Capturing the Value Premium

21 Pages Posted: 23 Aug 2011

Date Written: April 19, 2011

Abstract

MSCI Value Weighted Indices are systematic indices that aim to reflect the value premium by employing an alternative weighting scheme that tilts the index towards stocks with lower valuation ratios. In this paper, we review the theoretical aspects of value weighted indices and through empirical studies we discuss the important facets of index construction that underpin the design of MSCI Value Weighted Indices. The MSCI Value Weighted Indices are based on an objective and transparent methodology by which all the constituents of a standard MSCI parent index are re-weighted using four common accounting measures: book value, sales, earnings and cash earnings -- thereby adding a value tilt to the parent MSCI index towards stocks with relatively lower valuation ratios. Based on the empirical results, the MSCI Value Weighted Indices have historically outperformed their respective parent MSCI indices across different regions, reflecting the value premium, with slightly higher risk, low tracking error and modest turnover. The empirical finding on the long term outperformance of MSCI Value Weighted indices is consistent with the long history of published research on the value premium. MSCI Value Weighted Indices are complementary to capitalization weighted indices and could serve as tools in strategic asset allocation to enable investors to gain exposure to market beta with a value tilt.

Keywords: Capturing the Value Premium, Investment Management, Risk Management, Equities, MSCI Value, Weighted Indices

Suggested Citation

Subramanian, Madhusudan and Kulkarni, Padmakar and Kouzmenko, Roman and Melas, Dimitris, Capturing the Value Premium (April 19, 2011). MSCI Barra Research Paper No. 2011-12, Available at SSRN: https://ssrn.com/abstract=1915261 or http://dx.doi.org/10.2139/ssrn.1915261

Madhusudan Subramanian (Contact Author)

MSCI Inc. ( email )

88 Pine Street
2nd Floor
New York, NY 10005
United States

Padmakar Kulkarni

MSCI Inc. ( email )

88 Pine Street
2nd Floor
New York, NY 10005
United States

Roman Kouzmenko

MSCI Inc. ( email )

88 Pine Street
2nd Floor
New York, NY 10005
United States

Dimitris Melas

MSCI Inc. ( email )

88 Pine Street
2nd Floor
New York, NY 10005
United States

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