RealIndex Investments has launched an emerging markets index fund aimed at topping the returns of traditional offerings in this sector by 4 to 5 percentage points.
Colonial First State wholly owns RealIndex, which uses the trademarked Fundamental Index method of investment. The system was developed by US-based Research Affiliates as a means of capturing performance from inefficient markets.
Traditional index funds weight a portfolio by price, which can drag on a fund's performance over time because the companies that have delivered earnings growth are priced for future growth and companies with shrinking earnings are priced for continued shrinkage.
The Fundamental Index approach weights a company based on its size, which the investment manager defines as sales, cash flow and dividend over five years, as well as its latest book value.
RealIndex chief executive Andrew Francis said traditional index funds do not adequately reward investors for the risk they take on when they put money into markets such as China, India and Mexico. Emerging markets' economies have nearly doubled over the 16 years to 2010 but the MSCI Emerging Markets Index returned 4.5 per cent a year over that period.
"That's lower than the cash rate," Francis said.
"We anticipate our strategies will achieve an excess return of between 4 and 5 per cent over their cap-weighted equivalents as these markets continue to grow," he said, adding that the lending and production levels of emerging countries signals growth as does their relatively young population.
The RealIndex Emerging Markets Fund is invested across 21 countries. Its three biggest country investments are China, 21.99 per cent, Korea, 16.12 per cent, and Russia, 11.97 per cent.
RealIndex has $2.8 billion under management across five funds, including the emerging markets fund, which has about $90 million.
The fund is rebalanced quarterly. It's available through Colonial First State's FirstChoice and FirstWrap platforms, as well as through financial planners and direct investment. Minimum investment is $1000.
