BCE Closure??? and Fundamental Indexing

The courts ruled in favour of the BCE takeover leaving bondholders with debt that will be interestingly priced on Monday morning. BCE bonds with 5 year maturities should yield in excess of 8% and the bid ask spreads on dealers books should be substantial taking away any trading opportunities for retail investors.

This takeover should continue to be headline news as the banking group funding the takeover will probably try and renegotiate the terms now that the bondholders failed in their attempt to derail it. Dont expect the outcome to be any different. If your think the outcome will be any different, please feel free to leave your comments for a lively discussion.

On a totally different front, there is an investment strategy garnering alot of assets. The strategy was developed by Mr. Rob Arnott who heads a company called Research Affiliates. You may see some exchange traded funds (ETF’s) with the initals RAFI which stands for Research Affiliates Fundamental Index.

The idea behind the strategy is one where funds are placed in each stock within a particular index but the percentage weighting is different than the underlying index. Based on four different valuations, undervalued stocks are overweighted and overvalued stocks are underweighted.

Looking at the Canadian market, Nortel’s weighting on the TSX was 35%+ back in 2000. Fundamental indexing would have allocated only 4% of the funds to Nortel back then. Today, Research in Motion and Potash Corporation would have lower weightings with Fundamental indexing compared to the underlying index.

Over the long-term, results have shown that Fundamental indexing has returned 300+ basis points over its benchmark in developed markets and 600 basis points in emerging markets. These results should lead one to seriously consider adding this strategy to their long term investments.