Masters in Business: "Focusing on Growth (Not Market Cap)"

Host: Barry Ritholtz
Guest: Rob Arnott (Founder, Research Affiliates)
Date: May 7, 2026

Episode Overview

This episode of Masters in Business dives into a critical theme in modern investing: why investors should reconsider traditional market cap-weighted indexes in favor of approaches that focus on true business growth. Barry Ritholtz hosts Rob Arnott, founder of Research Affiliates, to discuss the newly launched Research Affiliates Growth Index—a novel methodology that selects and weights companies based on both the speed and magnitude of their contribution to economic growth, rather than simply their market cap or valuations.

Arnott challenges the conventional duality of "growth" versus "value" and proposes a richer, multidimensional approach to index construction. The conversation covers methodology, performance, volatility, real-world implications, and even a behind-the-scenes look at what’s coming next in index investing.

Key Discussion Points & Insights

1. Rethinking Growth & Value – Not Just a Binary Choice

Arnott debunks the growth vs. value dichotomy:
- "[The principle that] there's this binary duality of growth and value... Pardon me, those are not one dimension. Those are two dimensions." (03:15 – Rob Arnott)
- It’s possible for a company to be cheap or expensive, while also growing fast or slow—these are not mutually exclusive or opposite states.
Traditional Indexing’s Shortcomings:
- Cap-weighted indices overly concentrate investor dollars into a handful of mega-cap names—especially “the Magnificent 7.”
- Growth indexes typically rely on high valuations as a proxy for growth, but that can overexpose investors to expensive stocks, not necessarily the fastest growing ones.

2. What is the Research Affiliates Growth Index?

Constructing the Index on True Growth
- It selects companies for index inclusion based on top 25% percentage growth, not valuation or market cap.
- Factors considered:
  - Sales growth
  - Profit growth
  - Growth in R&D spending
- R&D growth is a key signal—shrinking R&D is a red flag for future growth potential.
"If you have three different growth rates—growth in sales, growth in profits, and growth in R&D spending... you average those growth rates and you've got a very good gauge of how fast the company's growing." (05:38 – Rob Arnott)
Weighting by Dollar Magnitude
- Once companies are selected by fast percentage growth, they are weighted by absolute dollar magnitude of growth—meaning the largest contributors to U.S. economic growth get the largest weights in the portfolio.
- This avoids over-weighting tiny, potentially volatile companies that, despite massive percentage gains, don’t actually move the economic needle.
"By weighting companies in proportion to the dollar magnitude, you're not going to introduce a bias towards frothy tiny companies... It might be a flash in the pan." (09:36 – Rob Arnott)

3. Surprising Constituents & Performance

Not All Big Tech Makes the Cut
- Of the vaunted "Magnificent 7," not all qualify.
- Apple and either Amazon or Microsoft (final answer: Amazon and Microsoft) do not make the index due to slower recent growth rates in revenue and R&D.
"Two of the Magnificent Seven don't make the cut for the RAFI Growth Index... Apple has been 10% of the aggregate growth in sales or profits of the US economy." (07:25, 09:36 – Rob Arnott)
Performance Track Record
- The new index outperformed Russell Growth by 4.5% per annum over the past 30 years (back-tested).
- In live tracking since it appeared on Bloomberg, it beat Russell Growth by 13% in under a year.
"Over the last 30 years [it] would have outperformed Russell Growth by 4.5% per annum..." (03:15 – Rob Arnott) "On Bloomberg... it's already 13 percentage points in less than a year ahead of Russell Growth." (07:27 – Rob Arnott)
Volatility and Underperformance
- Investors must tolerate slightly higher volatility (±7% per year).
- Outperforms 7 out of 10 years; occasionally underperforms in certain market phases.
"You have to live with a little bit more volatility and you have to live with occasional periods when it will underperform... it wins about 7 out of 10 years." (10:26 – Rob Arnott)

4. Practical Implementation, Liquidity & Capacity

Liquidity and Capacity
- No concerns at present; the AUM is zero but the index could, in theory, handle $1.5–$3 trillion in assets if it became as popular as the S&P 500, though with higher turnover.
"I think its capacity would be 10 to 20% of the S&P... that would give us something on the order of one and a half to three trillion as a capacity." (11:37 – Rob Arnott)
When Will It Be Investable?
- No mutual fund or ETF exists yet, but Ritholtz promises to invite Arnott back to the show when the product launches.
"When it becomes investable, we'll have you back." (08:05 – Barry Ritholtz)

5. Quantitative Rigour vs. Data Mining

Avoiding the Pitfall of Data Mining
- Arnott stresses their use of the scientific method: start with a hypothesis, test it, and avoid “manufacturing” a better backtest with endless optimization.
- Their approach led to the original Fundamental Index (RAFI), which has outperformed consistently both in backtesting and live markets.
"Scientific method means you start with a hypothesis and you only use the data to test the hypothesis." (12:59 – Rob Arnott) "Go back historically and ask, what can I construct that's worked? We don't do that." (12:59 – Rob Arnott)
- Ritholtz notes the universal tendency to promote only good backtests:
  
  "When do you ever see a bad back test? Right—all back tests are great." (14:10 – Barry Ritholtz)

Notable Quotes and Memorable Moments

On the problem with current indexes:

"Cap-weighted indexes like the S&P 500 have really done a great job in dominating investor inflows. But ... market concentration into just a handful of stocks, especially the Mag 7, [leads to] higher valuations and increased risks for investors." (01:53 – Barry Ritholtz)
On creating a better growth index:

"Nobody has posed the question, why don't we look at this fundamentally instead of based on valuations?" (03:15 – Rob Arnott)
On weighting by real dollar growth, not just percentages:

"We select based on percentage growth... but weighting... in proportion to the dollar magnitude... avoids a bias towards frothy tiny companies." (08:32, 09:36 – Rob Arnott)
On volatility:

"You have to live with a little bit more volatility... it adds 4.5% a year, plus or minus 7%... it wins about 7 out of 10 years." (10:26 – Rob Arnott)

Important Timestamps

[01:53] – Introduction and critique of cap-weighted indexing
[03:15] – Rob Arnott on the multidimensional nature of growth and value
[05:38] – Mechanics of the Research Affiliates Growth Index: selection and weighting
[07:03–07:27] – Which Magnificent 7 companies don't make the growth index?
[08:32–09:36] – Explanation of weighting by dollar growth vs. percentage growth
[10:26] – Volatility and performance consistency
[11:37] – Discussion on liquidity, capacity, and index scalability
[12:59] – Scientific method vs. data mining; RAFI’s development philosophy
[14:10] – The reality of backtesting and making a “good” strategy

Conclusion & Takeaways

Traditional market cap-weighted indexes face concentration risk; value and growth are not opposites.
A fundamentally constructed growth index—grounded in real, measurable business expansion (sales, profits, R&D) and weighted by actual contribution—can deliver superior returns, albeit with more volatility.
Not all mega-cap tech companies pass genuine “growth” criteria, challenging the notion that size alone drives economic impact.
The Research Affiliates Growth Index isn’t investable yet, but look for future ETF/mutual fund releases.
Investors should scrutinize methodologies that rely on backtesting alone and seek no-nonsense, science-first solutions to indexing.

If you seek to diversify from conventional cap-weighted strategies and want an index that reflects true business growth, keep an eye on the Research Affiliates Growth Index—and look forward to its eventual investable launch.

Masters in Business: "Focusing on Growth (Not Market Cap)"

Host: Barry Ritholtz
Guest: Rob Arnott (Founder, Research Affiliates)
Date: May 7, 2026

Episode Overview

Key Discussion Points & Insights

1. Rethinking Growth & Value – Not Just a Binary Choice

Arnott debunks the growth vs. value dichotomy:
- "[The principle that] there's this binary duality of growth and value... Pardon me, those are not one dimension. Those are two dimensions." (03:15 – Rob Arnott)
- It’s possible for a company to be cheap or expensive, while also growing fast or slow—these are not mutually exclusive or opposite states.
Traditional Indexing’s Shortcomings:
- Cap-weighted indices overly concentrate investor dollars into a handful of mega-cap names—especially “the Magnificent 7.”
- Growth indexes typically rely on high valuations as a proxy for growth, but that can overexpose investors to expensive stocks, not necessarily the fastest growing ones.

2. What is the Research Affiliates Growth Index?

Constructing the Index on True Growth
- It selects companies for index inclusion based on top 25% percentage growth, not valuation or market cap.
- Factors considered:
  - Sales growth
  - Profit growth
  - Growth in R&D spending
- R&D growth is a key signal—shrinking R&D is a red flag for future growth potential.
"If you have three different growth rates—growth in sales, growth in profits, and growth in R&D spending... you average those growth rates and you've got a very good gauge of how fast the company's growing." (05:38 – Rob Arnott)
Weighting by Dollar Magnitude
- Once companies are selected by fast percentage growth, they are weighted by absolute dollar magnitude of growth—meaning the largest contributors to U.S. economic growth get the largest weights in the portfolio.
- This avoids over-weighting tiny, potentially volatile companies that, despite massive percentage gains, don’t actually move the economic needle.
"By weighting companies in proportion to the dollar magnitude, you're not going to introduce a bias towards frothy tiny companies... It might be a flash in the pan." (09:36 – Rob Arnott)

3. Surprising Constituents & Performance

Not All Big Tech Makes the Cut
- Of the vaunted "Magnificent 7," not all qualify.
- Apple and either Amazon or Microsoft (final answer: Amazon and Microsoft) do not make the index due to slower recent growth rates in revenue and R&D.
"Two of the Magnificent Seven don't make the cut for the RAFI Growth Index... Apple has been 10% of the aggregate growth in sales or profits of the US economy." (07:25, 09:36 – Rob Arnott)
Performance Track Record
- The new index outperformed Russell Growth by 4.5% per annum over the past 30 years (back-tested).
- In live tracking since it appeared on Bloomberg, it beat Russell Growth by 13% in under a year.
"Over the last 30 years [it] would have outperformed Russell Growth by 4.5% per annum..." (03:15 – Rob Arnott) "On Bloomberg... it's already 13 percentage points in less than a year ahead of Russell Growth." (07:27 – Rob Arnott)
Volatility and Underperformance
- Investors must tolerate slightly higher volatility (±7% per year).
- Outperforms 7 out of 10 years; occasionally underperforms in certain market phases.
"You have to live with a little bit more volatility and you have to live with occasional periods when it will underperform... it wins about 7 out of 10 years." (10:26 – Rob Arnott)

4. Practical Implementation, Liquidity & Capacity

Liquidity and Capacity
- No concerns at present; the AUM is zero but the index could, in theory, handle $1.5–$3 trillion in assets if it became as popular as the S&P 500, though with higher turnover.
"I think its capacity would be 10 to 20% of the S&P... that would give us something on the order of one and a half to three trillion as a capacity." (11:37 – Rob Arnott)
When Will It Be Investable?
- No mutual fund or ETF exists yet, but Ritholtz promises to invite Arnott back to the show when the product launches.
"When it becomes investable, we'll have you back." (08:05 – Barry Ritholtz)

5. Quantitative Rigour vs. Data Mining

Avoiding the Pitfall of Data Mining
- Arnott stresses their use of the scientific method: start with a hypothesis, test it, and avoid “manufacturing” a better backtest with endless optimization.
- Their approach led to the original Fundamental Index (RAFI), which has outperformed consistently both in backtesting and live markets.
"Scientific method means you start with a hypothesis and you only use the data to test the hypothesis." (12:59 – Rob Arnott) "Go back historically and ask, what can I construct that's worked? We don't do that." (12:59 – Rob Arnott)
- Ritholtz notes the universal tendency to promote only good backtests:
  
  "When do you ever see a bad back test? Right—all back tests are great." (14:10 – Barry Ritholtz)

Notable Quotes and Memorable Moments

On the problem with current indexes:

"Cap-weighted indexes like the S&P 500 have really done a great job in dominating investor inflows. But ... market concentration into just a handful of stocks, especially the Mag 7, [leads to] higher valuations and increased risks for investors." (01:53 – Barry Ritholtz)
On creating a better growth index:

"Nobody has posed the question, why don't we look at this fundamentally instead of based on valuations?" (03:15 – Rob Arnott)
On weighting by real dollar growth, not just percentages:

"We select based on percentage growth... but weighting... in proportion to the dollar magnitude... avoids a bias towards frothy tiny companies." (08:32, 09:36 – Rob Arnott)
On volatility:

"You have to live with a little bit more volatility... it adds 4.5% a year, plus or minus 7%... it wins about 7 out of 10 years." (10:26 – Rob Arnott)

Important Timestamps

[01:53] – Introduction and critique of cap-weighted indexing
[03:15] – Rob Arnott on the multidimensional nature of growth and value
[05:38] – Mechanics of the Research Affiliates Growth Index: selection and weighting
[07:03–07:27] – Which Magnificent 7 companies don't make the growth index?
[08:32–09:36] – Explanation of weighting by dollar growth vs. percentage growth
[10:26] – Volatility and performance consistency
[11:37] – Discussion on liquidity, capacity, and index scalability
[12:59] – Scientific method vs. data mining; RAFI’s development philosophy
[14:10] – The reality of backtesting and making a “good” strategy

Conclusion & Takeaways

Traditional market cap-weighted indexes face concentration risk; value and growth are not opposites.
A fundamentally constructed growth index—grounded in real, measurable business expansion (sales, profits, R&D) and weighted by actual contribution—can deliver superior returns, albeit with more volatility.
Not all mega-cap tech companies pass genuine “growth” criteria, challenging the notion that size alone drives economic impact.
The Research Affiliates Growth Index isn’t investable yet, but look for future ETF/mutual fund releases.
Investors should scrutinize methodologies that rely on backtesting alone and seek no-nonsense, science-first solutions to indexing.

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Focusing on Growth (Not Market Cap)

Summary

Masters in Business: "Focusing on Growth (Not Market Cap)"

Episode Overview

Key Discussion Points & Insights

1. Rethinking Growth & Value – Not Just a Binary Choice

2. What is the Research Affiliates Growth Index?

3. Surprising Constituents & Performance

4. Practical Implementation, Liquidity & Capacity

5. Quantitative Rigour vs. Data Mining

Notable Quotes and Memorable Moments

Important Timestamps

Conclusion & Takeaways

Transcript

Summary

Masters in Business: "Focusing on Growth (Not Market Cap)"

Episode Overview

Key Discussion Points & Insights

1. Rethinking Growth & Value – Not Just a Binary Choice

2. What is the Research Affiliates Growth Index?

3. Surprising Constituents & Performance

4. Practical Implementation, Liquidity & Capacity

5. Quantitative Rigour vs. Data Mining

Notable Quotes and Memorable Moments

Important Timestamps

Conclusion & Takeaways