The Fundamental Index: A Better Way to Invest - Hardcover

by Robert D. Arnott (Author), Jason C. Hsu (Author), John M. West (Author)

2008 American Publishers Awards for Professional and Scholarly Excellence (The PROSE Awards) Finalist/Honorable mention, Business, Finance & Management.

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.

Front Jacket

Praise for the fundamental index

"The Fundamental Index^(R) method is a controversial financial innovation in the field of passive investing, but this book confronts the whole range of controversy head on. The case for use of the Fundamental Index method and against cap-weighted indexes is uncommonly lucid, well illustrated, and attention-grabbing. You cannot reach a judgment on the Fundamental Index strategy, pro or con, without reading The Fundamental Index."
--Peter L. Bernstein, author of Capital Ideas Evolving

"The Fundamental Index method is a financial innovation so logical that it is compelling to any and all who believe that common sense is a required ingredient for portfolio construction."
--Bill Gross, Chief Investment Officer and founder of PIMCO

"Rob Arnott's idea is both elegant and profound, yet some very smart people have trouble grasping his idea because of their unexamined assumptions about how the market works. This book will help the reader get past those assumptions."
--Jack Treynor, President of Treynor Capital Management, Inc.

"Rob Arnott is a financial pioneer and this volume is a welcome addition to the rapidly evolving debate surrounding the true nature of indexation and passive investing."
--Andrew W. Lo, Harris & Harris Group Professor, Director, MIT Laboratory for Financial Engineering, MIT Sloan School of Management

"Rob's research on the Fundamental Index approach was a major epiphany for me. He has turned conventional investing wisdom on its head. This idea is a BIG deal--it will be the fastest new investment idea to reach $100 billion in assets in history. Every investor needs to read this book."
--John Mauldin, Millennium Wave Investments, author of Bull's Eye Investing and Just One Thing

Back Jacket

The Fundamental Index^(R) approach is a straightforward concept that weights companies in an indexed portfolio by their current economic scale, rather than by the value of their shares outstanding. In effect, this method shifts the frame of reference for investing from a market-centric view of the world--weighting companies according to how large the market thinks a company will become in the future, and prepays for today--to an economy-centric view--mirroring the current look of the economy. The authors demonstrate that this puts you in a better position to capture considerable profits along the way.

Author Rob Arnott and his colleagues at his innovative investment firm, Research Affiliates, spent several years developing the Fundamental Index methodology. In just over three years, the idea has attracted over $20 billion of investment capital from some of the largest and most sophisticated institutional investors in the world. Now, with this book, Arnott and his coauthors Jason Hsu and John West explore the nuances of this approach, its historical roots, and its many practical applications.

The Fundamental Index examines how this new twist on indexing can overcome the structural return drag created by traditional capitalization-based indexing strategies--which systematically overweight overpriced securities and underweight underpriced securities--and in so doing, enhance the performance of your portfolio. Throughout these pages, 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.

In addition to discussing the powerful long-term performance of this strategy, The Fundamental Index also addresses an array of additional advantages associated with the Fundamental Index approach. You'll discover how it allows for more flexibility in your asset allocation decisions and learn how it can be particularly useful when dealing with inefficient market categories such as small companies and emerging markets. Best of all, you'll see how well Fundamental Index portfolios perform when excess returns are needed most--during market and economic downturns.

In the years ahead, the Fundamental Index approach will become an important part of the indexing community and an essential alternative for those who are disappointed with the hollow promises of active management and frustrated with the market bubbles that traditional index funds pull us into. This innovative and accessible strategy will give experienced and aspiring investors--and their advisors--a new tool to achieve better returns in a variety of markets and conditions. Pick up this book today and discover how the Fundamental Index strategy can work for you.

Author Biography

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, responsible 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.