SUMMARY

  • Many pundits have claimed recently that value investing is dead. Some argue that the U.S. shift from a manufacturing to a service economy has rendered the price-to-book ratio and other conventional measures inadequate to classify value stocks, while others assert that the value trade is crowded, distorting prices and lowering expected returns.
  • Research Affiliates takes a different view: that value has underperformed simply by getting cheaper and cheaper, and that patient investors may be rewarded when conditions supporting growth stocks eventually turn to favor value-oriented, diversifying strategies.
  • FINRA recently provided guidance allowing firms in the industry to display, subject to certain conditions, an adjusted expense ratio (AER) that excludes certain expenses that are not fees paid to the investment manager. The AER is a fund’s gross expense ratio (or net expense ratio, if fee waivers are applicable), further reduced by the fund’s interest expense, which is a specific type of investment-related operating expense of the fund.
  • We now include the AER in certain fund marketing materials because we believe it is relevant for investors who want to focus on the expense ratio of a mutual fund net of fee waivers and net of these investment-related expenses, in order to better highlight the fees payable to the manager.

In this issue, Rob Arnott, founder and chairman of Research Affiliates, explains why Research Affiliates believes the reported “death” of value investing has been greatly exaggerated, while John Cavalieri, asset allocation strategist for PIMCO, discusses how changes in the presentation of expense ratios for the All Asset funds seek to improve transparency for investors. As always, their insights are in the context of the PIMCO All Asset and All Asset All Authority funds.

Q: Many pundits and investors have recently suggested that value investing is dead. Given the value-oriented approach of the All Asset strategies, how concerned are you?

Arnott: Over the last 12 years, value investing has underperformed growth investing by nearly 30% cumulatively through the end of October 2019.1 Are we alarmed by these outcomes? Hardly. Are we concerned by how investors will likely react to these results? Yes.

People in our industry generally shun whatever hasn’t worked lately. Tacitly, this means that we expect past winners to be future winners. We’ve written about this tendency extensively. In fact, we published a paper in November looking at our RAFI (Research Affiliates Fundamental Index) strategies relative to both value and cap-weighted markets.2 All Asset and All Asset All Authority share this value orientation with the RAFI and RAE (Research Affiliates Equity) strategies, along with our confidence in long-horizon mean reversion.