From Barron's:
It's a big reason why the finance guru likes emerging markets long term.
Rob Arnott, chairman and CEO of money manager Research Affiliates in Newport Beach, Calif., has serious academic credentials. A summa cum laude graduate of the University of California, Santa Barbara, he has written more than 100 academic articles and was editor of the prestigious Financial Analysts Journal from 2002 to 2006. One of his talents is to bridge the worlds of academia and money management. For example, he is a big proponent of fundamental indexing, for which he received a patent and which emphasizes factors such as cash flow and book value, as opposed to stock-market capitalization. Arnott is also a contrarian, and it's often paid off for his investors. The PowerShares FTSE RAFI US 1000 fund (ticker: PRF), which is based on an index Arnott's firm developed, has a five-year annual return of nearly 22%, besting the S&P 500 by nearly three percentage points."When Barron's spoke with him during the financial crisis, he was bullish on stocks, and steered away from Treasuries. Nowadays, he tells us by telephone, he favors high-yield bonds, as well as emerging-market debt and stocks.Arnott, 59, and his colleagues have lately been studying demographics. He cautions that the eventual impact of people in developed countries living longer—with fewer younger people to support them—is being underestimated, particularly its impact on growth in gross domestic product.
What are some other key issues with bonds?The other illusion too many investors have is that, if rates go up, all bonds will perform badly. If you go back over the past quarter-century and look at all of the times when the Treasury yield rose over 100 basis points [one percentage point], it turns out that high-yield bonds and emerging-market bonds produced very respectable positive returns, while Treasury bonds had horrible negative returns. Inflation-linked bonds also fared OK.
So, not all bonds are alike. Of course, the same can be said for stocks.That's right. For example, emerging market stocks, real estate investment trusts, and natural-resource stocks all behave differently. Last year, emerging-market stocks trailed U.S. blue-chip stocks by about 3,000 basis points, or 30 percentage points. REITs trailed the blue chips by a similar margin. So last year could be viewed as, "My goodness, if you weren't invested in the S&P, you were nowhere." Or it could be viewed as a beautiful gift from the markets—a chance to rebalance out of blue chips and into out-of-favor inflation hedges, including emerging markets stocks and REITs. The S&P is no bargain. But REITs are OK, and emerging-market stocks are downright cheap....MORE
