performance?  Why in the glorious history of human accomplishment is investing the one area where average is really the best that we can do?  Another problem is that traditional index funds are what are known as “capitalization weighted,” which means the more expensive the stock and greater the number of shares outstanding the bigger the weighting they have in the index.

A great example of the pitfalls of weighting securities by price is what happened in  the tech bubble. By its peak in 1999 technology stocks as a percentage of the S&P 500 index fund had gone from a weighting of 11% in 1989 to more than 25% in 1999. If you were invested in Bogle’s original Vanguard 500 index fund you were tech heavy at the peak and got massacred when the sector crashed.  What happened to financial stocks in the last decade is another disturbing example.  You would have had 20% or more of your portfolio in financial stocks which then cratered during the financial crisis.

So is there a better mousetrap?

Today’s Financial Thought Leader guest says there is. He 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 unconventional portfolio strategies that Arnott has pioneered are tactical asset allocation and the Fundamental Index approach to indexation. Products based on the firm’s fundamental index approach, known as RAFI passed the $100 billion mark last year.

Arnott will discuss some of his astonishing research results on indexing and respond to some critics of his fundamental approach including James Montier who works with Jeremy Grantham at GMO. If you register at www.gmo.com you can read Montier’s White Paper, “No Silver Bullets in Investing (just old snake oil in new bottles).”  Registration is free and gives you access to other GMO reports as well.

When you have a chance we also invite you to explore a new section on our website.  It is called WEALTHTRACK WOMEN.  We have interviewed a group of experienced women advisors who specialize in helping women plan their financial futures. Every week they will address specific issues and concerns raised by their women clients.

Have a great weekend and make the week ahead a profitable and productive one!

Best Regards,

Consuelo
Mathews Asia





Be Open To New Investment Ideas But Don’t Bet The Farm On Them

-Fundamental Indexation – Weights stocks based on key fundamentals, not price.
-Fundamentals can include revenues, earnings, cash flow, book value, dividends, etc.
No book recommendations in this episode.

Fear Creates Bargains

Consider Emerging Markets Stocks and Bonds No stock mentions in this episode. PREMIUM subscribers have access to this transcript here.

You can also purchase and download this transcript safely and securely with your credit card or PayPal account for $4.99. You will need the free Adobe Acrobat Reader (Mac/Win) or Preview (Mac) to view and print the transcript.

March 13, 2009

Two Veteran Value Investors – Susan Byrne & Rob Arnott

Two veteran value investors tell us where they see the investment clouds clearing. Value investor Susan Byrne is finding companies with sound balance sheets and good cash flow that should withstand difficult times. Long-time bear Rob Arnott finally sees good values in the fixed-income markets. Find out where they see the profit opportunities.

WATCH NOW…







Celestial Chase

What does Financial Thought Leader and portfolio manager Arnott do to unwind from his intensive schedule of research, investing and financial innovation? He describes his “geeky hobby.”

Two Veteran Value Investors – Susan Byrne & Rob Arnott

March 13, 2009

Two veteran value investors tell us where they see the investment clouds clearing. Value investor Susan Byrne is finding companies with sound balance sheets and good cash flow that should withstand difficult times. Long-time bear Rob Arnott finally sees good values in the fixed-income markets. Find out where they see the profit opportunities.





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