Fundamental Indexing

What is Fundamental Indexation?

Fundamental index^® tracking has proved to be a highly successful long term investment strategy in overseas markets.  A fundamental index rates companies based on their economic value (i.e. their ability to create wealth) as opposed to their size (market cap).  Read more about our cost effective FTSE/JSE RAFI^® All Share Tracker Fund.

Dibanisa Fund Managers currently tracks the FTSE/JSE RAFI^® Top 40 Index and the FTSE/JSE RAFI^® All Share Index.

Information on the RAFI^® concept has been sourced from John Mauldin's weekly newsletter Thoughts From The Frontline. John Mauldin predicted that Fundamentals Weighted indices would be the fastest investing concept to grow from zero to US$100bn.

What is a Fundamental Index^®?

A Fundamental Index includes shares based on weights derived from a company's fundamentals (free cash flow, gross dividends, total sales and book equity value or net assets) as opposed to a company's market capitalisation.

Factors used in the weighing of companies are as follows:

1. Sales: Company sales averaged over prior five years
2. Cash Flow: Company cash flow averaged over prior five years, defined as Operating Income plus Depreciation
3. Book value: Company book value at the review date
4. Dividend: Total dividend distributions averaged over the last five years, including both special and regular dividends paid in cash

Ranking of Companies: The JSE universe of companies is ranked by each of the four factors. All factors have an equal weighting. A total fundamental value is given to each company by taking the average weighting of each fundamental measure. If a company has a zero dividend percentage, the average of the other three factors is taken.

Index Weighting: The total fundamental value for each company is then divided by the free-float market capitalisation to create the individual weightings.

Why Fundamental Indexation?

Fundamental Indexation is, in our view, a great hybrid between active and passive management.

By weighting securities on fundamental metrics of company size, like sales or cash, the index severs the link between stock weightings and the street's estimate of a company's long-term future growth prospects - for which the market prepays as if that future is a fait accompli!

By taking a simple average of each company's four financial measures over a five-year period creates a portfolio that is largely representative of today's economy. To reflect the changing economy, the index is rebalanced annually.

Fundamental Indexation also provides all of the positive attributes associated with index investing - low fees, good diversification, liquidity, transparency and low turnover.