Rob Arnott, founder and chairman of Research Affiliates, has told his clients that now is not the time to be in the firm’s low volatility smart beta funds.
‘If you like the idea of low volatility, put a Post-it note on the calendar for 2019 and take another look then.’
In this video, Arnott remarks that the VIX - Wall Street’s fear gauge – has remained stubbornly low, seducing many into buying low volatility stocks.
In turn this has pushed up their valuations, causing the smart beta pioneer to shift his focus to value.
‘Shame on them!’ he says of members of the smart beta community that are pitching products based on past performance, without taking out what portion of the performance came from rising valuations.
Explaining his rationale, he says: ‘If you’re selling a newly-expensive strategy on the basis of wonderful past performance you are luring investors into something that will cause them a lot of pain.
‘People think they are buying low volatility stocks to protect themselves from down markets, but if you’re paying twice as much, it’s dangerous!’
His message as billions and billions of dollars continues to pour into low volatility stocks is this: Watch out! Rising valuations are non-recurring and they can mean revert.
Research Affiliates was set up in 2002 as a research-intensive asset management firm focusing on asset allocation and alternative indexation. It now runs over $180 billion and serves as a sub-adviser to Pimco.