Last month fundamental index pioneer, Research Affiliates (RA) of Newport Beach, California, withdrew its patent infringement lawsuit against ETF sponsor WisdomTree Investments of New York City. Robert Arnott, RA’s founder, said that during the legal process, he had become convinced that WisdomTree had developed its series of fundamentally weighted indexes “independently.”

Still, imitation is the sincerest form of flattery. Since 2005, when Arnott and colleagues Jason Hsu and Philip Moore published their “Fundamental Indexation” treatise in the Financial Analysts Journal, the concept of weighting indexes differently, based on “fundamental” measures of company value, like book value or sales, has become more the norm. But do the new fundamentally weighted indexes actually produce superior returns when put into practice?

Some of the largest public pension funds have been among the first adopters for part of their passively managed equity portfolios. That includes CalPERS, the California Public Employees' Retirement System, which had $239.9 billion in its investment portfolios as of early November, and the Oregon Public Employees Retirement Fund (OPERF), which had $55.4 billion in assets under management at year-end 2011. And their portfolio managers say that while the experience is still relatively brief, they’re ready to give the new indexes a thumbs-up.

RA has worked with the FTSE Group of London and with Russell Investments of Seattle on the development of fundamental indexes that have in turn been licensed to pension funds. FTSE, which launched its first fundamental indexes in 2005, now has 27 in its FTSE RAFI (Research Affiliates Fundamental Index) series; while Russell, which launched more recently in February of 2011, has 24 indexes in its Russell Fundamental Index series. CalPERS is a FTSE client, while OPERF is a Russell client.

....