The fundamental index concept is generating interest as an alternative to traditional equity indexing among institutional investors.
• The Washington State Investment Board in June issued an RFP for fundamental index managers.
• The California Public Employees' Retirement System and San Joaquin County (Calif.) Employees' Retirement System are looking into the concept.
• PIMCO Funds launched in June two mutual funds, based on the fundamental index that have since grown to $317 million.
• PowerShares Capital Management LLC registered with the Securities and Exchange Commission in August to launch an exchange-traded fund based on the new index.
Robert D. Arnott, chairman of Research Affiliates LLC, Pasadena, Calif., created the concept and the Research Affiliates fundamental index (Pensions & investments, Sept. 20, 2004).
Instead of using traditional market capitalization to weight index components, fundamental indexation selects, ranks and weights equities using fundamental measures of company size, including book equity value, sales and cash flow, according to a Research Affiliates statement. "Fundamental indexes offer investors the same features as traditional passive capitalization-weighted indexes, including low turnover costs, broad diversification, vast capacity and transparent, rules-based selection," the statement said.