The Fundamental Index: A Better Way to Invest

by Robert D. Arnott; Jason C. Hsu; John M. West; Foreword by: Harry M. Markowitz (University of New York)

• ISBN13: 9780470294130
• ISBN10: 0470294132
• Format: eBook
• Copyright: 2008-07-01
• Publisher: Wiley

Summary

The Fundamental Index examines a new approach to indexing that can overcome the structural return drag created by traditional capitalization-based indexing strategies, and in so doing, enhance the performance of your portfolio. Throughout this book, Robert Arnott and his colleagues outline this breakthrough strategy and explain how it can be used to improve investment returns, typically at lower risk and lower cost than most conventional investments.

Table of Contents

Foreword

Preface

Efficient Indexing for an Inefficient Market

Evidence of Market Efficiency

The Case for Indexing

Evidence of Market Inefficiency

Conclusion

Origins of the Fundamental Index Concept

The Origins of Research Affiliates Fundamental Index (RAFI)

A Series of Aha! Moments

Research Affiliates Fundamental

Index Fundamental

Index Performance

Concluding Thoughts: A Better Way to Invest

Investors Greatest Errors

Negative Alpha

Practicing What We Preach

Conclusion

The Virtues of Index Funds

The Appeal of Equity Investing

Equity Investing Choices

The One Guarantee in Investments-Costs Matter

Index Fund Advantages

Avoiding the Performance Game

Concluding Point

The Index Fund's Achilles Heel

Market Efficiency: Two Interpretations

Constructing a Well-Functioning

Index

The Achilles Heel of Cap-Weighting

The Problems with Equal Weighting

Concluding Thoughts

A Fundamental(ly) Better Index Building the Fundamental Index

Adjustments for non-dividend-paying companies

Why Multiple Measures of Company Size?

Advantages of a Composite Measure

An Index of the Broad Economy

Capacity and Liquidity

Reconstituting the Fundamental Index: Keeping Turnover Low

Concluding Comments

Fundamental Index Performance in U.S. Stocks

RAFI US Large Company Performance

Digging Deeper across Market Cycles

Digging Deeper into Different Time Periods

An Equal Comparison: Fundamental Index vs. Equal Weighting

Out-of-Sample Results: Small Companies

Using the Fundamental Index with Style: Growth and Value Applications

Narrowing the Focus: NASDAQ

Narrowing the Focus: REITs

Narrowing the Focus: Sector Performance

Extending the Analysis Back in Time

Conclusion

Beyond Borders: Fundamental Index Performance in Global Markets

Fundamental Index Performance in Global Markets

Multicountry Portfolios

Emerging Markets

Consistency Counts

Concluding Comments: Lessons Learned From the Global Markets

Has Theory Led the Profession Astray?

Will the Real Active Strategy Please Step Forward?

The Origins of Cap Weighting

Apparent Validation of Cap Weighting by Theory

Forty Years Later: Empirical Results of the CAPM

Ockham's Razor Applied

Concluding Comments: Theory and the Profession

The Basic Criticism: Our Style and Size Tilt

Merely a Value Tilt

Small-Cap Bias

Fama and French Factors

Some Big Surprises in Small Companies

Conclusion

Other Common Critiques: Hits and Misses

Mining the Data?

Costs

Is It an Index?

Do We Know Which Stocks Are Overvalued?

How Long Can It Last?

Conclusion

Why Trust the Fundamental Index Concept?

Stock Logic

The Present vs. the Future: How Often Is Wall Street Right?

Why Does Wall Street Get It Wrong?

Dynamic Style and Size Exposures: When Do We Want Value and Small Cap?

Show Me the Numbers

Fundamental Index Strategy vs. the Crystal Ball

Does the Fundamental Index Concept work in Bonds?

Conclusion

The Future for the Fundamental Index: Secular Market Considerations

What Can We (Rationally) Expect from Our Investments?

Forecasting Bond Returns

Forecasting Stock Returns

The Fundamental Index Strategy in a Low-Return Environment

The Outlook for Pricing Errors

Could Pricing Errors Actually I

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