Robert D. Arnott

Robert D. Arnott
Residence	U.S.
Nationality	U.S.
Fields	Finance
Institutions	Research Affiliates
Alma mater	University of California at Santa Barbara

Robert D. Arnott (born 1954) is an American entrepreneur, investor, editor and writer who focuses on articles about quantitative investing. He is the father of Richard Wiles-Arnott, Sydney Arnott, and Robin Arnott. He edited the CFA Institute's Financial Analysts Journal from 2002–2006, and has edited three books on equity management and tactical asset allocation.^[1] He is a co-author of the book The Fundamental Index: A Better Way to Invest.^[2]

Arnott has also served as a Visiting Professor of Finance at the UCLA Anderson School of Management, on the editorial board of the Journal of Portfolio Management, the product advisory board of the Chicago Mercantile Exchange, and the Chicago Board Options Exchange.^[1] He previously served as Chairman of First Quadrant, LP, as global equity strategist at Salomon (now Salomon Smith Barney), president of TSA Capital Management (now TSA/Analytic), and as vice president at the Boston Company.^[3]

Arnott has received seven ^[4] Graham and Dodd Scrolls and Awards, awarded annually by the CFA Institute for best articles of the year, and has received three Bernstein-Fabozzi/Jacobs-Levy awards from the Journal of Portfolio Management and Institutional Investor magazine.^[5]

Writing

Arnott has published over 100 academic papers in refereed journals.^[3] Topics of these papers have included mutual fund returns, the equity risk premium, tactical asset allocation, and alternative index investing.

• 2000, "Investment Management Reflections," with Andrew L. Berkin and Jia Ye. This paper argued that not only did 75% of actively managed equity mutual funds underperform the Vanguard S&P 500 Index Fund but that after taking into account taxation, 66 out of the 71 mutual funds in the sample underperformed. A later study that looked at the 1990s found that 322 out of 355 mutual funds in the sample underperformed the Vanguard S&P 500 Index Fund after tax.^[6]
• 2002, "What Risk Premium is 'Normal'?" with Peter Bernstein. This paper argued that much of previous stock market returns had come from price-to-earnings ratio expansion and dividend yields, the former of which is unsustainable and the latter of which is historically low. Therefore, stock market returns will be lower in the long-term than they have historically been.^[7] Arnott and Bernstein were awarded the Graham and Dodd Award for excellence in financial writing for this article.^[8]
• 2003, "Surprise! Higher Dividends = Higher Earnings Growth," with Cliff Asness. This paper stated that against traditional theory, that the more a public company paid out in dividends, the greater that company's earnings grew. Results were statistically significant and robust with respect to time period and after controlling for the investment-to-GDP ratio, earnings yield, and the slope of the yield curve.^[9]
• 2005, "Fundamental Indexation" with Jason Hsu and Phil Moore. This paper introduced the idea of weighting indices by fundamentals instead of capitalization, stating that indices weighted by fundamentals tend to outperform indices weighted by capitalization with similar volatility.^[10] This paper was the recipient of the William F. Sharpe best-index related research paper award. Research Affiliates's fundamentally based indexes won the award for the most innovative benchmark index.^[11]

• 2008, The Fundamental Index: A Better Way to Invest. This book, published by Wiley Press and co-authored with Jason Hsu and John West, examines in detail how the Fundamental Index approach to investing can overcome the structural return drag created by traditional capitalization-weighted index strategies.
• 2009, "Clairvoyant Value and the Value Effect" ^[12] with Feifei Li and Katy Sherrerd. Using the prism of "clairvoyant value" - the net present value of all future cash flows on an investment, which is only known long after-the-fact for stocks in decades past - this paper and related subsequent paper demonstrate that the market does a superb job of differentiating which stocks deserve premium valuation multiples, but then pays too much for them. Selected as the lead article in the Spring 2009 Journal of Portfolio Management.
• 2012, "Demographic Changes, Financial Markets, and the Economy" ^[13] with Denis Chaves. Spanning sixty years of data in two dozen economies, this paper demonstrates that demography plays a very important role in shaping GDP growth and capital market returns. It strongly suggests that the developed world should prepare for slower GDP growth in the years ahead, and softer stock and bond returns in the 2020s and beyond. This paper was selected as the lead article for the January/February 2012 issue of the Financial Analysts Journal, and went on to win a Graham and Dodd Scroll.
• 2013, "The Surprising Alpha from Malkiel's Monkey and Upside-Down Strategies" ^[14] with Jason Hsu, Vitali Kalesnik, and Phil Tindall. This paper documents that many of the popular so-called "smart beta" strategies work just as well, if not better, when turned upside-down, with their smallest and largest holdings reversed. In so doing, the paper demonstrates that the key to the success of these strategies is not the advertised method of the strategy, but the mere act of breaking the link between a stock's price and its weight in the portfolio. This paper was one of three winners of a Bernstein-Fabozzi/Jacobs-Levy Award, as one of the best articles in 2013 in the Journal of Portfolio Management.

Research Affiliates, LLC

In 2002, Arnott founded Research Affiliates, a Newport Beach, California-based investment management firm. As of March 31, 2014, about $169 billion in assets are managed worldwide using investment strategies developed by Research Affiliates.^[15] The firm has been involved with fundamentally based indexes since mid-2004 and has worked with the FTSE Group to create indices based on this methodology.^[16]

On January 8, 2006, Research Affiliates sold a minority interest in the company to Nomura Asset Management.^[17]

In November, 2009, Research Affiliates was granted a patent for their index methodology that selects and weights securities using fundamental measures of company size. Laise, Eleanor (November 18, 2009). "Indexing Patent to Test Fund Firms". The Wall Street Journal.

Political contributions

Arnott has given $750,000 to support The Club for Growth, a conservative anti-tax group. Arnott considers himself a libertarian, and opposes the Patient Protection and Affordable Care Act.^[18] In 2015, Arnott donated $100,000 to America's Liberty PAC, a political action committee formed in support of Rand Paul's 2016 presidential bid.^[19]

Education

Arnott graduated summa cum laude from UCSB in 1977 in economics, applied mathematics and computer science.^[3][20] While a high school student in 1970, he attended the Summer Science Program.^[21]

Bibliography

1. "The Glidepath Illusion Revisited ... And Possible Solutions" with Katy Sherrerd and Lilian Wu, Journal of Retirement, Fall 2013. Selected as lead article
2. "A New 'New Normal' in Demography and Economic Growth" with Denis Chaves", Journal of Indexes, September/October 2013.
3. "The Surprising Alpha from Malkiel’s Monkey and Upside-Down Strategies" with Jason Hsu, Vitali Kalesnik, and Phil Tindall, Journal of Portfolio Management, Summer 2013. Winner of Bernstein-Fabozzi/Jacobs-Levy Award for 2013
4. "Clairvoyant Discount Rates", with Katy Sherrerd and Geoff Wilson, Journal of Portfolio Management, Spring 2013.
5. "The Winner’s Curse: Too Big to Succeed?" with Lillian Wu, European Financial Review, Winter 2013, Selected as lead article.
6. "The Winner’s Curse: Too Big to Succeed?” with Lillian Wu, Journal of Indexes, November/December 2012.
7. "Rebalancing and the Value Effect" with Denis Chaves, Journal of Portfolio Management, Fall 2012.
8. "Demographic Changes, Financial Markets, and the Economy" with Denis Chaves, Financial Analysts Journal, January/February 2012. Selected as lead article. Winner of 2012 Graham and Dodd Scroll.
9. "Better Beta Explained: Demystifying Alternative Equity Index Strategies" Journal of Index Investing, Summer 2011.
10. "Selection Bias: How an index chooses stocks really does make a difference" with Li-Lan Kuo. Journal of Indexes, July/August 2011
11. "Is Your Alpha Big Enough To Cover Its Taxes? Revisited" with Andrew Berkin and Paul Bouchey. Investments and Wealth Monitor, January/February 2011. Selected as lead article
12. "Debt be not Proud: Getting Down to the Fundamentals of Sovereign Debt" Journal of Indexes, November/December 2010. Selected as lead article
13. "How UMAs Can Help Limit Your Tax Tab" with Brian Langstraat. Investment News, June 2010.
14. "Applying Valuation-Indifferent Indexing to Fixed Income" with Jason Hsu, Feifei Li and Shane Shepherd. Journal of Portfolio Management, Spring 2010.
15. "Beyond Cap Weight: The Search for Efficient Beta" with Vitali Kalesnik, Paul Moghtader and Craig Scholl, Journal of Indexes, January/February 2010.
16. "Does Noise Create the Size and Value Effects" with Jason Hsu, Jun Liu and Harry Markowitz. Draft paper, pending publication.
17. "Applying Valuation-Indifferent Indexing to Fixed Income" with Jason Hsu, Feifei Li and Shane Shepherd. Journal of Portfolio Management, Spring 2010.
18. "Illusions and Delusions" Editor's Corner, Financial Analysts Journal, November/December 2006.
19. "Clairvoyant Value and the Growth/Value Cycle" with Feifei Li and Katy Sherrerd, Journal of Portfolio Management, Summer 2009.
20. "Clairvoyant Value and the Value effect" with Feifei Li and Katy Sherrerd, 'Journal of Portfolio Management, Spring 2009. Selected as lead article.
21. "Bonds: Why Bother?" Journal of Indexes, May/June 2009. Selected as lead article.
22. "Noise, CAPM and the Size and Value Effects" with Jason Hsu, Journal of Investment Management, First Quarter 2008.
23."What is Wealth?" Editor's Corner, Financial Analysts Journal, September/October 2006.
24."Fundamental Indexes^TM: Current and Future Applications" with John West, Institutional Investor Fifth Anniversary Guide to ETFs, Fall 2006.
25."Expectations Shortfall" Editor's Corner, Financial Analysts Journal, July/August 2006.
26."Implementation Shortfall" Editor's Corner, Financial Analysts Journal, May/June 2006.
27."The Fiduciary Time Line: Implications for Asset Allocation" Editor's Corner, Financial Analysts Journal, March/April 2006.
28."The Pension Problem: On Demographic Time Bombs and Odious Debt" Editor's Corner,Financial Analysts Journal, November/December 2005.
29."Disentangling Size and Value" Editor's Corner, Financial Analysts Journal, September/October 2005.
30."Performance Fees: The Good, the Bad, and the (Occasionally) Ugly" Editor's Corner,Financial Analysts Journal, July/August 2005.
31."What Cost'Noise'?" Editor's Corner, Financial Analysts Journal, March/April 2005.
32."Fundamental Indexation" with Jason Hsu and Phil Moore, Financial Analysts Journal, March/April 2005.
33."Whither Finance Theory?" Editor's Corner, Financial Analysts Journal, January/February 2005.
34."Can We Keep Our Promises?" Editor's Corner,Financial Analysts Journal, November/December 2004.
35."The Policy Portfolio Problem" Editor's Corner,Financial Analysts Journal, July/August 2004.
36."Will We Retire Later and Poorer" with Anne Casscells, Journal of Investing, Summer 2004.
37."Blinded by Theory: How Finance Theory Leads Us Astray" Journal of Portfolio Management, Thirtieth Anniversary Edition, Summer 2004.
38."Ethics and Unintended Consequences" Editor's Corner, Financial Analysts Journal, May/June 2004.
39."The Meaning of a Slender Risk Premium" Editor's Corner, Financial Analysts Journal, March/April 2004.
40."Is Our Industry Intellectually Lazy?" Editor's Corner, Financial Analysts Journal, January/February 2004.
41."Who's Minding the Store?" Editor's Corner, Financial Analysts Journal, November/December 2003.
42."The Mystery of TIPS" Editor's Corner, Financial Analysts Journal, September/October 2003.
43."Earnings Growth: The Two Percent Dilution" with Bill Bernstein, Financial Analysts Journal, September/October 2003.
44."Managing Investments for the Long Term" Editor's Corner, Financial Analysts Journal, July/August 2003.
45."Dividends and the Three Dwarfs" Editor's Corner, Financial Analysts Journal, May/June 2003.
46."Demographics and Capital Market Returns" with Anne Casscells, Financial Analysts Journal, March/April 2003.
47."What Risk Matters? A Call for Papers!" Editor's Corner, Financial Analysts Journal, March/April 2003.
48."Surprise! Higher Dividends = Higher Earnings Growth" with Clifford S. Asness, Financial Analysts Journal, January/February 2003. 49."Dividends and Dividend Taxation" Editor's Corner, Financial Analysts Journal, January/February 2003.
50."Risk Budgeting and Portable Alpha" Journal of Investing, Summer 2002.
51."What Risk Premium is 'Normal'?" with Peter L. Bernstein, Financial Analysts Journal, March/April 2002. Selected as Cover Article. Winner of Graham and Dodd Award for 2002. Translated and reprinted in Japanese Security Analysts Journal,July/August 2002.
52."DB and DC Plans Face a Trillion-dollar Time Bomb" Pensions and Investments, March 18, 2002.
53."The Death of the Risk Premium: Consequences of the 1990s" Journal of Portfolio Management, Spring 2001.
54."The Management and Mismanagement of Taxable Assets" Journal of Investing, Winter 2001.
55."How Well Have Taxable Investors Been Served in the 1980s and 1990s" Journal of Portfolio Management, Summer 2000.
56."Tax-Advantaged Investing" Journal of Private Portfolio Management, Spring 1999.
57."Avoiding the Taxman: Tax-Efficient Investing" Journal of Private Portfolio Management, Winter 1998.
58."The Concept of Portable Alpha" with Eric A.T. Innes, Benefits and Pensions Monitor, October 1999.
59."A Fundamental Approach to Currency Valuation" Risk in Investment Portfolios: AIMR Conference Proceedings, November 1998.
60."Options and Protective Strategies" Journal of Investing, Summer 1998.
61."Surprise! TAA Can Work in Quiet Markets" Journal of Investing, Fall 1997.
62."Bull Market? Bear Market? Should You Really Care?" Journal of Portfolio Management, Fall 1997.
63."Quantitative Management: Its Role in the Coming Decade" Financial Analysts Journal, March/April 1994.
64."Winning in the '80s: What It Took" Journal of Investing, Winter 1994.
65."Controlling Insurance Risk and Consumer Costs: Asset Risk Under Risk-based Capital Requirements" with Dave Flynn, Journal of Insurance Regulation, July/August 1993.
66."Is Your Alpha Big Enough to Cover Its Taxes?" with Robert H. Jeffrey, Journal of Portfolio Management, Spring 1993.
67."Tactical Currency Allocation" Financial Analysts Journal, July/August 1993.Translated and reprinted in Japanese Security Analysts Journal, November/December 1992.
68."Rebalancing: Why? When? How Often?" Lead article, The Journal of Investing, Spring 1993.
69."The Policy Management Challenge: Plugging the Performance Drain" Canadian Investment Review, Summer 1992.
70."Due Diligence" Journal of Portfolio Management, Winter 1992.
71."How Active Management Can Take the 'Drift' Out of Policy Asset Mix" with Greg Edwards, Canadian Investment Review, Winter 1992.
72."The Case for the Futures" with Greg Edwards, Benefits Canada, October 1992.
73."Style Management: The Missing Element in Equity Portfolios" Journal of Investing, Summer 1992.
74."Transaction Costs: Measurement and Control" with Wayne Wagner, Financial Analysts Journal, September/October 1990.
75."Reappraising the Asset Allocation Decision" with M. Leibowitz, L. Bader, R. Elenriksson, Journal of Portfolio Management, Spring 1990.
76."Tactical Asset Allocation Concepts" Equity Insights, Chicago Mercantile Exchange, March 1990.
77."Tactical Asset Allocation" Futures, November/December 1989.
78."Forecasting Factor Returns" Journal of Portfolio Management, Fifteenth Anniversary Edition, Fall 1989.
79."A Total Differential Approach to Equity Duration" with M. Leibowitz, E. Sorensen, H. Hanson, Financial Analysts Journal, September/October 1989.Awarded 1989 Graham and Dodd Scroll. Chapter in Asset Allocation, Probus Press, 1988. Translated and reprinted in Japanese Security Analysts Journal, September 1989.
80."Global Asset Allocation: A World of Opportunity" Investment Management Review, January/February 1989.
81."The Future for Quantitative Investment Management" Journal of Portfolio Management, Winter 1998.
82."The Investment Management World of the 1990s" Institutional Investor/Investment Management Forum, December 1998.
83."Mounting Pressures for a Shift to Conservatism" Financial Analysts Journal, November/December 1998.
84."Asset Allocation for the Canadian Investor" Canadian Investment Review, Fall 1988.
85."The Equity Risk Premium and Stock Market Performance" with E.H. Sorensen, Journal of Portfolio Management, Summer 1988.
86."Asset Allocation-Look Before You Leap" with M. Leibowitz, L. Bader, R. Henriksson, Investment Management Review, March/April 1988.
87."Marketing Quantitative Product" Marketing Investment Management Services, Institute of Chartered Financial Analysts, February 1988.
88."The Right Way to Manage Your Pension Fund" with P.L Bernstein, Harvard Business Review, January/February 1988.
89."Portfolio Insurance: Trade-offs and Choices" with R.G. Clarke, Financial Analysts Journal, November/December 1987.
90."Cluster Analysis and Manager Selection" with J. Bailey, Financial Analysts Journal, November/December 1986.Selected as cover article.
91."Futures Strategy in Asset Allocation" The Challenge of Investing for Endowment Funds, Institute of Chartered Financial Analysts, October 1986.
92."S&P Additions and Deletions - A Market Anomaly" with .S.J. Vincent, Journal of Portfolio Management, Fall 1986.
93."Pension Funds and The Bottom Line: A Review" with R.G. Clarke, Journal of Portfolio Management, Spring 1986.
94."Asset Allocation: The Challenges and Opportunities of Implementation" Asset Allocation for Institutional Portfolios, Institute of Chartered Financial Analysts, February 1986.
95."The Pension Sponsors View of Asset Allocation" Financial Analysts Journal, September/October 1985.
96."The Business Cycle and Security Selection" with W. Copeland, Lead article, Financial Analysts Journal, April/May 1985. Winner of the 1986 Graham and Dodd Scroll. Required reading for the CFA level III exam. Translated and published in Japanese Securities Analysts Journal, January 1988..
97."The Use and Misuse of Consensus Estimates" Journal of Portfolio Management, Spring 1985.
98."Economics Considerations in Initiating and Adjusting Portfolio Positions" Improving the Investment Decision Process: Applying Economics Analysis to Portfolio Management, Institute of Chartered Financial Analysts, July 1984.
99."Systematic Asset Allocation - Reflections from the U.S.A." with J.N. von Germeten, Benefits International, May 1984.
100."Clues to Effective Asset Allocation" with J.N. von Germeten, Pensions and Investments, January 9, 1984 Feature.
101."Systematic Asset Allocation" with J.N. von Germeten, Financial Analysts Journal, November/December 1983. Winner of the 1984 Graham and Dodd Scroll. Required reading for the CFA level II exam. Translated and published in Japanese Securities Analysts Journal, September 1986.
102."What Hath MPT Wrought: What Risks Reap Rewards?" Journal of Portfolio Management, Fall 1983. Selected as lead article. Chapter in Selected Topics in Investment Management, Institutional Investor, 1988.
103."Cluster Analysis and Stock Price Co-movement" Financial Analysts Journal, November/December 1980.Required reading for the CFA Level III exam.
104."Modeling Portfolios of Covered Option" Journal of Portfolio Management, Fall 1980.
105."Relative Strength Revisited" Journal of Portfolio Management, Winter 1977.
106."FORTRAN Control of the Real-Time Signal Processing with High-Speed Processor" with J.D. Market, IEEE Transactions on Acoustics, Speech and Signal Processing, May 1977.
107."The Basic Speed Law for Capital Market Returns" with Brad Cornell, CFA Magazine, November/December 2008.
108."An Overwrought Orthodoxy" Institutional Investor, December 2007.
109."Blinded by Theory?" Institutional Investor, October 2004.
110."Past and Present Flaws in the Mantra of Stocks-for-the-long-run" with Peter L. Bernstein. short version. Pensions and Investments, February 18, 2002.
111."The Policy Management Challenge: Plugging the Performance Drain" Global Investing, May/June 1991.
112."Transaction Costs and Logn Term Performance" with Charles D. Walbrandt, Investing, Winter 1990.
113."The Transactions Costs Barrier" Investing, March/April 1990.
114."Derivatives, Program Trading and Volatility" Pensions & Investments, February 10, 1990.
115."Mistakes Result in Poor Global Performance" Pensions & Investments, October 16, 1989.
116."Reducing the Risks of Divestiture" with R. Boling, Feature,Pensions and Investment Age, August 5, 1985.
117."Portfolio Insurance's Future Rides on Futures" with R. Boling,Feature,Pensions and Investment Age, September 1, 1986.

Notes

1. ""Q&A with Rob Arnott" NAREIT - Capital Markets.". January–February 2007.
2. "Wiley: The Fundamental Index: A Better Way To Invest.".
3. "Robert D. Arnott biography". Research Affiliates.
4. "All Past Graham and Dodd Award Winners.".
5. "Bernstein-Fabozzi/Jacobs Levy Award.".
6. "Arnott, Robert. Berkin, Andrew L. Ye, Jia. "The Management and Mismanagement of Taxable Assets." Investment Management Reflections No. 2" (PDF). 2000.
7. "Arnott, Robert D. and Bernstein, Peter L., "What Risk Premium is 'Normal'?" Financial Analysts Journal, Vol. 58, No. 2: 64-85.". March–April 2002. (Note: The final page of this report is clearly labeled as an advertisement)
8. "CFA Institute. "Charles Ellis, Ph.D., CFA of Greenwich Associates Receives Prestigious AIMR Award for Professional Excellence"". June 4, 2003.
9. "Arnott, Robert D. Asness, Clifford S. "Surprise! Higher Dividends = Higher Earnings Growth." Financial Analysts Journal" (PDF). January–February 2003.
10. "Arnott, Robert. Hsu, Jason. Moore, Phil. "Fundamental Indexation." Financial Analyst Journal. Volume 61. Number 2." (PDF). 2005.
11. "Hougan, Matt. "Is 'Buy the market' Best?" Financial Advisor.". February 2006.
12. "All Clairvoyant Value and the Value Effect." (PDF).
13. "All Demographic Changes, Financial Markets, and the Economy." (PDF).
14. "All The Surprising Alpha from Malkiel's Monkey and Upside-Down Strategies.".
15. "About Research Affiliates.".
16. "How to Corral an Index Fund (with a new rope)", January 21, 2007, New York Times
17. "Research Affiliates Sells Minority Interest to Nomura Asset Management". January 8, 2007. Press Release listed at Yahoo! Finance
18. Yang, Jia Lynn (11 October 2013). "Here’s who pays the bills for Ted Cruz’s crusade". Washington Post. Retrieved 11 October 2013.
19. http://www.huffingtonpost.com/entry/rand-paul-super-pac_55b28c43e4b0074ba5a48427
20. "Fundamental Index ETFs; The difference is fundamental" (pdf). Invesco PowerShares. 2009. Retrieved November 29, 2010.
21. "The Universal Times". Summer Science Program. February 2010. Retrieved November 29, 2010.

External links

• Research Affiliates, LLC