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Fundamental index mutual funds fire warning shot to ETFs, says Pro-Financial

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Ontario-based Pro-Financial Asset Management says its low-cost index mutual funds that track the FTSE Rafi Fundamental Indices outperformed their benchmark market-capitalisation weighte

Ontario-based Pro-Financial Asset Management says its low-cost index mutual funds that track the FTSE Rafi Fundamental Indices outperformed their benchmark market-capitalisation weighted indices in four out of five markets in 2008 on an after-fee basis for the F-class units of the funds.

The index mutual funds, which are among the first in Canada to offer financial advisers traditional compensation options for passive investment strategies and compete directly with exchange traded funds, had net positive sales for 2008 – a rarity for mutual funds.

The five funds are the Pro FTSE Rafi Canadian Index Fund; Pro FTSE Rafi US Index Fund; Pro FTSE Rafi Global Index Fund; Pro FTSE Rafi Emerging Markets; and Pro FTSE Rafi Hong KongChina Index Fund.

Preet Banerjee, a senior vice-president of Pro-Financial Asset Management, says: ‘The fundamental index methodology avoids one major flaw of market-capitalization indices: it doesn’t systematically overweight over-valued stocks and under-weight under-valued stocks whereas a market-capitalization index will do precisely that.

‘It’s a very simple concept, but very powerful. For example, when Nortel was almost one-third of the cap-weight index in 2001, it was less than ten per cent in the fundamental index. It avoids getting caught up in the mania that many investors dislike about cap-weight index tracking ETFs.’

Chief executive and president Stuart McKinnon adds: ‘Passive investment strategies are gaining popularity with investors. Until now, ETFs had been the only real choice for financial advisers who wished to harness the power of indexation, but fewer than one-third of all financial advisors in Canada are licensed to trade ETFs.

‘Our line-up of fundamental index mutual funds allows almost all advisers in Canada to harness the power of low cost indexation strategies. Our total asset growth for 2008 has been 25 per cent compared with a decline of 25 per cent for the mutual fund industry as a whole in Canada.’

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