Strategy Spotlight

The Value of RAE Fundamental in Today’s Markets

RAE Fundamental Portfolio Managers Rob Arnott and Chris Brightman explain why systematic active strategies may be poised to benefit from the nascent shift from growth to value – and the challenges of traditional active stock picking.

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John R. Cavalieri, Product Manager, Asset Allocation: Hello, my name’s John Cavalieri at PIMCO. Today I'm joined by Rob Arnott, founder, chairman and CEO of Research Affiliates, and to Rob’s right is Chris Brightman, chief investment officer at Research Affiliates. Gentlemen, thank you for joining us here today.

Rob Arnott, Chairman and CEO, Research Affiliates: Thank you.

Chris Brightman, Chief Investment Officer, Research Affiliates: You’re Welcome

John: The goal of today is to provide an overview of the PIMCO RAE Fundamental Equity Strategies.

Chris, these RAE fundamental equity strategies, now PIMCO is manager alongside with Research Affiliates, you two as co-PMs on the strategies — why is now a great opportunity to invest in these systematic, active strategies?

Chris: One reason is the prolonged period of underperformance of value stocks, the outperformance of growth stocks, glamour stocks, stocks that have high-quality, low-volatility, etc. I think that period seems to have come to an end,

Chart: The bar chart compares value less growth cumulative returns for U.S. large cap and U.S. small cap. Value's leadership (2016) follows 10 years of outperformance by growth stocks (2005-2015). The period for both assets classes underperforms from 2005-2015 and outperforms for 2016.

and we're more likely to revert to a prolonged period of value companies outperforming, as has been the long-term history in capital markets. Generally, stocks with cheaper prices outperform more expensive stocks.

But that growth-value dispersion opened up to an extreme, began to collapse a little bit, but that's reassuring. And so now is, I think, an excellent opportunity to be in a value strategy in general.

Systematic strategies have the potential to add value in a more transparent, in a more consistent fashion than traditional fundamental stock picking.

Sure, there are always going to be some good stock pickers out there. But it's extraordinarily difficult for the typical investor to figure out who among those fundamental stock pickers that did well over the last three or five years are going to continue to do well over the next three to five years. The history of active management in the mutual fund industry doesn’t compel confidence that investors have that ability to find those outperforming managers.

Much more consistency in a systematic process.

Rob: In fact, I'd go one step further. In our research we've found that trailing three-year performance is the best predictor of future three-year performance. Unfortunately, it has the wrong side. So one of the most powerful ways to invest is to find the 10% of mutual funds that have the worst three-year track record and buy them. Nobody’s going to do that. But, this is a strategy that will tend to be buying the stocks that those managers own.

And so it's embedded, it's inherent in the strategy to do this contrarian buying of what's deeply out of favor, and easing off on what's popular and beloved.

John: Okay, so very consistent then with the contrarian ethos that tends to be defining characteristic of the products that Research Affiliates puts out broadly.

Great. Well, on behalf of Rob Arnott and Chris Brightman, Thank you.

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