Traditional Asset Classes Outlook
Research Affiliates' Rob Arnott says investors need to ratchet down their return expectations and, when they become cheaper, increase exposure to inflation-protected assets.
Traditional Asset Classes Outlook
Christine Benz: Hi, I'm Christine Benz. I'm here at the Investment News
Retirement Income symposium. I'm here today with Rob Robert
Arnott. Rob is the chairman of Research Affiliates and he's also the
former editor of the Financial Analysts Journal. Rob, thanks so
much for being here.
Robert Arnott: Thank you very much.
Christine Benz: So Rob, you talked this morning and one might have come away
with the sense that you have a pretty gloomy outlook for traditional
asset classes overall. You think conventional bonds; stocks are
pretty expensive right now. Is that a correct assessment?
Robert Arnott: I think that's accurate. What people will often do is shape their
expectations on what's happened in the past rather than looking at
And yields on stocks, they've doubled in the last 10 years because
it was such a horrific decade. They're still half what they've been
And so the yields on stocks are low. The yields on bonds and an
array of other asset classes are low. People need to ratchet down
their return expectations. If you're expecting double-digit returns
on your investments, then I'm a bear. I think you're not going to get
If you're expecting 5% return on your investments and you're well
diversified and you're taking advantage of an array of alternative
markets, yeah, that's not just achievable but reasonably easily
achievable. 6% or 8% is possible.
Christine Benz: So this is a conference focused on retirement income. One idea you
talked about this morning is just looking at TIPS for the
conservative sleeve of a retiree portfolio. Can you talk about how
you're thinking about inflation and why you think TIPS are
Robert Arnott: Well, inflation is the big risk that threatens people's retirements in
the years ahead. Capital market returns have hurt them but severe
inflation would be crippling.
So that's the big risk and unfortunately right now, with debt at
unprecedented levels in U.S. history, we have a problem. We're
borrowing from future generations, and then we're wanting those
future generations to fund our retirements through Social Security
The deal is going to change. It will change. It'll change because
society can't afford the deal that's currently on the table.
So, as a consequence of that, looking to protect yourself from
inflation, TIPS are a great vehicle. When they have their
occasional corrections and become cheap, the opportunity to add to
our allocations to commodities, to emerging markets debt, to
These all represent very, very interesting diversifications away
from an over-reliance on mainstream stocks and bonds, neither of
which serves us well in a reflationary world. And the risk is that
the reflation could potentially be pretty severe.
Christine Benz: So it's hard to argue that any asset classes you just enumerated are
particularly cheap now. Correct?
Robert Arnott: Correct.
Christine Benz: So what should you do, if you're someone sitting there with maybe
Robert Arnott: If you want to be tactical, take a lot of risk off the table. Warren
Buffett has been quoted as saying, "Be greedy when others are
terrified. Be terrified when others are greedy."
A year ago, people were terrified. It was a great time to take risk,
because it was so frightening to do so.
Today, quality spreads on high yield are approaching where they
were in 2007, same with investment grade. The same holds true for
emerging markets bonds. The PE ratios for stocks are approaching
where they were two years ago.
This is not a time to get greedy. This is a time to take some of that
risk off of the table and say, "Thank you very much for those
wonderful returns in the last year."
With so many people thinking the global financial crisis is past, not
prologue, the risks are to the downside. We have a tax hike coming
at the end of the year.
The likelihood that high-net-worth investors, affluent consumers
will ramp down their spending as early as Q4 in anticipation of
those higher taxes to brace them selves for it, very real possibility.
What would be the consequences? A second dip in the recession. I
think that's better than a 50-50 chance. The markets are priced to
say that's not happening; that's not going to be the eventuality.
And so if the market is saying "no recession" and if we get a
recession, then the markets will be hit. And in so doing, you will
have bargains in some of these inflation protection strategies.
Christine Benz: You had mentioned this morning that you actually thought,
possibly within the next six to 12 months, there could actually be a
buying opportunity in some of these assets.
Robert Arnott: Yes. Now is not the time to load up on them but over the course of
the next two to three years, investors really owe it to themselves to
ramp up their investment in inflation protection assets that can help
them weather an inflationary storm.
Christine Benz: Ok. Well, thanks Rob. Not necessarily a sunny outlook but helpful.
Robert Arnott: There's always something interesting to invest in, always.
Christine Benz: Thanks Rob. Thanks for being here.
Robert Arnott: Thanks.
Christine Benz: Thanks for watching. I'm Christine Benz.
Traditional Asset Classes Outlook
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