For Research Affiliates, Bigger Not Always Better

Smart Beta Pioneer Exploits Fundamental Factor Virtues

Bigger is not always better, says John West, head of client strategies at Research Affiliates in Newport Beach, California. The 15 year old firm created by Rob Arnott and Chris Brightman works with other investment firms like Invesco for product development and distribution. Research Affiliates was one of the first firms to stake their claim to the smart beta movement, if you will, launching a tradable index in 2005. The PowerShares FTSE RAFI US 1000 (PRF) is based on their RAFI methodology of contrarian investing. The ETF is up more than 100% since inception.

Here, West talks about the RAFI Fundamental Index with RIA Channel founder and CEO Julie Cooling, arguing against the standard benchmark indices that weight their holdings by price.

“If a security becomes more and more overpriced guess what happens? Well in the tech bubble we found it,” he says. “You end up owning more of it. At its peak level of pricing, just when it is about to crash, you have your maximum exposure.”

Research Affiliates came up with a different way to define “size”. In the video, West explains how they weight stocks in the RAFI index. He thinks interest rates are going to stay lower for longer, and advises clients to “simply save more.”