This article displays the investment portfolio by Rob Arnott, founder of Research Affiliates. Here you will find a description, performance, and resources for the portfolio as well as detailed information on how to implement it yourself.
Article Contents
Rob Arnott portfolio, better than the permanent portfolio?
Research Affiliates is a giant in wealth management with $193 billion in assets under management. Research Affiliates license their strategies. An example of this is their RAFI index used by ETF provider Invesco for many of their smart-beta ETFs. PRF – Invesco FTSE RAFI US 1000 ETF should be well known for smart-beta investors.
Rob Arnott is their founder. He is the archetypical investment specialist with over 100 academic articles to his name.
He is also the author of the book The Fundamental Index: A Better Way to Invest. In that, he lays out the method for constructing the above mentioned RAFI index. It is co-written with Jason Hus and John West who are both smart-beta masterminds.
Description of the Rob Arnott portfolio
The Rob Arnott portfolio comes from an article from the now-defunct indexuniverse.com, where Robb Arnott analyzed hedge-fund performance against a model portfolio. The article is now available at etf.com.
Meb Faber included the model portfolio in his fantastic book Global Asset Allocation: A Survey of the World’s Top Asset Allocation Strategies.
The portfolio that Meb Faber presented in his book is slightly different from the one presented at indexuniverse.com. Originally Robb Arnott proposed an equal weight of the following asset classes:
- Commodities
- REITs
- Emerging market bonds
- TIPS
- High-yield bonds
- Long-term U.S. government bonds
- Unhedged non-U.S. bonds
- International stocks
- U.S. stocks
- investment-grade bonds
Meb Faber’s version merged some of the bond asset classes, probably due to missing time-series data for the asset classes.
We present both versions here as we have time-series data for all asset classes. We believe it offers a smidgin of a higher fidelity to the original model portfolio. Spoiler: The higher fidelity model has slightly higher returns. We call it the Rob Arnott ETF.com model portfolio.
If we consider Rob Arnott’s position on smart-beta he would most likely recommend a different portfolio. A portfolio with the majority of asset classes dedicated to smart-beta index strategies.
The portfolios have a 50% allocated to bonds so we don’t expect to see record-breaking returns but we do expect to see a low drawdown.
Let’s see the performance numbers.
Performance of the Rob Arnott portfolio
| Portfolio name | Asset class count | 1 year return (2019) | Year to date | 10 year return | CAGR since 1989 | Drawdown | Risk Level | Expense ratio | Yield |
|---|---|---|---|---|---|---|---|---|---|
| S&P 500 (Benchmark) | 1 | 31.46% | 3.69% | 13.52% | 10.54% | -37.63% | 5 - very high risk | 0.04% | 1.79% |
| Rob Arnott's Portfolio | 8 | 16.42% | 0.94% | 5.76% | 7.40% | -14.71% | 2 - low risk | 0.18% | 1.83% |
| Rob Arnott ETF.com model portfolio | 10 | 16.79% | 1.27% | 5.99% | 7.66% | -16.70% | n/a | 0.22% | 2.31% |
Rob Arnott’s portfolio displays good returns while at the same time getting good returns. The Permanent Portfolio has lower returns and also a lower drawdown.
Asset Allocation for the Rob Arnott portfolio
Check the best mutual funds and ETFs here.
Resources for the Rob Arnott portfolio
As mentioned, his book The Fundamental Index: A Better Way to Invest is very worthwhile. It was one of the first books I read detailing smart-beta strategies.
Meb Faber’s interview with Rob Arnott is here.
Barry Ritholtz interview with Rob Arnott on his Master in Business series. You can find links here.
Conclusion
Rob Arnott is the master of smart-beta strategies. The portfolios presented here are not smart-beta but they are very well diversified with very strong returns while keeping drawdowns in check.
Would you implement the Rob Arnott portfolio or the Permanent Portfolio?