Fundamental Indexation: An Active Value Strategy in Disguise

7 Pages Posted: 29 Jul 2008 Last revised: 15 Dec 2008

David Blitz

Robeco Asset Management - Quantitative Strategies

Laurentius (Laurens) Adrianus Petrus Swinkels

Erasmus University Rotterdam (EUR); Robeco Institutional Asset Management

Multiple version iconThere are 2 versions of this paper

Date Written: July 1, 2008

Abstract

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, G12

Suggested Citation

Blitz, David and Swinkels, Laurentius (Laurens) Adrianus Petrus, Fundamental Indexation: An Active Value Strategy in Disguise (July 1, 2008). Available at SSRN: https://ssrn.com/abstract=1184848 or http://dx.doi.org/10.2139/ssrn.1184848

David Blitz (Contact Author)

Robeco Asset Management - Quantitative Strategies ( email )

Weena 850
Rotterdam, 3014 DA
Netherlands

Laurentius (Laurens) Adrianus Petrus Swinkels

Erasmus University Rotterdam (EUR) ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands

Robeco Institutional Asset Management ( email )

Rotterdam, 3000
Netherlands
+31 10 224 2470 (Phone)
+31 10 224 2110 (Fax)

Paper statistics

Downloads
1,341
Rank
10,527
Abstract Views
5,305