Rob Arnott: Value Investing Isn’t Dead—It’s Just Unloved
Value investing is down, but it's far from out, according to the Research Affiliates founder.
After more than a decade of underperformance, value investing may be down—but it’s far from out. That was the message from Rob Arnott, founder and chairman of Research Affiliates, during a lively fireside chat with CNBC senior markets correspondent Bob Pisani at the Exchange conference in Las Vegas.
"This has been the longest and deepest dry spell for value ever," Arnott said. "Really, from [February] 2007 to somewhere [in] 2020, value underperformed growth almost nonstop. Since then, it’s been bottom bouncing."
Despite the rough stretch, Arnott believes the fundamentals still favor value, especially today.
“If you've got a stock that's down 50% but its price-to-earnings ratio is down 60%, is that a sell—'get me out of here'? Or is that, 'I can't believe it's this cheap'—a buy? That’s where we are now.”
Why Value Lagged—And What Might Bring It Back
Arnott and Pisani discussed a range of factors behind value’s underperformance. Low interest rates were one major culprit.
Low Interest Rates
"Low interest rates are good for growth stocks relative to value,” Arnott explained. “Higher interest rates today could be setting the stage for a recovery in value.”
The hype around artificial intelligence hasn’t helped either. “The narrative that AI is going to change our world—spot on, it absolutely will,” Arnott said. “But the thing about narratives is they’re usually true, and they’re always [100%] reflected in current share prices.”
He added, “If AI gains traction a little slower than people expect—[and] human beings embrace change gradually and grudgingly—we may see growth underperform.”
Cap-Weighted Index Funds
Another drag has been the explosion of flows into cap-weighted index funds, which Arnott said has created structural advantages for growth stocks already in the index while pushing value stocks further into the background.
Still, Arnott remains confident in value’s long-term outlook: “On a one-year horizon, it’s a coin toss. On a 10-year horizon, it’s a slam dunk that value will win.”
Rebalancing with Fundamentals
Arnott walked the audience through his firm’s signature approach: The Fundamental Index, which weights stocks not by market cap but by metrics like book value, sales, cash flow and dividends. This methodology, he says, systematically forces investors to “buy low and sell high.”
“Conventional indexation is thought to be passive but, at the margins where it adds stocks or drops stocks, it is tremendously active and feverishly performance-chasing,” he said. “You’re buying a popular, beloved growth stock that’s on a roll and selling a deeply out-of-favor value stock.”
How NIXT Exploits Index Turnover
His new fund, the Research Affiliates Deletions ETF (NIXT), seeks to exploit inefficiencies created by traditional index turnover.
“The average stock kicked out of the Russell or S&P index is trading at half the multiple of those indexes,” Arnott said. “And some of them come roaring back.”
He cited Dillard’s, a department store chain, as a perfect example. “It’s been a member of the Russell 1000 four times in the last 30 years. It’s been kicked out four times. Last kicked out in [June] 2017. It’s up 550% since then.”
On the Indexing Backlash
The conversation turned to the growing criticism of indexing by some active managers, often those who have struggled to outperform in recent years.
Arnott didn’t mince words. “I think it’s a cop-out to blame indexing for underperformance,” he said. “People are buying index funds rationally because index funds are beating most active managers.”
He added, “If you’re an active manager and have underperformed, you owe it to yourself and your clients to understand why. If indexation was going to set you up to underperform, why didn’t you anticipate that?”
Still, Arnott acknowledged that indexing at scale can distort markets over time: “As indexation continues to grow, it does start to interfere with the effective functioning of the market—but I think that’s a ways off.”
Global Value and the China Dilemma
Arnott also made the case for looking beyond U.S. borders, where valuation spreads are wide.
“At the start of this year, the U.S. [Shiller PE ratio] was 37 times earnings,” he said. “The rest of the world in aggregate? 17. Emerging markets? 15.”
As for China—a lightning rod for both investors and policymakers—Arnott acknowledged the risks but argued they’re now reflected in valuations.
“China is now priced at a Shiller PE ratio of 10 instead of 25,” he said. “That narrative—‘Xi Jinping is an unreconstructed Maoist, keep out’—that’s what pulled the price down. So it’s in the price.”
Still, he noted that some investors are rightfully choosing to exclude China based on personal or ESG-driven principles.
Caution on Private Markets
Asked about the explosion of interest in private equity and private credit, particularly in ETF wrappers, Arnott urged caution.
“If a product is easy to sell, don’t buy it,” he said. “I like the idea of making private markets available to the broad market. [But] I question whether they’re going to get the best of it.”
Concentration Concerns
Finally, Arnott addressed the growing dominance of mega-cap tech stocks in the S&P 500.
“These companies represent about 15% of the U.S. economy—measured in terms of sales and profits—but they represent 35% of the S&P,” he said. “That’s more stretched than it was at the peak of the dot-com bubble.”
While AI’s promise is real, he cautioned that the current market narrative assumes rapid disruption with no risk of the disruptors being disrupted themselves.
“People embrace technological change grudgingly and gradually,” he said. “And these stocks already reflect [huge] expectations.”
