The Financial Times last week published an interesting interview with Rob Arnott, the founder of Research Affiliates.
Research Affiliates is a value-oriented asset manager that uses a quantitive approach to choose stocks. They call their approach fundamental indexing. The idea is that stocks are chosen by a computer, and stocks with better fundamentals (earnings, cash flows, sales) are emphasised in the portfolio.
Research Affiliates often publish research papers that are of interest to value investors.
The company’s asset allocation tool can be used to gauge the future returns investors can expect from various asset classes.
So what does Rob Arnott have to say in the Financial Times?
Arnott argues that markets remain inefficient today. That means that share prices sometimes get out of line with fundamentals.
As an example Arnott cites AI stocks. The prevalent market narrative is that AI is going to change everything, which is true, but the change is going to take longer to play out than investors expect, setting the scene for disappointments in the near term.
Arnott is then asked why Value stocks ($VTV) have underperformed Growth stocks ($VUG) for the past 15 years. The reason is that Value stocks became a lot cheaper relative to Growth. This is something we can see quantitatively in the value spread, which is at a high level, indicating a good opportunity In Value stocks today.
Arnott believes that in the 2020s, inflation will be more volatile and perhaps higher on average than the market expects. This should benefit Value stocks.
Overall, Arnott’s message is that he believes it’s a good time to invest in Value stocks because they are cheap. It would be dangerous to look at past 10-15 year returns when evaluating Value stocks. The time to buy them is when they have done poorly in the past, and the time to sell may come after a period of good performance.