Fundamental indices perform better in emerging markets

The fundamentally weighted FTSE RAFI Emerging Market (EM) index has produced a 6.5% out-performance per annum against the MSCI EM index in the last five years, says Hsu. He says the fundamental methodology thrives on market price inefficiencies, whereas the capitalisation weighted indices typically give greater exposure to the more over-valued stocks. Hsu explains fundamental indices are not influenced by price, meaning there is no correlation between weights and the random mistakes prices can make. He adds: "In emerging markets, where miss-valuation is the greatest, it is essentia...