Skip to main content
MENU
Subscribe
  • Subscribe
  • Account
  • LOGIN
  • Topics
    • Alternatives
    • Consultants
    • Coronavirus
    • Courts
    • Defined Contribution
    • ESG
    • ETFs
    • Hedge Funds
    • Industry Voices
    • Investing
    • Money Management
    • Opinion
    • Partner Content
    • Pension Funds
    • Private Equity
    • Real Estate
    • Russia-Ukraine War
    • SECURE Act 2.0
    • Special Reports
    • White Papers
  • Rankings & Awards
    • 1,000 Largest Retirement Plans
    • Top-Performing Managers
    • Largest Money Managers
    • DC Money Managers
    • DC Record Keepers
    • Largest Hedge Fund Managers
    • World's Largest Retirement Funds
    • Best Places to Work in Money Management
    • Excellence & Innovation Awards
    • Eddy Awards
  • ETFs
    • Latest ETF News
    • Fund Screener
    • Education Center
    • Equities
    • Fixed Income
    • Commodities
    • Actively Managed
    • Alternatives
    • ESG Rated
  • ESG
    • Latest ESG News
    • The Institutional Investor’s Guide to ESG Investing
    • Climate Change: The Inescapable Opportunity
    • Impact Investing
    • 2022 ESG Investing Conference
    • ESG Rated ETFs
  • Defined Contribution
    • Latest DC News
    • DC Money Manager Rankings
    • DC Record Keeper Rankings
    • Innovations in DC
    • Trends in DC: Focus on Retirement Income
    • 2022 Defined Contribution East Conference
    • 2022 DC Investment Lineup Conference
  • Searches & Hires
    • Latest Searches & Hires News
    • Searches & Hires Database
    • RFPs
  • Performance Data
    • P&I Research Center
    • Earnings Tracker
    • Endowment Returns Tracker
    • Corporate Pension Contribution Tracker
    • Pension Fund Returns Tracker
    • Pension Risk Transfer Database
    • Future of Investments Research Series
    • Charts & Infographics
    • Polls
  • Careers
  • Events
    • View All Conferences
    • View All Webinars
    • 2022 Innovation Investing Conference
    • 2022 Defined Contribution East Conference
    • 2022 ESG Investing Conference
    • 2022 DC Investment Lineup Conference
    • 2022 Alternatives Investing Conference
Breadcrumb
  1. Home
  2. Print
September 03, 2007 01:00 AM

Letters to the Editor

  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print

    Fundamental index backer responds

    The July 23 Pension & Investments published an article on page 6 about Research Affiliates’ Fundamental Index strategies, referencing the Wilshire Associates white paper “Fundamentally Active” by Robert Waid.

    We have little substantive disagreement with many of Mr. Waid’s points, including his perspective that RAFI is not passive and is not an index. This is a matter of semantics: if we define “passive” or “index” to mean cap-weighted, then the RAFI strategy is not an index.

    Further, Mr. Waid argues that alternatively weighted indexes, which include RAFI strategies, don’t offer a gauge on how the market is performing. Markets are indeed cap-weighted and cap-weighting is the right way to measure the performance of markets, though not necessarily the performance of the “average stock.”

    Mr. Waid also indicates that investment strategies using fundamental metrics to measure the size of a firm are a form of value and small-cap investing. We agree that relative to cap-weighting, RAFI strategies will always have a value tilt and at times will have a size tilt. We also believe, however, that a cap-weighted portfolio, relative to the size-weighted average company in the economy, will always have a growth tilt.

    More substantively, many of Mr. Waid’s criticisms relate to the following points (and our rebuttal):

    • The RAFI concept is not structurally better than cap-weighting. We believe the RAFI concept is structurally superior because markets are not perfectly efficient — that is, stock prices are estimates of fair value, with errors roughly randomly distributed around fair value. Given pricing errors, a cap-weighted strategy will structurally overweight overvalued stocks and underweight undervalued stocks, leading to a performance drag of two to three percentage points. Of course, RAFI strategies will not outperform every year; however, over a long horizon, we are confident that this structural advantage will prevail.

    • RAFI strategies are not a better measure of a company’s true value. Of course not! We do not claim to know the “right” weight, or whether a stock is over- or undervalued. Linking price to the portfolio weights, as cap-weighting does, creates a structural performance drag, relative to the investible opportunity set, which the fundamental approach largely neutralizes.

    • RAFI strategies are just a value play. Relative to cap-weighting, RAFI strategies are a value play — but RAFI is more than that. Just as cap-weighting loads up on growth companies relative to their footprint in the economy, RAFI strategies load up on value stocks relative to their footprint in the stock market. One-fourth of the 2.2 percentage-point RAFI advantage can be attributed to its average value tilt. The remaining three-fourths of the value-added comes from dynamic shifts in the RAFI tilts.

    • RAFI advantages will disappear if enough money moves from cap-weighting to RAFI strategies. We agree but think it will be years before any meaningful capacity constraint is reached. Currently, about $5 trillion is indexed worldwide. If 20% of this sum — or about $1 trillion — shifted to RAFI investing, RAFI portfolios would comprise only 2% of world equities.

    An example of the power of RAFI strategies is seen this year. Through July, the Russell 1000 Growth index led the Russell 1000 Value index by over 500 basis points, an environment in which a value-tilt strategy should significantly underperform, yet the FTSE RAFI US 1000 has kept pace with the S&P 500 index.

    ROBERT D. ARNOTT

    chairman, Research Affiliates LLC

    Pasadena, Calif.

    Praising stable value

    I am writing on behalf of the Stable Value Investment Association in response to the Aug. 6 editorial titled, “Default for Growth.” The editorial assumes “some investment service providers are going to be disappointed” if the Department of Labor’s safe harbor for auto-enrollment and auto-invested funds excludes stable value funds.

    The issue is not whether stable value providers will be disappointed, but the inevitable disappointment of the many plan participants who will be defaulted into the proposed safe harbor investments if stable value is excluded as a safe harbor default.

    Your editorial missed the point about the safe harbor and stable value. Certain employee populations are risk averse and have investment horizons of short or unknown duration. These populations tend to be lower paid, shorter-tenured employees and older workers close to retirement. These populations do not have the risk tolerance associated with target-date funds or the time to recoup investment losses and to achieve the “higher returns” promised under your scenario of “default for growth.”

    Stable value funds offer a cost-effective, competitive risk-adjusted return while focusing primarily on capital preservation and providing returns similar to intermediate bonds without the volatility. Including stable value funds in the safe harbor broadens the array of qualified investment defaults to include a vehicle that focuses exclusively on capital preservation that not only fulfills the legislative mandate for such a vehicle but also recognizes the broad support for stable value as a safe harbor among plan sponsor groups, participant groups and unions.

    Most importantly, including stable value as a safe harbor provides a safety net for plan participants, plan sponsors and the Department of Labor should any of the underlying assumptions be wrong about managed accounts, target-date funds or balanced funds.

    GINA MITCHELL

    Stable Value Investment Association

    Washington

    Recommended for You
    Read the print edition of P&I
    Read the print edition of P&I
    How low is low? Projections say it's not low enough
    How low is low? Projections say it's not low enough
    FINRA honors Wharton's Olivia Mitchell with Ketchum Prize
    FINRA honors Wharton's Olivia Mitchell with Ketchum Prize
    OCIO, Anchor in Rough Seas
    Sponsored Content: OCIO, Anchor in Rough Seas

    Reader Poll

    May 9, 2022
    SEE MORE POLLS >
    Sponsored
    White Papers
    Are Factors a Thing of the Past?
    Q2 2022 Credit Outlook: Carry On
    Leverage does not equal risk
    Is there a mid-cap gap in your DC plan?
    Out of the Shadows: The Revolution in Shadow Accounting
    The pivotal role of fixed income markets in the ESG revolution
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    May 9, 2022 page one

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    130 E. Randolph St.
    Suite 3200
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2022. Crain Communications, Inc. All Rights Reserved.
    • Topics
      • Alternatives
      • Consultants
      • Coronavirus
      • Courts
      • Defined Contribution
      • ESG
      • ETFs
      • Hedge Funds
      • Industry Voices
      • Investing
      • Money Management
      • Opinion
      • Partner Content
      • Pension Funds
      • Private Equity
      • Real Estate
      • Russia-Ukraine War
      • SECURE Act 2.0
      • Special Reports
      • White Papers
    • Rankings & Awards
      • 1,000 Largest Retirement Plans
      • Top-Performing Managers
      • Largest Money Managers
      • DC Money Managers
      • DC Record Keepers
      • Largest Hedge Fund Managers
      • World's Largest Retirement Funds
      • Best Places to Work in Money Management
      • Excellence & Innovation Awards
      • Eddy Awards
    • ETFs
      • Latest ETF News
      • Fund Screener
      • Education Center
      • Equities
      • Fixed Income
      • Commodities
      • Actively Managed
      • Alternatives
      • ESG Rated
    • ESG
      • Latest ESG News
      • The Institutional Investor’s Guide to ESG Investing
      • Climate Change: The Inescapable Opportunity
      • Impact Investing
      • 2022 ESG Investing Conference
      • ESG Rated ETFs
    • Defined Contribution
      • Latest DC News
      • DC Money Manager Rankings
      • DC Record Keeper Rankings
      • Innovations in DC
      • Trends in DC: Focus on Retirement Income
      • 2022 Defined Contribution East Conference
      • 2022 DC Investment Lineup Conference
    • Searches & Hires
      • Latest Searches & Hires News
      • Searches & Hires Database
      • RFPs
    • Performance Data
      • P&I Research Center
      • Earnings Tracker
      • Endowment Returns Tracker
      • Corporate Pension Contribution Tracker
      • Pension Fund Returns Tracker
      • Pension Risk Transfer Database
      • Future of Investments Research Series
      • Charts & Infographics
      • Polls
    • Careers
    • Events
      • View All Conferences
      • View All Webinars
      • 2022 Innovation Investing Conference
      • 2022 Defined Contribution East Conference
      • 2022 ESG Investing Conference
      • 2022 DC Investment Lineup Conference
      • 2022 Alternatives Investing Conference