US - Research Affiliates has partnered with Russell Investments to launch a range of fundamental indices in a move that could help it increase its foothold in the US market, Global Pensions has learned.
In an exclusive interview with GP, Research Affiliates chairman Rob Arnott said the suite of indices will be rolled out in the third quarter of the year.
Arnott has made his name promoting indices that weight securities based on a set of fundamental factors, rather than market capitalisation. Traditionally, the strategy has used a range of fundamental factors - sales, profits, book value and dividends - to pick stocks.
But the new strategy was tweaked to better fit with Russell's methodology, Arnott said. The new suit will use three measures: a sales weight adjusted to reflect leverage in a company; dividends will include stock buy-backs; and instead of cash flow and book value, it'll be the retained cash flow net of dividends and buy backs, he said.
The indexing strategy is used by pension funds and other investors to diversify away from market cap indexes that they believe are prone to market bubbles.
The firm already heavily markets the strategy through its partnership with index provider FTSE Group.
Some US$12.5bn in assets are managed against the so-called FTSE RAFI indices, up from $9bn at the start of the year. Three years ago, the assets totalled about $2bn, said Arnott, a figure he expects Russell to match in the next year.
Arnott said the $35bn is run under all RAFI strategies, up from $29bn at the start of the year.
The headway FTSE has made in promoting the idea of fundamental indexing to investors will in turn help investors feel more comfortable with the Russell suite, he added.
"(The Russell partnership) broadens our market place, takes us into the client market place that's wedded to Russell. Russell is much stronger in the US than FTSE and FTSE is much stronger in Europe and East Asia.... So our potential scope of business in the US takes a quantum leap here," said Arnott.
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