Over a 45-year evaluation period in the US, the Fundamental Index concept produced returns in excess of 2% a year with less volatility than similar cap-weighted indices. This is enough to result in the difference between making 80 times your money versus 200 times your money, over the 45 years.
Nomura Securities replicated this work in all 23 FTSE developed market indices, and found that fundamental indexing outpaced cap-weighting in 23 out of 23 markets, with no exceptions. The average outperformance was 2.6% per annum, from 1988 to 2006.
The Fundamental Index advantage only widens in less efficient markets like small companies and emerging markets.
Below is the performance of key South African indices: FTSE/JSE RAFI® All Share Index, the FTSE/JSE All Share Index, and the SE/JSE SWIX. Back-tested data for the RAFI was supplied by the JSE.
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