Fundamental Indexation: An Active Value Strategy in Disguise
Robeco Asset Management - Quantitative Strategies
Laurens A. P. Swinkels
Erasmus University Rotterdam (EUR); NBIM - Norges Bank Investment Management
Journal of Asset Management, Vol. 9, No. 4, pp. 264-269, November 2007
In this paper we critically examine the novel concept of fundamental indexation. We argue that fundamental indexation is by definition nothing more than an (elegant) value strategy, because the weights of stocks in a fundamental index and a market capitalization-weighted index only differ as a result of differences in valuation ratios. Moreover, fundamental indices more resemble active investment strategies than classic passive indices, because (i) they appear to be at odds with market equilibrium, (ii) they do not represent a buy-and-hold strategy and (iii) they require several subjective choices. Last but not least, because fundamental indices are primarily designed for simplicity and appeal, they are unlikely to be the most efficient way of benefiting from the value premium. Compared to more sophisticated, multi-factor quantitative strategies, fundamental indexation is likely to be an even more inferior proposition.
Keywords: Indexation, Fundamental Indexing, Alternative Beta, Value Premium, Capitalization Weighting, Non-Cap Based Indexing, Portfolio Construction
JEL Classification: G11, G12Accepted Paper Series
Date posted: November 2, 2008
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