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Portfolio > Portfolio Construction

‘It’s Exactly the Right Time to Buy’: Research Affiliates’ Brightman

By James J. Green

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When asked what advisors should tell clients who want to make adjustments to their portfolios in light of the recent market volatility, Chris Brightman says “it’s easy to say, harder to do” to stay the course in a diversified portfolio when bond yields are so low and equities are being battered.

It’s difficult for individual investors to follow Warren Buffett’s dictum to be “fearful when others are greedy and greedy when others are fearful,” he says, but knowing that “fear creates lower prices,” advisors should be looking for investing opportunities when the overall markets are tottering.

However, the Research Affiliates chief investment officer said in an interview Thursday that now and in the future, a diversified portfolio without a hefty exposure to non-U.S. equities isn’t a diversified portfolio at all.

A strategy of investing in a broadly diversified portfolio of non-U.S. equities presents “very attractive future return prospects from today’s prices,” he says. Most U.S. investors have a heavy home-market bias, Brightman says, which leaves their portfolios “poorly diversified.”

So what should investors be doing now, and what should advisors be counseling clients to do during this volatile time?

“You should be rebalancing” your portfolio to take advantage of cheaper stocks, Brightman says, stressing that “volatility creates opportunity, not risk.”

As an example of why the current markets present an opportunity, he cites the current Shiller cyclically adjusted price-to-earnings ratio in the equity markets. “It’s at 25 in the U.S.” equity markets right now — the average is about 16 — while the Shiller CAPE is at 12 in the U.K. “There are bargains around the world” right now in equities, Brightman argues, especially if you look for those bargains that have a “value tilt.”

Are the portfolios created by robo-advisors properly diversified? While Brightman, like many others, heartily dislikes the term “robo,” he thinks the advent of digital advice is a “terrific development” whose platforms will gain much in the way of assets while “disintermediating” some investors from their advisors, though he expects that to be more likely in the wirehouses than among independent advisors.

But as for diversification in robo-managed portfolios, Brightman says they could be “wise” diversified portfolios or unwise. Digital advice platforms are a “structure, not a strategy,” he says.

Brightman doesn’t downplay the risks in international investing, pointing out that investing in the overall U.K. equity market will give you less exposure to tech stocks than the U.S. equity market provides, and likely too much exposure to global mining companies.  

But he argues that bargains exist in many developed nations’ equities, and even among BRIC equities, though Brazil, Russia, India and China each contain their own risks, especially Russia, and Chinese stocks are still overvalued. He concludes: “sell your expensive U.S. equities, buy on-sale equities,” especially abroad, instead. “It’s exactly the right time to buy.”

— Check out Research Affiliates Screens for Smart vs. Dumb Dividends on ThinkAdvisor.

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