Fundamental indexing selects, ranks and weights companies, not by market capitalization, but by financial fundamental measures, such as sales, cash flow, book price and dividends. "CalPERS is intrigued by the concept of fundamental index construction and how this new approach may complement our traditional passive investments in market capitalization weighted benchmarks. We will be examining this innovative idea closely", a spokesperson from CalPERS Investment Office in Sacramento commented.
Matt Clark at South Dakota Investment Council stated "Late last year, we made the inaugural investment in the fundamental indexes approach; we felt that it was and is an important advance in equity management. While we focus on the long term, we have been pleased with the results thus far, as the process has already added over 2% in our first six months. Part of the reason that we wanted to be first is that we think this idea will likely attract very substantial assets in the years ahead. If so, we think that the earliest adopters can expect outsized benefits.”
FTSE RAFI 1000 for the US and FTSE RAFI Global ex US 1000 indexes will be introduced in Fall 2005. Additional indexes will be introduced in the months ahead. FTSE will also assume calculation of the existing RAFI 1000 index at the same time. Rob Arnott, Chairman of Research Affiliates, LLC, said, “Cap weighted indexes overweight over-valued companies and underweight under-valued companies - this creates a performance drag that isn’t replicated in fundamental indexes. We have done extensive research and have found that fundamental weighted indexes, on average, have outperformed the well-known cap weighted indexes in the US by some 200 basis points a year. In international applications, the benefit surpasses 300 basis points, on average” Mark Makepeace, Chief Executive FTSE Group added, “ Fundamental indexes are an exciting new development which will appeal to many investors. FTSE continues to innovate and bring more choice to investors and plan sponsors worldwide.”
