Friday, November 18, 2011

"Rob Arnott: Four Asset Classes at a Bargain"

While I have great respect for Mr. Arnott and have dozens of 'Arnott posts', particularly on expected future returns and the role of cash dividends in equity market returns, these four asset classes are not the field where I hunt.
That said Rob's work is always worth a look and should get one thinking.
From the Reformed Broker:
Rob Arnott of Research Affiliates is one of the most important voices in portfolio management of our era.  His overarching theme is that the 3 D's - Deficits, Debt and Demographics - will work as a headwind preventing traditional 60/40 stock-bond portfolios from achieving success going forward.
He posits that the impact of these features on the global economic situation will be a stubbornly high rate of real inflation.  As a remedy, he's created a "toolkit" of investment asset classes that can be both non-correlated to traditional indices and perform above the rate of inflation on a go-forward basis.
We know that deficits, debt and demographics are, to a large extent, inexorable - there is little that can be done by any legislator or central banker in the world to change these realities.  So given that, what is an investor to do?
Here's Rob:
Over the past two years, we have encouraged investors to place a greater emphasis on real return asset classes and the emerging markets (where our 3-D headwind is a relative tailwind). We also advocate using an expanded inflation-protection asset class toolkit and tactical management to produce substantive real returns in such an environment.2 Key tools in the toolkit: traditional real return asset classes (TIPS, commodities, and REITs) and what we have labeled “stealth inflation fighters” such as bank loans, emerging market local currency debt, high yield bonds, and convertibles
The bad news is that the headwinds represented by the 3D's are not going anywhere anytime soon.  The good news is that the tools we can use to fight those headwinds have gotten markedly cheaper this fall as other managers have carelessly sold asset classes they do not fully understand....MORE
Reformed Broker had another good Arnott post, "Notes from the Pimco Lunch with Rob Arnott" back in September which has a bunch o'links.