John Serrapere is known as The Active Indexer.

The title was bestowed on the longtime analyst after he started contributing research reports to the Journal of Indexes in 2003.

"I don't have an axe to grind in terms of classifying my investing strategy," said the investment strategist for Foster Holdings Inc. in Pittsburgh.

Serrapere takes a distinctly contrarian approach to index investing. It's an independent view that at times has brought him harsh words from other money managers and advisors.

"Excessive hubris and ego aren't traits that serve investors very well over the long run," said Serrapere during a recent discussion. "The markets keep even the best humble. It's important to realize there's no silver bullet in investing."

He has the credentials to walk among some of the biggest names in the business. A case could be made that Serrapere was instrumental in helping to shape Rydex's product strategy for indexing and alternative investments earlier this decade when he served as a principal at Rydex Leveraged Hedges LLC.

And his research into what's now called fundamental indexing puts him in many ways in the same league as industry leaders such as Research Affiliates' Rob Arnott.

But throughout his long career, Serrapere has stayed out of the limelight. He prefers to work on the fringes, putting ideas and pet projects in the forefront. These days, he's working on a new consulting venture, Arrow Insights LLC, which is trying to advance a host of new alternative indexing strategies.

Eclectic Approach 

It isn't easy to classify Serrapere's method. He considers himself somewhere between a fundamental indexer and an active fund sampler. He takes a top-down approach, looking at expected long-term returns of passively investing in various stock and bond indexes.

In 1999, his research led him to conclude that stock returns would fall into the 3.5%-to-5% range over the next 20 years. Serrapere also wrote that specific bond categories could produce anywhere from 6%-to-8% gains in that same period.

Of course, that was way ahead of the curve. Today, strategists are just starting to revise down their estimates for most equity categories over the longer term.

"I published a series of articles for Corporate Finance Review from 1997 through early 2000," said Serrapere. "But nobody was reading except for a bunch of real finance geeks."

The magazine was owned by Thomson, the big data provider. In late 1999, as stock markets were peaking, a well-known chief investment officer at a major insurance company accused him of trying to raise a ruckus to gain fame.

"I got terribly frustrated and almost quit the whole business," said Serrapere. "I wasn't trying to be a hero. I was just saying that this is a crazy world."

A tenet of his investing philosophy is to look at a basket of seven or eight fundamental valuations. Those include price-to-earnings, free cash flow, price-to-book and dividend yields.

"It's very similar to how Rob Arnott invests," said Serrapere. "In fact, when he came out with his fundamental indexes, I was right behind him at Rydex. If I could've convinced as many people and assembled as big of an army as Rob formed, we'd have been right there."

He adds: "In fact, if you look at the recent Barron's article on Arnott, I'm doing the same thing. He's going into TIPS, corporate bonds, emerging markets and foreign debt. Those are the same things I'm moving into."

Half of his portfolio is based on fundamentals using index-based products. "Those enable me to overlay technical analysis on top of the fundamentals without worrying about company-specific risk and what other managers are doing," said Serrapere.

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