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What Rob Arnott Learned from the Market Meltdown

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As you read this, I am having breakfast in the sky, on my way to the Financial Planning Association’s national conference in Denver, Colo. Before the conference begins, I will be spending the afternoon at Janus Funds’ headquarters, attending a training session for advisors called “The Art of Wow.” I have to say, the title alone impresses me.

So I thought I’d take this opportunity to review a great recent breakfast with portfolio sage and fundamental index founder Rob Arnott. We met in August for some sublime oatmeal (yes, oatmeal can be sublime) in midtown Manhattan to discuss portfolio strategy and wound up talking about how you can be right and still lose money. Surprise, surprise—we were talking about lessons from the market meltdown. It’s amazing how that has become the scab that doesn’t heal; we pick and pick at it, trying to understand how we all got hurt, whether we were ourselves overextended or just collateral damage.

What did Arnott learn from his experience? “The year 2009 was an eye opener for us because we realized that our profits were squeezed even though we were right,” said Arnott, whose official title is chairman of Research Affiliates. “We were down less than other stock investors but we were still down.” The $40 billion Arnott had under management in August 2008 had turned to $30 billion in February 2009. As of this past August, though, Arnott’s assets under management were back to $53 billion. “A lot of our comeback had to do with credibility we gained,” he observes.

Arnott’s research focus, he says, is on “figuring out the inevitable and its implications.” Take demographics, for example: The United States and Europe have aging populations, similar to that of Japan 10 years ago—what can we learn? Or, consider debt: The U.S. and many other nations are shouldering unmanageable burdens. What does that mean?

These questions translate directly into strategy, and the choices you make about weighting equity and debt allocations. “If you weigh an equity index by price, you own the most expensive issues,” Arnott says. “If you weight a bond index by issue, you load up on the most indebted.” Arnott sees this as an endorsement of his fundamental strategy, which is by its very nature value-oriented. He is “focusing on the answers that work and then patiently riding out the ups and downs.”

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