This presentation analyzes the early record of two leading fundamental indexing funds

1. The Fundamental Indexing Conundrum Gaetan “Guy” Lion April 2010

4. Back testing Robert Arnott back-tests his (RAFI) indexes over decades. And, discloses his results (shown below) within his book:

7. Large Cap indexes correlation The large cap fundamental index (PRF) is slightly more correlated with value oriented indexes. We will compare PRF’s performance to the other indexes.

8. PRF vs S&P 500 in the recent Crash

9. PRF vs S&P 500 in the current Recovery

10. PRF vs S&P 500 since onset

11. PRF vs Russell 1000 (RUI)

12. PRF vs Russell 1000 Value

13. PRF vs Vanguard Value (VIVAX)

14. Table Summary for Large Cap The fundamental index fund (PRF) beat out handsomely the other benchmarks over the entire period by 2.3 to 5.1 percentage points in annual return. But, it did it by fairing poorly in the 2007 Crash and extraordinarily well in the 2009 Recovery. Level of risk (daily volatility) is similar.

15. Large Cap: Back Testing vs Actual The relative performance of the RAFI large cap was very different during the two periods . While in the 45 years of back testing, it excelled at besting the S&P 500 in Bear markets while recording only a small advantage in Bull markets; in the actual 4.25 years it faired poorly in the Crash of 2007. But, did extremely well in the Recovery of 2009.

16. Small Cap indexes correlation Fundamental index (PRFZ) correlation to value index or regular ones are equally high.

17. PRFZ vs Russell 2000 (IWM)

18. PRFZ vs Vanguard Small Cap Value (VISVX)

19. PRFZ vs Vanguard Midcap Value (VMVIX)

20. Table Summary for Small Cap The fundamental index fund (PRFZ) beat out the other benchmarks over the entire period by 7.2 to 8.0 percentage points in annual return. But, it did it by fairing poorly in the Crash and extraordinarily well in Recovery. PRFZ bears similar level of risk.

21. Small Cap: Back Testing vs Actuals The relative performance of the RAFI small cap was very different during the two periods . While in the 28 years of back testing, it excelled at besting the Russell 2000 in Bear markets while recording a smaller advantage in Bull markets; in the actual 3.5 years it faired poorly in the Crash of 2007. But, did extremely well in the Recovery of 2009.

24. Growth vs Value – the Overall Picture

25. The Dot.com bust A Value index being less exposed to the hi-tech sector with high P/E ratio performed much better than a Growth index.

26. The 2007 Credit Crash Now, the Value index performed marginally worse. This credit crisis emerged from the financial sector (banks, insurance) that is more prevalent within a Value index including the RAFI US 1000 fund.

27. Why did RAFI US 1000 do well in Recovery? Let’s look at sector allocations

28. 3 key sector allocation differences and performances during the recovery RAFI US 1000 is more heavily invested in Financials that did extremely well and less invested in Energy and Healthcare that did not do as well.