Rob Arnott: Emerging Markets Are Worth the Risk

Everybody loves a good story. But when people invest based on those stories, they can lose money, says Rob Arnott.

The 60-year-old founder and chairman of Research Affiliates prefers to stick to the data. The numbers have led Arnott to some unconventional investment strategies. The most famous of Arnott’s inventions are “smart beta” funds, which use non-traditional indexes to invest based on fundamental measures -- such as sales, dividends or cash flow -- rather than market capitalization.

About $177 billion are now managed in funds and strategies developed by Research Affiliates. Founded in 2002, Arnott's firm is the adviser for more than $61 billion at Pacific Investment Management Co., half of that in the Pimco All Asset Fund (PAAIX). Over the last 10 years, it's up an average of 5.5 percent annually. However, with about 8 percent of the fund in emerging markets currencies, it's down 4.25 percent this month.

Arnott is making long-term bets on emerging markets because his calculations make him gloomy about U.S. stocks and the long-run growth of the U.S. economy. As he told Bloomberg.com, the rest of the world is full of opportunity for the patient and brave investor.