Masters in Business• May 8, 2026• 14:12Interview

Focusing on Growth (Not Market Cap) | Masters in Business

From Masters in Business

Rob Arnott•Founder, Research Affiliates

Executive Summary

Market-cap weighted indexes like the S&P 500 are creating significant market concentration risk in a handful of mega-cap stocks.
Research Affiliates has developed a new 'RAFI Growth Index' that selects companies based on fundamental growth (sales, profits, R&D) and weights them by their dollar contribution to economic growth.
Backtested over 30 years, this methodology outperformed the Russell Growth index by 4.5% annually, and has continued to outperform in its first year of live tracking.
The index is not yet investable but is estimated to have a capacity of $1.5 to $3 trillion, offering a potential alternative for investors concerned with current index construction.

12 quotes

Concerns Raised

The strategy is expected to have 4-5 times the portfolio turnover of the S&P 500.
The index will have higher volatility than its cap-weighted counterparts.
The strategy is not yet available as an investable product for the public.

Opportunities Identified

Significant historical outperformance of 4.5% per year over the Russell Growth index in backtests.
Provides a solution to the market concentration risk inherent in cap-weighted indexes.
Offers a way to invest in companies based on fundamental growth rather than just high valuations.

Key Themes

Indexing Methodology Innovation

The core of the discussion is a critique of traditional market-cap weighting and the introduction of a novel approach to building a growth index. This new method selects companies based on their percentage growth in fundamental metrics and weights them by the dollar magnitude of that growth.

This challenges the decades-old standard for index construction and offers a potential solution to the increasing problem of market concentration in major indexes like the S&P 500.

Redefining Growth Investing

Rob Arnott argues against the conventional finance dichotomy where 'growth' is simply the opposite of 'value' and is often a proxy for 'expensive'. He proposes defining growth companies by their actual, measurable growth in sales, profits, and R&D, completely separating the concept from valuation.

This fundamental re-framing provides a more economically-grounded way to identify and invest in high-growth companies, potentially avoiding valuation bubbles associated with traditional growth indexes.

Backtesting vs. Live Performance

The conversation highlights the common pitfall of 'data mining' in quantitative finance, where strategies are created to look good in backtests but fail in the real world. Arnott emphasizes their 'scientific method' approach of starting with a hypothesis and then testing it, citing the successful live track record of their original RAFI index as proof of concept.

This serves as a crucial reminder for investors to be skeptical of purely backtested results and to look for strategies with sound economic logic and, ideally, a history of live performance.

Portfolio Weighting and Concentration

A key technical point is the index's unique weighting scheme, which is based on a company's dollar contribution to the economy's aggregate growth. This allows giants like Apple and NVIDIA to have significant weights (around 10% each) because their absolute growth is massive, while preventing tiny, frothy companies from dominating the index despite high percentage growth.

This methodology directly addresses how to build a concentrated portfolio of true growth drivers without introducing the biases found in either cap-weighted or equal-weighted schemes.

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Topics

Indexing Factor Investing Growth Investing Value Investing Market Concentration S&P 500 Magnificent Seven Research Affiliates RAFI Growth Index Rob Arnott Portfolio Construction Weighting Methodology Backtesting Data Mining Quantitative Investing NVIDIA Apple ETF

Processed May 8, 2026 yt-dlp + mlx-whisper + Gemini

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