Rob Arnott: "Emerging Markets Still Look Good"
From Index Universe:
Rob Arnott’s Research Affiliates
can now boast about $60 billion in assets that use “fundamental” indexes
from his Newport Beach, Calif.-based company that screens stocks based
on book value, cash flow, sales and dividends. One wonders if the future
of indexing will feature Arnott more and more. When IndexUniverse.com
Managing Editor Olly Ludwig sat down with Arnott in his office, they
talked about his disagreement with indexing legend John Bogle, the state
of the ETF industry and the allure of investing in relatively debt-free
emerging markets countries.
Ludwig: When we talk about the pioneers of indexing, there
are those who say that the baton must be passed at some point, and that
perhaps you represent the next chapter. How do you respond to those
views?
Arnott: Well, I have enormous respect for Jack. He
is one of my heroes in this business. He is one of the pioneers. But as
with so many pioneers, the ideas that spawned his and Vanguard’s
meteoric success—that if you hold costs down, the customer gets more;
and that since departures from the market are a zero-sum game, you
should just hold the market—are very powerful ideas. But as with so many
pioneers, he latches onto those ideas tenaciously and defends them
fiercely. And so to him, Fundamental Indexing is active management in
drag.
Ludwig: I was going to say you are in his cross hairs in some sense.
Arnott: He and I are friends. But this is one area of fierce disagreement. Another is ETFs.
Ludwig: Let’s start with the “active management in drag”—I love that formulation—then we’ll move on to ETFs.
Arnott: OK. Viewed from the perspective of classic
cap-weighted indexation, Fundamental Indexing is active management. Any
departure from cap weight is active management, viewed from that
perspective. What a lot of people miss is that there's another
perspective. Viewed from the vantage point of the macroeconomy, the
cap-weighted market is making huge active bets. During the Internet
boom, Cisco was 4 percent of the market, when it was 0.2 percent of the
economy, and that’s a huge active bet. And so viewed from that
perspective, Fundamental Indexing is studiously seeking to mirror the
look and composition of the economy and using it as an anchor to
contra-trade against the market’s constantly changing views,
expectations, speculations, fads, bubbles and crashes.
That’s the elegance of Fundamental Indexing. Viewed from the vantage
point of the macroeconomy, Fundamental Indexing does its best to be
passive. And cap weight winds up loading up on growth companies, safe
havens, weighting companies in proportion to their popularity....MUCH MORE
HT:
Abnormal Returns
