PIMCO RAE Strategies: Redefining Active Value Investing

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Text on screen: Prashant Pandey, PRODUCT STRATEGIST

Pandey: I'm Prashant Pandey, equity strategist at Pimco. I'm joined today by Robert Arnott, founder and chairman of research affiliates and portfolio manager of the Pimco RAE Strategies, our value oriented active equity approach.

Pandey: Rob, what makes value investing such a compelling approach to equity markets?

Text on screen: Robert Arnott, FOUNDER AND CHAIRMAN, RESEARCH AFFILIATES

Arnott: Ben Graham famously observed that in the short run, the market is a voting machine and in the long run, it's a weighing machine. The markets in the short run are driven by narratives, narratives that tell us what the markets and the collective psyche of investors think will happen in the long-term future.

But that view changes and that view changes, as the view changes, so do the prices in the market, so does the opportunity set.  

Graphic on screen: Three circles green, red and blue, representing in green Value, in red Quality, and in Blue Momentum; Text on screen: List graphic: Value: Exploit market mispricing, Quality: Avoid value traps, Momentum: Avoid stock in freefall

So, as a result of that value investing,

which anchors on the underlying fundamentals of a business, seeks to take advantage of the mispricings that are created by a market that's driven in the short run by emotion.

Pandey: Thanks, Rob. Can you describe the RAE approach to value investing and what makes it different from other active value strategies?

Arnott: RAE is I think very special in two ways.

Firstly, it uses quality filters and momentum filters to weed out value traps. And if you weed those companies out, you'll weed out some good bargains too, but you'll potentially weed out the value traps. Value investing all too often involves buying more and more of a stock all the way to zero. Now, the second key advantage of RAE is that it doesn't anchor on capitalization weighting.

Text on screen: TITLE – Fundamental economic footprint: BULLETS – Sales as a percentage of all publicly traded companies, Profits as a percentage of total profits in the economy, Dividends and buybacks as a percentage of all dividend distributions

It weights companies in accordance to their fundamental economic footprint in the macro economy.

Measures like how big are its sales as a percentage of all publicly traded company sales, how big are its profits, again as a percentage of total profits in the economy.

How big are its dividends and buybacks as a percentage of all dividend distributions in the economy? And when you use these fundamental measures to set the target size of your investment, then if a company tanks and its fundamentals don't, you're going to be buying more. If it rebounds sharply and its fundamentals don't follow suit. You're going be saying thank you for those lovely gains in trimming it. This potentially creates a rebalancing alpha.

This is the only value strategy in the world that I'm aware of that anchors on the fundamental size of a business for its weight rather than anchoring on its market value, its market capitalization and hence its price.

Pandey: How do you think about including RAE in equity allocation?

Arnott: The strategy has been live in the US, in US small companies in international, in emerging markets, in developed XUS, in global strategies.

The ways people use RAE are most typically as part of the value sleeve in their portfolio. Investors will allocate to growth managers and to value managers.

There are segments of the market where investors won't typically have a value sleeve. Small cap companies and emerging markets are two examples where people often won't have a dedicated sleeve for value. But in the less efficient markets like small cap and emerging markets, we find that the value added is historically even larger and historically even more consistent.

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Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions or are appropriate for all investors and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Outlook and strategies are subject to change without notice.

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