MMasters in Business
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07 May 2026

Focusing on Growth (Not Market Cap)

3Frameworks
5Insights

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Frameworks in this episode

Finance6 steps

Fundamental Growth Indexing

Select firms by growth rate, then weight them by economic contribution

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Innovation6 steps

Hypothesis-First Strategy Testing

Form a causal investment thesis before testing historical data

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Finance4 steps

The Two-Dimensional Growth-Value Model

Judge business growth and valuation on separate axes

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Insights & moments

The myth-busts, hot takes, explainers, and tools worth keeping.

Myth Buster· 1

Myth Buster05:13

Why Two Magnificent Seven Stocks Missed the Growth Cut

Amazon and Microsoft were excluded from the Research Affiliates Growth Index despite their scale and reputations. Arnott says both had grown nicely in the 2020s, but not quickly enough to satisfy the index's current fundamental-growth threshold.

  • Famous technology firms do not automatically qualify as growth stocks
  • Amazon and Microsoft failed the index's growth cutoff
  • Past rapid expansion does not guarantee current eligibility

“Amazon and Microsoft both were growing incredibly fast into the twenty tens and have been growing nicely in the twenty twenties, but not fast enough…”

Rob Arnott · 05:41
#magnificent seven#amazon#microsoft#growth stocks

Hot Take· 1

Hot Take10:32

Let Fundamentals, Not the Latest Narrative, Choose the Winners

The discussion contrasts narrative-led investing in themes such as crypto and artificial intelligence with an index that refreshes according to measured business growth. The implication is that constituents should change as sales, profits, and research spending change, rather than because a fashionable story dominates markets.

  • Market narratives rise and fade
  • Fundamental data can update index membership systematically
  • Theme popularity is not the same as measurable company growth
  • Rules-based reconstitution can adapt without predicting the next narrative

“I've been watching various narratives come into favor and then fade.”

Barry Ritholtz · 10:32

“does the dominant narrative matter or is it us redefining its constituents based on what is best working today, what is seeing the highest increases…”

Barry Ritholtz · 10:49
#market narratives#ai#crypto#fundamentals

Explainer· 1

Explainer09:29

How Turnover Limits the Index's Capacity

Arnott estimates that the index turns over four to five times as much as the S&P 500 and focuses on a narrower category of stocks. After applying both constraints, he estimates capacity at 10 to 20 percent of S&P 500 indexed assets, or roughly $1.5 trillion to $3 trillion.

  • Turnover is estimated at four to five times the S&P 500's
  • Higher turnover reduces scalable capacity
  • A narrower growth universe warrants another capacity haircut
  • Estimated capacity remains in the trillions of dollars

“It has about four times the turnover of the S and P maybe five, So just on that alone, its capacity would be a fourth…”

Rob Arnott · 10:01

“I think its capacity would be ten to twenty percent of the S and P.”

Rob Arnott · 10:16
#capacity#liquidity#turnover#index funds

Q&A· 1

Q&A08:28

What Investors Must Endure for the Reported Excess Return

The proposed index does not offer a smooth advantage over conventional growth benchmarks. Arnott says it carries somewhat higher volatility, can underperform in individual years, and historically won in roughly seven out of ten years rather than every year.

  • Higher expected return comes with somewhat higher volatility
  • Annual relative results have varied substantially
  • A typical disappointing year could lag by about two points
  • The strategy reportedly won around seven out of ten years

“The short answer is you have to live with a little bit more volatility, and you have to live with occasional periods when it will…”

Rob Arnott · 08:40

“But if you go back, you find that it wins about seven out of ten years.”

Rob Arnott · 09:21
#volatility#tracking error#risk#outperformance

Takeaway· 1

Takeaway03:13

The Index's Reported Backtest and Early Live Performance

Arnott reports that the methodology would have beaten Russell Growth by about 4.5 percentage points annually over nearly three decades. He also says the tracked index was 13 percentage points ahead of Russell Growth in less than a year, while emphasizing that it was not yet investible.

  • Reported historical value added was 4.5 percentage points annually
  • The comparison benchmark was Russell Growth
  • Early tracked performance was 13 percentage points ahead
  • The index was not yet available as an investible product

“You wind up with an index that, over the last thirty years would have outperformed Russell growth by four and a half percent peranum going…”

Rob Arnott · 03:13

“The index is on Bloomberg has been since last March, and it's already thirteen percentage points in less than a year ahead of Russell growth.”

Rob Arnott · 05:56
#performance#russell growth#backtest#index