Focusing on Growth (Not Market Cap)

This episode of Masters in Business explores a radical rethinking of how growth-oriented investment indexes are constructed, challenging the long-standing dominance of market-cap-weighted benchmarks like the S&P 500. Hosted by Stephen Carroll and Caroline Hepker, the conversation centers on Rob Barnott, founder of Research Affiliates, who introduces the Research Affiliates Growth Index (RAFIG)—a fundamentally different approach that selects and weights companies not by valuation or market cap, but by their actual rate of growth in sales, profits, and R&D spending. The index prioritizes companies with high dollar contributions to macroeconomic growth, rather than just percentage gains, which helps avoid overexposure to small, volatile 'flash-in-the-pan' stocks. Backtested over 30 years, RAFIG has outperformed Russell Growth by 4.5% annually, with strong performance even in recent years—13% ahead in less than a year—while maintaining a 70% win rate over the long term. The episode also addresses concerns around volatility, liquidity, and the danger of data mining in index design, emphasizing a scientific, hypothesis-driven methodology over backtest cherry-picking. Despite being non-investable at the time of recording, the team expresses confidence that an ETF or mutual fund version will soon be available. The episode concludes with a broader reflection on how investment strategies should evolve with changing economic narratives—especially in the age of AI and tech-driven growth—without being trapped by past trends. The core takeaway is that investors should focus on real, measurable economic growth rather than inflated valuations or market concentration. The discussion underscores the importance of innovation in indexing and offers a compelling alternative for those wary of the risks posed by the MAG7 and cap-weighted dominance. The tone is forward-thinking, intellectually rigorous, and cautiously optimistic about the future of indexing.