Decomposing Fundamental Indexation

Abstract

This paper compares fundamental index strategies to strategies that start with the market index and then tilt towards high fundamental-to-price stocks. We find that the tilt strategies have similar return, volatility and turnover as the corresponding fundamental index, but have higher Information ratios and lower tracking error. Using the same methodology, we also show that a modified index strategy that incorporates multiple distinct quantitative factors generates much higher Information ratios with similar turnover.

Keywords: Fundamental Indexation, Value Investing, Portfolio Construction

JEL Classification: G11, G12