Arnott Sees Double-Dip -- and Inflation -- on Horizon

In Consuelo Mack’s latest WealthTrack interview, Research Affiliates’ Rob Arnott discusses the “fundamental indexing” system he developed, and talks about where he sees the market going from here.

Arnott, whose approach replaces the market-cap-weighting system with a system that weighs stocks based on sales, cash flow, dividends, and book value, says that the financial crisis of 2008 hasn’t yet run its full course. “The seeds that delivered that crop — the global financial crisis — there’s more of those seeds than ever,” he says. “They’re bigger than ever.” Among the biggest “seeds”: government deficits, which he says are bigger than many believe; high private and public debt; and changing demographics that are leading to more government spending commitments.

Arnott adds, however, that there are always interesting places to invest. And in coming years, he says he expects high inflation, which makes inflation-fighting investments like Treasury Inflation-Protected Securities appealing, for example. He also recommends buying commodities when they have sizeable dips.

Arnott also has a lot to say about investor mindset, echoing Warren Buffett’s famous “be greedy when others are fearful” mantra. “The market doesn’t reward comfort, it rewards discomfort,” he says — and that’s why fundamental indexing works, he says. While the approach has somewhat of a “value tilt”, Arnott says it makes most of its money because it “contra-trades” against the market’s constantly changing opinions.

In addition, Arnott discusses a variety of alternative asset classes that he says many investors overlook, to their detriment.

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