Rob Arnott of Research Affiliates pioneered"smart beta" investing, which has gone global.They say their blend of fundamental metrics beat the market in good and bad periods for 30 years.
That's the first stage of a return-sapping dynamic, according to a recent note from Arnott and his team. They're specifically taking aim at the, in which the most valuable stocks on an index count more based on their market capitalization. That's why tech giants such as Apple and Microsoft account for 6%-to-7% of the S&P 500, and why movements in their individual stock prices can cause outsized changes to the value of the index.
It's an idea that stems naturally from Arnott's work in developing"smart beta," a technique that pursues market-beatingby selling a stock when its price exceeds its fundamental value or buying when its price drops to an unreasonable low. Arnott and his team generated Research Affiliates Capitalization-Weighted Indexes with 500 and 1000 stocks each using these metrics, and those resulting indexes weren't radically different from major indexes. But by cutting out a few overpriced growth names and adding a few smaller value names, they varied enough in approach to generate compounding returns for long periods.