Capital Markets
Jason Hsu, Chief Investment Officer at
Research Affiliates, LLC
by Christopher M. Wright
Aunique investment strategy employed by investment firm Research Affiliates (RA) known as “funda- mental indexing” relies on measures such as sales,
profits, book value and dividends,
rather than market capitalization,
to determine the weighting of
stocks within an index.
In an article to be published
in the next issue of the Journal
of Investing, Jason Hsu, chief
investment officer at RA, along
with co-authors, reports that
applying his company’s Fundamental Index® methodology
to real estate generates outperformance of 3.96 percentage
points a year compared to the
F TSE NAREIT Composite
REIT Index and 2.90 percentage points a year compared to
the F TSE EPRA/NAREIT
Ex-North America. Previous
study results show similar outperformance against other cap-weighted indexes by 2 percentage points for large-cap domestic
equities, 3. 5 percentage points
for international equities and 6
percentage points in recent years
for emerging market equities.
But the question of whether
the fundamental indexing is the
best choice for passive investors
remains controversial. REI T
magazine recently spoke with
Hsu to give him an opportunity
to state his case.
REI T: Your company’s founder,
Rob Arnott, said in this column
in January 2007 that it was his
hope that fundamental index-
ing would eventually achieve 10
percent market share. What can
you tell us about investor accep-
tance today?
Hsu: Ten percent is a very
achievable outcome. Of course,
our goal is to become an even
more significant fraction of
the total indexing market. As
of June 30, nearly $33 billion
was managed using the Funda-
mental Index methodology by
firms such as PIMCO, Charles
Schwab and Invesco Power-
Shares.
REIT: Why does fundamental
indexing work better for real
estate than for U.S. large-cap
equities?
Hsu: The key driver that de-
termines the excess return—or
alpha—of a Fundamental Index
methodology is the degree of
inefficiency in the specific mar-
ket. The U.S. large-cap equity
space is relatively efficient.
NAME: Dr. Jason Hsu
TITLE: Chief Investment
Officer, Research Affiliates
EXPERIENCE: Hsu oversees
the development of asset
allocation and equity strategies
based on the Research Affiliates
Fundamental Index® concept.
This work won him the 2008
Institutional Investor 20
Rising Stars of Hedge Funds
Award and the 2005 William
F. Sharpe Award for Best New
Index Research. Hsu is also
professor of finance at the
Anderson School of Business at
UCLA and a visiting professor
in international finance at the
Taiwan National University
of Political Science (NCCU).
He is co-author of The
Fundamental Index: A Better
Way to Invest and has more than
20 academic and practitioner
articles to his credit.
