Lippo Investments Management will today unveil an index that tracks Chinese and Hong Kong real estate stocks using fundamental indexing methodology.

The Hong Kong-based firm says the Lippo Select Hong Kong & Mainland Property Index has the potential to consistently outperform similar benchmarks. That's because stocks included are assessed by a range of fundamental factors, four of which in particular are found to have a positive effect on stock prices; namely dividend yield, sales growth, capital expenditure growth and net debt to capital ratio.

According to Lippo's back testing, the index outperformed both the Hang Seng Composite Industry Index – Properties & Construction and the Hang Seng Properties Sub-index since the first quarter of 2006. Also, among these three indices, Lippo's index had the highest dividend yield as at the end of the first half of this year.

“At this point of the cycle, any investment vehicle replicating the index will be a good alternative to buying bricks and mortar,” suggests Sammy Yip, Lippo IM’s head of business and product development.

The fundamental indexing approach screens a range of ratios/variables from the financial statements of property-related stocks and assesses whether these factors are key drivers of stock returns over different business sub-cycles, notes Conrad Cheng, Lippo IM’s chief investment officer.

The index covers a range of high-quality Hong Kong and mainland China property-related securities within the Hang Seng Composite Index and Hang Seng Reit Index, says Lippo, and was designed in partnership with Hang Seng Indexes.

With a total of 36 component stocks, the index is comprised 52% of Hong Kong names and 48% of China stocks. In terms of size, 58% are large caps, 11% are real estate investment trusts (Reits), and mid- and small-cap names account for 27% and 4% respectively.

As of August 9, the top 10 holdings in the index were: Sino Land (6.85% weighting), Cheung Kong Holdings (6.35%), SHK Properties (6.17%), Link Reit (6.11%), Wheelock (5.94%), Hang Lung Properties (5.84%), Hang Lung Group (5.80%), China Overseas Land & Investment (5.75%) China Resources Land (5.64%) and Kerry Properties (5.28%).

The index constituents and fundamental factors will be reviewed every six months.