Realindex Investments has announced an emerging markets fund, which aims to achieve excess returns over its equivalent cap-weighted index of four to five per cent using a fundamental indexing approach.
Fundamental Indexing was developed by US researchers Research Affiliates and works by re-weighting stocks within a portfolio based on fundamental measures of a company’s size.
These factors are derived from the past five years of accounting data from a global database of companies, with companies then weighted according to dollar sales, dollar cash flow and dollar amount of dividends, as well as the company’s actual book value, according to Realindex chief executive Andrew Francis. The portfolio is then rebalanced quarterly, he said.
Traditional indexing is inefficient in that it results in a portfolio being overweight to overvalued companies and underweight to undervalued companies, causing return drag when prices revert, Francis said.
The Realindex emerging markets fund holds around 400 stocks across 21 countries, holding only stocks in markets that are defined as “emerging” according to the MSCI Index, although Francis pointed out that the individual stocks do not mirror those in the MSCI Index.
He cautioned that this approach can and will underperform a cap-weighted index in a growth oriented bubble-type market but added that in a lower return environment such as the one we are currently looking at, removing that return drag can have significant long-term return benefits.
The fund is aimed at institutional investors as well as advisers and end retail clients, and has so far attracted about $90 million in funds since its January launch.
Realindex is an investment management subsidiary of Colonial First State but has its own board, team and Australian Financial Services Licence, although it is able to leverage Colonial’s distribution resources.
