State Street Global Advisors (SSgA) has secured $350 million from two clients for its new Wealth Weighted Global Equities pooled trust, which tracks the financials-weighted FTSE GWA Developed Index.

Launched in mid-2005, the FTSE GWA index ranks companies according to the size of their earnings, cash flows and book value, ignoring market capitalisation. According to SSgA product engineer Jonathan Shead, 40-year historical simulations suggest this “fundamental indexing” approach outperforms global cap-based indices by 2 per cent a year, at almost 0.5 per cent less annual volatility. The FTSE GWA index rebalances quarterly in sync with its constituents’ quarterly accounting releases, however SSgA will use trading filters and cash flow management to reduce the indices’ inherent 40-60 per cent annual turnover rate down to 20-30 per cent. The Wealth Weighted trust will still have an MER of 30 bps, against 15-20 bps for the typical institutional global passive trust. Shead defended criticism that “fundamental indexing” was nothing but value indexing by another name, pointing out that whereas value and growth indices “split the world in two”, the FTSE GWA included all 2055 stocks in the global FTSE index. This resulted in far greater diversification, with the top 20 stocks in the FTSE Value index accounting for 29 per cent of that benchmark, against just 17 per cent for the FTSE GWA top 20. Head of research at Watson Wyatt, Tim Unger, who advises one of the initial investors in the new SSgA trust, said an existing global indexed equity portfolio could benefit from a component which eliminated market sentiment. “If we accept that equity markets are more volatile than justified by fundamentals, and assuming prices revert to fundamental value over time, it should be possible to make profits versus cap-weighted indices by rebalancing using ‘buy low and sell high’ trades…fundamental indexation is one way of doing this,” he said.

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