The World According to 'The Bear'

Arnott is bearish on real estate, too: He rents his new Newport Beach (Calif.) home alanlevenson.com

By Lauren Young

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As Robert Arnott steps out of a taxi en route to a CNBC interview at the New York Stock Exchange, two young Italian tourists stop him on the street. "Do you know where The Bull is?" asks one of the young men clutching a map. The bull in question is Charging Bull, a 7,000-pound, 16-foot-long bronze sculpture by Italian artist Arturo Di Modica that stands in Bowling Green Park.

Arnott, an investment guru who lives in California, isn't familiar with the twisty streets of Lower Manhattan, but one of his colleagues points the tourists in the right direction. I Little do the Italians know that they've just met The Bear, a.k.a. Rob Arnott, chairman of investment advisory firm Research Affiliates.

Big and burly, with a gray-flecked beard and a bit of a belly after loading up on pastries during a trip to Europe, Arnott certainly looks the part. His bearish outlook informs the way he manages $35 billion for clients such as pension giant CalPERS. Included in that $35 billion is $15.2 billion he runs in the Pimco All Asset Fund (PKO) for Pacific Investment Management (Pimco). Index strategies he has created are used in products offered by a variety of investment companies, including some Charles Schwab (SCHW) mutual funds. The strategies are also the basis for a slew of exchange-traded funds (ETFs) listed in the U.S., France, Sweden, and elsewhere.

Stocks are likely to move lower in the next six months and will be in hibernation for years, predicts Arnott. "For the long-term investor, stocks will offer single-digit returns over the next 10 to 20 years, though individual years could be far better or worse," he says. Among Arnott's worries: Congress getting too protectionist or doing a massive bailout of the housing market. Even after such musings, though, Arnott says: "I don't perceive myself as wildly bearish, but compared to rest of world I am." He does see some bright spots. "There are always places to invest," he says. He likes U.S. Treasury Inflation-Protected Securities (TIPS) and local currency emerging markets debt.

Arnott, 53, made his name as a pioneer in the wonky-sounding field of tactical asset allocation. He advocates actively shifting assets among categories—stocks, bonds, real estate, commodities—to take advantage of pricing anomalies or strong market sectors. He's also known for his bold, big-think forecasts. "His talent is his insight," says Nobel prize-winning economist Harry Markowitz, who is an adviser to Research Affiliates. Arnott's views are closely followed by leading financial advisers such as Louis Stanasolovich, a Pittsburgh wealth manager. "A lot of people are focused on what is happening this minute. Rob steps back and says: 'Here's the big picture,'" says Stanasolovich, CEO of Legend Financial Advisors.

Stanasolovich has invested more than $20 million of his clients' money in the Pimco All Asset Fund. In that fund, Arnott mixes quantitative screens with his own insights to rebalance the portfolio among investments such as stocks, bonds, TIPS, commodities, emerging-market debt, and real estate. The fund, which invests only in other Pimco portfolios, is up 6.01% for the past year, 4.8 percentage points ahead of the Dow Jones Moderate Portfolio Index, according to fund tracker Morningstar. The fund's five-year annualized return, however, is 6.77% through June 9, below the 10.69% return for its benchmark. All Assets's top bets include inflation-related strategies (30%), alternative bond strategies (26%), short-term strategies (14%), and equities and convertible bonds (10%).

MATH GEEK AT THE BEACH

At the beginning of May, Arnott and about 15 colleagues moved some 50 miles from Pasadena, Calif., up to Newport Beach to be closer to Pimco, Arnott's biggest client. But the unofficial reason for the change of location is that Arnott fell in love with the beach when he was studying economics, applied mathematics, and computer science as a student at University of California at Santa Barbara in the 1970s.