Masters in Business · Wednesday, September 2, 2026
Rob Arnott explains that while fundamental index strategies have a value tilt, their rebalancing mechanism helps manage the volatility often associated with value investing. He notes that even during periods where value underperforms significantly, fundamental indexes demonstrate resilience, outperforming cap-weighted value indexes in about three out of every four years.
“RAFI, Fundamental Index, has a rebalancing alpha, a stock soars and its fundamentals don't validate that, then you're going to say, thanks for the nice high price, I'm going to trim it. If it tanks and the fundamentals don't falter, you're going to say, thanks for the bargain, I'm going to top it up.”
“Relative to the value indexes, this is live, the RAFI indexes have beat the cap-weighted value indexes by a little over 2% per year compounded.”
“And in most years when value has been losing, it doesn't matter. Rafi has been winning at about three out of every four years. And this is live, this is not a back test.”