![]() That number equates to 2.5% “real” gains, since RA foresees inflation running at a 2.9% annual pace, well above the Federal Reserve’s 2% target. large caps, RA predicts that earnings per share (EPS) will rise, on average, at 5.4% a year through 2033. Falling P/Es and modest profit growth will mean low future returns It also deems that earnings per share will expand close to historical norms, and ignores the bluebird predictions of consistent, double-digit growth usually posited by Wall Street analysts. The numbers are based on the principal of “reversion to the mean.” In predicting changes in valuation, for example, RA forecasts that over the next decade, price/earnings ratios (P/Es) will move from their current levels toward their long-term averages. The RA website features an “Asset Allocation Interactive” map that shows the firm’s 10-year total return projections for three dozen investment categories, from emerging markets to REITs, from TIPS to commodities. RA’s CEO and chief investment officer, Chris Brightman, is also one of the leading masters of scientifically based data analysis in the investment industry. RA founder Rob Arnott is the former editor-in-chief of Financial Analysts Journal, and ranks among the top academic thinkers in portfolio management. ![]() The firm’s RAFI-branded fundamental funds are hence structured to avoid putting a bigger and bigger percentage of total holdings in the most expensive stocks, a big problem for traditional index funds and ETFs and other “cap-weighted” vehicles where allocations are based on stocks’ market capitalization. It created a template called “fundamental indexing” that weights stocks not by their dollar value, but by such bedrock measures as cash flow, sales, and dividends. Research Affiliates is a firm that designs investment strategies for $130 billion in mutual funds and ETFs for such managers as Pimco, Charles Schwab, and Invesco.
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