In a June episode of the Bloomberg What Goes Up podcast, Research Affiliates founder Rob Arnott discusses smart beta investing and, specifically, his views on investing in emerging markets value stocks and how it requires a level of comfort with “maverick risk.”

Arnott defined maverick risk as an investor’s perception that a portfolio is performing differently from how they think it should, adding that “it’s the risk people most want to avoid.” Given that EM value stocks have delivered much lower returns than the S&P 500, he says, it only makes sense that EM investors don’t care about maverick risk. Arnott describes himself as one such investor, adding that half of his personal assets are in emerging markets indices.

For his clientele, however, Arnott advises differently: “I would advocate for putting nearly as much in emerging markets as their maximum comfortable exposure and most of that into value, not growth. For most people, that’s about a 5% or 10% allocation, and that’s fine. That’s enough to move the needle and make a difference in returns.”

Arnott explains that his firm’s models show EM value stocks beating the S&P 500 by “about 1000 basis points per year for the next ten years.” He adds, “that adds up. Big.”

Regarding relative volatility of EM stocks, Arnott says it is not drastic compared to S&P 500 stocks. “People fear emerging markets because of unfamiliarity, not because they are inherently, hugely risky,” he argues.

Arnott comments on current Fed policy by suggesting that an inverted yield curve should not be viewed as a “signal that a recession is coming,” but rather as “something that creates a recession.” He explains that yield curve inversion is the market’s way of telling the Fed that “It is too tight” and “is stifling investment.”