Rob Arnott Portfolio: Allocations, Performance, and Returns Overview
Rob Arnott is the founder and chairman of the board of Research Affiliates — a giant in wealth management with $193 billion in assets under management. Research Affiliates is famous for publishing seminal research and investing based on that research. It created the Rob Arnott Portfolio. Let’s see what the portfolio strategy is about.
The Rob Arnott Portfolio is a medium-risk investment strategy with a 30% allocation to stocks, 60% to bonds, and 10% to commodities. It aims to balance returns and risks by diversifying globally with international stocks and bonds, including emerging market bonds. It was referenced by Rob Arnott in an article in 2008 as an example of a simple portfolio that performs comparably with expensive hedge funds.
In this post, we take a look at the Rob Arnott Portfolio. At the end of the article, we have provided a backtest.
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Rob Arnott’s Investment Strategies
Rob Arnott is the founder and chairman of Research Affiliates, a wealth management company known for its innovative investment strategies. He is widely recognized as a pioneer in the field of smart beta investing, which seeks to enhance traditional index investing by incorporating various risk and return factors. He has published over 130 papers in financial journals, discussing different investment methods.
One of Rob Arnott’s key strategies is the Fundamental Indexation approach, which seeks to address the flaws in traditional market capitalization-weighted indexing. This approach weights securities based on their economic importance, such as sales, dividends, and earnings, rather than their market value. This results in a more diversified and less overvalued portfolio, leading to potentially higher returns and lower risks.
Another strategy developed by Arnott is the RAFI (Research Affiliates Fundamental Index) methodology, which uses a multi-factor approach to construct indices. The RAFI methodology seeks to improve upon traditional market capitalization weighting by considering factors such as earnings, sales, dividends, and book value in its index construction.
In addition to the RAFI methodology, Arnott also developed the Smart Beta ETFs, which use the principles of smart beta investing to offer low-cost, passive investment options to investors. These ETFs provide access to portfolios constructed based on the RAFI methodology, offering an alternative to traditional index-tracking ETFs.
However, the popular Rob Arnott Portfolio flying around the internet is a simple, diversified portfolio used as an example in Rob Arnott’s article in 2008 to show the arguable suboptimality and expensiveness of hedge funds as a vehicle for most investors. The strategy is based on a 30% allocation to stocks (US stocks, international stocks, and REITs); 60% to bonds (including investment-grade corporate bonds, international bonds, emerging-market bonds, and various Treasury bonds); and 10% to commodities.
Rob Arnott’s Performance Metrics
Rob Arnott and Research Affiliates are known for their innovative approach to performance metrics and evaluating investment strategies. Some of the key performance metrics used by Rob Arnott include:
- Total return: Total return measures the combined effects of price changes and income generated by an investment, including capital gain, dividends, and interest. The total return is an important metric for evaluating the performance of a portfolio, as it considers both capital appreciation and income generated.
- Risk-adjusted return: Risk-adjusted return measures the return of an investment relative to the risk taken to generate that return. Rob Arnott uses a number of risk-adjustment metrics, including the Sharpe and Sortino ratios, to evaluate the performance of portfolios and make investment decisions.
- Value: Rob Arnott is a proponent of value investing, which seeks to identify undervalued securities with the potential for future growth. He