Rob Arnott, founder and chief executive officer of Research Affiliates, believes investors should avoid U.S. stocks and buy emerging market equities to outperform in the coming years. CNBC's Mike Santoli spoke with Arnott in an exclusive interview for CNBC PRO . Santoli asked the fundamental indexing pioneer about his market outlook. "Our global asset allocation work is giving some pretty stark indications. We like to look at what we call a Shiller PE ratio, price relative to 10-year smoothed earnings. U.S. is at 29 times earnings. The markets have been higher than those levels twice in history, the tech bubble and 1929. That's not very pleasant company to keep. I'd be very worried about US equities," Arnott said.

"International stocks are at 14 to 15 times earnings. That's not bad. Emerging market stocks are 11 to 12 times earnings. That's cheap. So I would look to invest my equity money outside of the US … Emerging markets is the low hanging fruit in world investing today," he added.



Fundamental indexing strategies, which Arnott developed, rebalance positions according to valuation measures instead of the market cap-weighted allocations typically used by passive index funds. As a result, the holdings tend to overweight undervalued companies and underweight overvalued companies.



Arnott is also the portfolio manager of the PIMCO All Asset and All Asset All Authority funds.

Approximately $179 billion of assets are managed using strategies developed by Research Affiliates as of March 2017, according to the company website. The firm's RAFI Developed index generated 4.85 percent annual returns in the last decade compared to the MSCI All Country World index's 4.27 percent return.



See here for the full CNBC PRO report and the interview video.