On January 16, this writer held a Zoom call with Rob Arnott to get the equity market savant's take on a reliable metric that's flashing red for U.S. big cap stocks. For this writer, Arnott's the best go-to source for assessing when and where equities are way under or overvalued. As founder and chairman of Research Affiliates, a firm that oversees investment strategies for $156 billion in RAFI mutual funds and ETFs, Arnott's proven a winner in the real-world contest of developing strategies that deliver benchmark-beating returns for big institutions and retail customers alike. Plus, he's assembled that record by harvesting ideas from the best minds in academia, from his time as editor-in-chief of the Financial Analysts Journal to today's brainstorming sessions enlivened by RA's long roster of PhDs.
A prime example of turning a concept born of research into a durable, practical blueprint for enriching investors: His role as father of "fundamental indexing," an approach that allocates the shares in a RAFI fund not by market cap, but by the size of the companies comprising the index in the overall economy. RA assigns those weights based by such metrics as revenues, net worth and dividends—a formula that drives dollars away from what's hot and expensive towards the cheap and unloved.
