Every year, it seems markets look to value investing to finally make a comeback. This year has been no different, as value has shown some signs of life amid early uncertainty. Still, many investors likely don’t want to make a big call on value, only for the category to disappoint yet again. Two major industry voices, Research Affiliates' Founder and Chair Rob Arnott and CNBC Senior Markets Correspondent Bob Pisani, discussed this at Exchange in Las Vegas on Tuesday.
The duo took to the stage to talk about Arnott’s takes on the market landscape, concentration risk, international equities, and value investing. To start, Pisani asked Arnott to speak to the question of when value investing will start working. Having done well to start the century, it’s had a 15-year period of struggle.
Value Investing
Arnott noted that the current value era has been the “longest and deepest dry spell” ever for the category. From 2007 to the summer of 2020, he said that value has underperformed growth “almost nonstop.” He added that the low interest rate regime is good for growth stocks relative to value. And higher rates today are perhaps setting the stage for a value recovery.
“Will value come back? Yes. When will value come back? Not sure,” Arnott noted. “One a one-year one horizon, it’s a coin toss. One a 10-year horizon, it’s a slam dunk.”
Arnott pointed to a few key factors in the value landscape to watch, including a changing rate environment and a potential change in narrative for AI.
“There are a few things going on that have helped to drive that wedge between growth and value,” Arnott explained. “One of them is the low interest rate environment, which seems to be history. Another is the innovations associated with AI. The narrative that AI is going to change our world? Spot-on. It absolutely will.”
“The thing about narratives is they're usually true. But they're always 100% reflected in current share prices. So, what moves share prices is changes in narrative,” he added. “Human beings embrace change gradually and grudgingly. And the result is that, just as the internet took on adoption and reshaped our world, it did it more gradually than was expected back in 2000. [I] think the same will hold true for AI.”
Value in Non-U.S. Equities
The pair also addressed a few audience questions about U.S. valuations compared to international valuations as well as concentration risk. Audience members asked for comment on whether the current moment calls for a greater investment abroad. Pisani noted that the U.S. accounts for about 65% of global stock value, or about $110 trillion.
“It's a pretty staggering and somewhat scary number, because could you think, I got to throw my money in the U.S.,” Pisani said. “But of course, mean reversion. That's a warning sign to me.”
Arnott pointed to the Shiller PE ratio to illustrate the U.S. versus non-U.S. equities landscape. The ratio takes the price of the market and divides it by 10-year earnings, he said. The U.S. all-time record high was 44 times earnings at the top of the dot-com bubble, with that ratio at 37 to start 2025. By contrast, the rest of the world sat at about 17 times earnings.
“So, we're more than twice the multiple of the rest of the world. Is more than twice as much growth in GDP in the decades ahead going to be in the U.S.? No. Do I believe in us exceptionalism? Yes, I do,” Arnott said. “Do I believe U.S. exceptionalism means we're going to be two-thirds of the growth of the world in the years ahead? No, I do not.
“Europe at the start of the year was 17 times. Emerging markets were 15 times. It doesn't take a lot of mean reversion for those markets to do brilliantly,” he added. “So, I see this as an opportunity-rich environment, in which there's a lot of wonderful opportunities that are deeply out of favor.”
Concentration Risk
Pisani also asked Arnott if he believed that the current concentration risk, with just seven or eight stocks making up about 30% weight, bothered him. Arnott agreed that it did, but noted that while concentration is fine, the bigger issue is the degree of concentration.
“If you look at the economic footprint of these companies, they represent about 15% of the U.S. economy, measured in terms of sales or profits, and they represent 35% of the S&P. That's very stretched,” Arnott explained. “It's more stretched than it was at the peak of the dot-com bubble.”
“The aftermath of the dot-com bubble was that of the 10 largest market cap tech stocks in the world in the year 2000, zero out of 10 beat the S&P over the next 15 years,” he added.
Pisani and Arnott also touched on the Research Affiliates Deletions ETF (NIXT). The fund, from Arnott’s Research Affiliates firm, invests in companies that drop out of two cap-weighted indexes of 500 and 1,000 firms, respectively.
The strategy, which charges 9 basis points, looks to capture the value opportunities in firms deleted from cap-weighted indexes. Where the firms added to big indexes are likely at their frothiest, capping off significant growth, he said, roughly one-third of all stocks added to the S&P are dropped within six to eight years. For example, he noted, the company Dillards (DDS) has been in and out of the Russell 1000 four times in the last 30 years. Since its last departure in 2017, it’s returned 550%, Arnott said.
Looking ahead, he urged audience members to “watch this space about further strategies becoming available in a fund format." Specifically, he pointed to the Research Affiliates Cap-Weighted Index Series as one to watch.
“There may be strategies coming out in fund form in the not-too-distant future that capture this,” Arnott noted.
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