Index funds have been assembled using market capitalization since their inception forty plus years ago. Rob Arnott was wondering if there was not a better way to create index-based portfolios. His research led him to the concept of using equity fundamentals – earnings, dividend yield, book value and other concepts – to create indices that did not rely on market weights.
Thus, the idea of Smart Beta was born. His concept was for to create funds that were still passively managed, but did not run into issues where certain holdings became wildly over-weighted. And, according to Arnott, still have a chance to outperform the broader cap-weighted benchmark indices.
Arnott is the founder and chairman of Research Affiliates (RAFI), and his ideas of fundamental indexing are the intellectual property behind over $200 billion in portfolios. He explains why fundamental indexing is a superior form of portfolio construction when compared with either active management or traditional indexing.
His favorite books are referenced here; our conversation transcript is published here. Our 2014 interview with Arnott it is still available.
You can stream/download the full conversation, including the podcast extras on iTunes, Bloomberg, Overcast, and Stitcher. Our earlier podcasts can all be found on iTunes, Stitcher, Overcast, and Bloomberg.
Next week, we speak with Torsten Sløk, Chief International Economist at Deutsche Bank Securities.
