Market Outperformance While Holding Down Costs
Market Outperformance While Holding Down Costs
(Bloomberg Opinion) -- How can investors use inexpensive index strategies yet still generate returns that outperform the markets? The solution to that particular challenge is the combination of fundamental and factor investing, according to Chris Brightman, chief investment officer and partner at Research Affiliates LL, and this week's guest on Masters in Business.
Brightman notes that so-called smart beta allows for simple, transparent and inexpensive index strategies that are not market-cap weighted. He calls this a “simple, elegant way to pursue a contrarian approach” that is more akin to cap-weighted indexes than expensive active stock selection. It also has the benefit of keeping emotions out of the process of selecting and rebalancing individual equites. Bad behavior leads to an average annual underperformance of 200 basis points versus the broad indexes. By using a systematic approach to indexing, investors avoid this performance penalty.
In our conversation, we discuss the lagging performance of value stocks, and why they tend to be so cyclical. Every long-term study that looked at the value-versus-growth question historically has confirmed value eventually will outperform growth around the world. The issue is that long time line, which eventually leads investors to becoming bored and shift away from value. Brightman adds that value’s outperformance comes from some assumption of additional risk, as well as investor’s behavior.
Brightman was a member of the Investment Fund for Foundations, the Virginia Retirement System, the University of Virginia Investment Management Company, and Strategic Investment Group. Previously, Brightman managed money for the University of Virginia endowment.
You can stream/download the full conversation, including the podcast extras on Apple iTunes, Bloomberg, Spotify, Google Podcasts, Overcast, and Stitcher. All of our earlier podcasts on your favorite hosts can be found here.
To contact the editor responsible for this story: James Greiff at jgreiff@bloomberg.net
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Barry Ritholtz is a Bloomberg Opinion columnist. He founded Ritholtz Wealth Management and was chief executive and director of equity research at FusionIQ, a quantitative research firm. He is the author of “Bailout Nation.”
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