“The Largest Drawdown For Value We’ve Ever Seen”: Asset Manager Who Warned Of Crash Turns Bullish

Rob Arnott of Research Affiliates spent years warning people about crowding into stock and looming bubbles that were on the verge of collapsing. His firm had warned that U.S. large caps would see “zero return annually” for the next decade.

Then, the coronavirus hit, grinding the economy to the halt, the Dow shed 10,000 points over the course of just weeks and the Federal Reserve started immeasurable open-ended stimulus from the Federal Reserve.

Now Arnott, whose shop is a sub-adviser to names like PIMCO, has “re-calibrated” his forecast for the future and is now turning more optimistic, according to Bloomberg. Arnott is now raising his exposure to small cap U.S. equities and buying the most value stocks that their “models will allow”. 

Chris Brightman, the chief investment officer of Research Affiliates, said: “In reaction to the global sell-off, we are moving from a relatively defensive position to a much more risk on position. We are selling government bonds and other defensive sorts of allocations, and rebalancing into and increasing positions in more risk on assets.”

Now, Research Affiliates forecasts real returns of 1.5% annually for stocks, favoring “large firms in developed nations outside the U.S.” and smaller companies domestically. 

Brightman calls the strategy a “significant change”. The strategy may be looking appealing to the firm as Russell 2000 small caps fell 42% at their lows versus 34% for the larger S&P 500 names. Small caps have been hit harder because of the smaller firms have shakier balance sheets. But the valuations look more attractive than their larger counterparts. 

But Research Affiliates is also slightly biased: the firm “specializes” in value names and offers a product called the RAFI Fundamental Index, which sorts underpriced stocks using weightings other than market caps. In November, the firm wrote a paper making the case as to why it was wrong at the time to bail on value investments.

Meanwhile the Russell Value Index fell about 39% at its lows and the Russell 1000 Growth Index fell 31.5%. 

Brightman concluded:

“We are responding to the greatest drawdown of the value factor ever in history. Going into this corona crash, value was at one of the longest and one of the deepest drawdowns in its history. Now looking at data through March 31, we well and truly are in unprecedented territory with the largest drawdown for value ever seen.”

He also said the firm is raising its exposure to REITs.