Michael Butler, the new president of fast-growing Pro-Financial Asset Management Inc. of Oakville, Ont., has plans to more than double the firm’s assets under management to $500 million over the next two years.

Pro-Financial specializes in investment funds based on fundamental indexing — a strategy, says Butler, that is low-cost and well suited for the core equities holdings in a client’s portfolio.

“I’m a big proponent of value investing,” he says, “and fundamental indexing is essentially putting a quantitative value overlay on top of an index. It reduces some of the risks involved with regular index investing and results in less volatility.”

Butler, formerly the president and driving force at Northwest Mutual Funds Inc. of Toronto, has emerged from a short retirement to become president and partner of Pro-Financial. His exit from the business about a year ago had followed the 2007 merger of Northwest, which he founded, and Vancouver-based Ethical Funds Co. to form Northwest & Ethical Investments LP. Prior to Northwest, Butler had held various senior sales positions with Mackenzie Financial Corp., Talvest Fund Management Inc. and Spectrum Investments Inc.

Also joining Pro-Financial is Tony Cox, a chartered accountant who has helped build fund companies for a variety of groups, including Toronto-based Sun Life Financial Inc. and Mon-treal-based National Bank of Canada. Cox has been appointed as Pro-Financial’s chief financial officer and chief operations officer.

Butler says his primary role at Pro-Financial is running the sales and marketing side of the business. He has already increased his staff and is hiring more wholesalers. Cox is responsible for the back-office administration, compliance and customer service. Pro-Financial’s founder and CEO, Stuart McKinnon, is focused on overall corporate strategy, such as potential partnerships with other companies and developing the product lineup.

The most recent product introduction, scheduled for this month, is a fundamental index dividend income fund based on the top dividend-paying stocks in the U.S. and Canada. Butler says additional fund-of-funds portfolios will also be introduced.

“Pro-Financial has blossomed in the past year or so as people have discovered fundamental indexing,” Butler says. “I saw the opportunity to become involved with an exciting opportunity in which the platform was in place but I could start from scratch and build a team.”

Fundamental indexing is based on a methodology that involves weighting the companies in an index according to such factors as sales, cash flow, book value and dividends instead of market capitalization, the method used to determine weightings in traditional indices. Fundamental indexing was originally developed by Rob Arnott, chairman of Research Affiliates LLC of California and editor of the Financial Analysts Journal. That formula has been used to create a family of indices in various global markets under the FTSE Research Affiliates fundamental index banner.

“When the company weightings are determined by fundamentals, there is less risk of being overexposed to overvalued stocks,” says Butler. “With a traditional index, a stock is going to have more weight as its price rises.”

Pro-Financial was founded in 2002 and has AUM of about $200 million in both fundamental index funds and segregated funds providing access to the same fundamental indices. According to the Investment Funds Institute of Canada, Pro-Financial’s AUM had jumped by 113% in the year ended Sept. 30, making it the fastest-growing fund company in Canada.

Pro-Financial has a distribution agreement with London-based FTSE Group, a world leader in the creation of indices, and Research Affiliates to offer open-ended mutual funds in Canada with portfolios based on the FTSE RAFI indices. That lineup includes Canadian, U.S., international developed markets (excluding U.S.), Hong Kong/China and emerging markets funds.

In addition, Pro-Financial offers seg versions of these individual funds, as well as four seg fund-of-funds portfolios. Claymore Investments Inc. of Toronto also offers access to the FTSE RAFI funds through its exchange-traded funds, but these can’t be sold through the large network of mutual fund dealers as their advisors don’t qualify to sell securities. Invesco Trimark Ltd. also offers a family of four PowerShares mutual funds based on FTSE RAFI indices.

“We are able to provide index strategies to all distribution channels,” says Butler, “including fund dealers and insurance agents.”

The fundamental indexing process leads to weightings based on measurable factors that indicate a company’s actual financial situation and the strength of its business. Butler says the traditional market cap-weighted indices are more vulnerable than fundamental indices to strong corrections when hot sectors get out of whack or when a popular stock becomes so expensive that it accounts for a disproportionate share of a conventional index. IE