Rob Arnott, the founder and chief executive officer of Research Affiliates, shares his market views in an exclusive interview for CNBC PRO with Mike Santoli.
On why fundamental indexing outperforms: "You're getting the return from re-balancing. You're contra-trading against the market's most extravagant bets. When the market says, here's a company that's a wonderful company with great growth prospects. You're basically saying that's probably true, but it's already in the price," Arnott said.
"You're already pre-paying for all the future growth you're expecting. So thanks for those lovely gains, I'm just going to re-weight it back down ... As the market is constantly changing its mind. You're turning that volatility into excess return," he added.
Fundamental indexing strategies rebalance positions according to valuation measures instead of the market cap-weighted allocations typically used by passive index funds. As a result, the holdings tend to overweight undervalued companies and underweight overvalued companies.
He is known as one of the earliest advocates of fundamental indexing. The investor is also the portfolio manager of the PIMCO All Asset and All Asset All Authority funds.
Approximately $179 billion of assets are managed using strategies developed by Research Affiliates as of March 2017, according to the company website. The firm's RAFI Developed index generated 4.85 percent annual returns in the last decade compared to the MSCI All Country World index's 4.27 percent return.
He also discusses:
- US stocks
- International equities
- Passive indexing
- Performance chasing
The interview is exclusively for CNBC PRO subscribers.