Fundamental Indexation: Rebalancing Assumptions and Performance

Journal of Index Investing, Vol. 1, No. 2, pp. 82-88, 2010

15 Pages Posted: 25 Mar 2010 Last revised: 30 Sep 2010

See all articles by David Blitz

David Blitz

Robeco Asset Management - Quantitative Strategies

Bart van der Grient

Robeco Asset Management - Quantitative Strategies

Pim van Vliet

Robeco Asset Management - Quantitative Investing

Date Written: August 3, 2010

Abstract

We show that the performance of a fundamental index with annual rebalancing, as proposed by Arnott, Hsu and Moore (2005), can be highly sensitive to the subjective choice of when to rebalance. For the year 2009, for example, we find that a fundamental index rebalanced every March outperformed the capitalization-weighted index by over 10%, whereas a fundamental index rebalanced every September underperformed. We provide intuitive and statistical evidence in support of the hypothesis that if two fundamental indexes diverge, they do not tend to mean-revert subsequently, i.e. the gap is likely to be permanent. This performance ambiguity is an undesirable feature for an index which is used for benchmarking purposes. We introduce the idea of blending multiple underlying fundamental indexes, each one rebalanced annually, but at different dates, as an example of how to construct a more robust fundamental index without increasing turnover.

Keywords: Indexation, Fundamental Indexing, Alternative Beta, Value Premium, Capitalization Weighting, Non-Cap Based Indexing, Portfolio Construction, Rebalancing

JEL Classification: G11, G12

Suggested Citation

Blitz, David and van der Grient, Bart and van Vliet, Pim, Fundamental Indexation: Rebalancing Assumptions and Performance (August 3, 2010). Journal of Index Investing, Vol. 1, No. 2, pp. 82-88, 2010. Available at SSRN: https://ssrn.com/abstract=1574150

David Blitz (Contact Author)

Robeco Asset Management - Quantitative Strategies ( email )

Weena 850
Rotterdam, 3014 DA
Netherlands

Bart Van der Grient

Robeco Asset Management - Quantitative Strategies ( email )

P.O. Box 973
3000 AZ Rotterdam
Netherlands

HOME PAGE: http://www.robeco.com

Pim Van Vliet

Robeco Asset Management - Quantitative Investing ( email )

Rotterdam, 3011 AG
Netherlands

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