Some of the pension funds held by Argus Financial Ltd. (AFL) are being invested using an innovative — yet surprisingly simple — new technique.

An academic study has shown that “fundamental index” (FI) investing would have outperformed the S&P 500 by two percent annualised over the past 45 years.

Last month AFL became the first offshore fund to invest into fundamental index funds managed by Research Affiliates (RA).

And last week Schwab, one of the largest asset management companies in US, followed AFL’s lead and introduced three RAFI funds into their portfolio.

These funds invest in large and small capitalisation US markets, AFL’s lead portfolio manager Bill McKay said yesterday, and during 2007 the company plans to invest in more FI funds based on European and Japanese markets.

“One thing common to indexed investments is that they are ‘cap weighted’, determined by equities’ market capitalisation, that is the number of shares multiplied by the price,” Mr. McKay said.

“The problem with cap weighting is that one thing you know for sure is that undervalued stock is not weighted enough — and of course you want to be buying more undervalued stock — while overvalued stock is overweighted.

“Fundamental indexing is based on four fundamental measures — sales, cash flow, book equity value and dividends.”

Applied to the US markets back to 1962, this technique would have secured two percent higher returns — annualised — than the S&P 500. Applied to international markets, going back to 1988, FI would have performed 2.5 percent better.

Another attractive aspect to AFL was how FI appeared to be more resistant to the effects of fads, hype and temporary trends.

“In bull markets, FI tends to perform about one percent better, but when things are going down then FI performs five percent better,” Mr. McKay said.

“The wider study looked at 23 different markets and FI fared better in all 23.”

The strong performance in falling markets means FI fits in well with AFL’s emphasis on capital preservation in investments, Mr. McKay said.

“We believe this is going to be a large turning point,” Mr. McKay said. “The amount invested in fundamental indexing has gone from zero two years ago to $20 billion-plus now. More people will adopt this approach.

“Capital asset pricing has been widely taught in business schools since the 1950s and it’s been accepted as gospel. A lot of assumptions have been made that in practice don’t hold up.”

Henry Perren, AFL’s chief operating officer, said: “The exciting part is that AFL is not interested in providing the status quo. We want to provide the best investment ideas from all over the world.”

Mr. McKay acknowledged that the four-measure basis of FI was remarkable simple. “Mr. Arnott has commented that it’s really amazing that no-one has looked into this approach over the last 40 years,” he said.