Von Aldo

Was It Really A Lost Decade? Not If You Used Fundamental Indexes for Your Equity Exposure

Sure, Rob Arnott, a pioneer in fundamental indexing, has an ax to grind. He is after all chairman of Research Affiliates, which creates fundamental indexes and subadvises for PIMCO, Schwab and other asset managers. (Fundamental indexers create indexes based on companies' economic scale rather than on its market value a la the traditional cap-weigthed indexes, such as the S&P; the idea is to avoid over-priced stocks by using fundamental metrics, such as dividends, price to book, cash flow, among others, weight them in an index.

In this research report, Arnott shows how you would you would have done in a traditional 60/40 portfolio by replacing the S&P 500 cap-weighted index with the FTSE RAFI US 1000 (Research Affiliates' fundamental index). The annualized return moves from a negative 2.3% to 5.8%.

Old indexing hands, such as former Vanguard chairman John Bogle and Princeton finance professor Buron Malkiel, thought fundamental indexes would be unlikely to consistently outperform cap-weighted benchmarks, because of the new paradigm’s inherently higher operating expenses, greater portfolio turnover rates and heavier tax burdens.

But Registered Rep.'s contributing editor for altnernative investments Brad Zigler came to a similar conclusion when I asked him to investigate fundamental indexers' claims that they actually live up to thier billing. Zigler did indeed find a slightly better return by using funamental indexes. But he didn't find a marked reduction in volatility, however, even as measured by the Sortino ratio which attempts to focus on downside volatility and not upside volatility. His story will be published in the February issue of Registered Rep. and online too.

Hide comments


  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.