The Fundamental Index A Better Way to Invest

The Fundamental Index offers a breakthrough strategy for capturing the best market returns at the lowest cost and with the least risk. In this important new book, the highly respected Rob Arnott explains how passive, market capitalization weighted index investing falls short and fails to serve investors, investing too much in overpriced stocks and too little in underpriced shares. He shows how a new twist on indexing, fundamental indexing, eliminates this return drag and, in so doing, earns greater returns. In addition to discussing the powerful long-term performance of this strategy, this comprehensive guide also reveals how the new fundamental index outperforms most powerfully when excess returns are needed most, during market and economic downturns. In short, Arnott's innovative and straightforward strategy gives investors a new tool to achieve excess returns in a projected low-return environment while preserving the many positive attributes of index fund investing.

Robert D. Arnott is a leading industry thinker and researcher who served as the editor of the Financial Analysts Journal from 2002–2006 and who has authored over 100 articles for journals such as the Financial Analysts Journal, the Journal of Portfolio Management, and the Harvard Business Review. Arnott serves as Chairman of Research Affiliates, LLC, a global leader in innovative investing and asset allocation strategies. Founded in 2002, Research Affiliates distributes investment products in partnerships with leading financial institutions including PIMCO, PowerShares, Charles Schwab, Nomura Asset Management, and FTSE, to name only a few.

Jason C. Hsu, PhD, is Managing Director, respon-sible for Research and Investment Management, at Research Affiliates, LLC. He is also a Professor in Finance at the Anderson School of Business at UCLA.

John M. West is Associate Director and Product Specialist at Research Affiliates, LLC. Previously, he was vice president and senior consultant at Wurts & Associates, where he managed the firm's overall research effort.

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 FundG+&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
OckhamG+&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?
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Problems
Effect of Stress
Cold Working
Stress-Corrosion Cracking of Iron and Steel
Mechanism of Stress-Corrosion Cracking of Steel
Effects through Coupling of Different Steels
Effect of Heat Treatment
Steel Reinforcements in Concrete
References
General References
Problems
Effect of Stress
Cold Working
Stress-Corrosion Cracking of Iron and Steel
Mechanism of Stress-Corrosion Cracking of Steel
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The Fundamental Index A Better Way to Invest

Summary

Author Biography

Table of Contents

Supplemental Materials