Fundamental Indexing in the UK

44 Pages Posted: 7 Mar 2016 Last revised: 19 Feb 2017

See all articles by Mirco Balatti

Mirco Balatti

Henley Business School - ICMA Centre; European Central Bank (ECB)

Chris Brooks

University of Bristol - School of Economics, Finance and Management

Konstantina Kappou

University of Reading - ICMA Centre

Date Written: February 18, 2017

Abstract

This study proposes indexing strategies representative of the equity market and based on readily available accounting information. In contrast to the previous literature, we discard balance sheet variables and instead develop two indices that revolve solely around income statement and dividend measures. We find that these indices outperformed the FTSE 100 by 3% on an annual basis over the last 25 years, whilst delivering similar or lower volatility. The constructed indices overlap by 90% with the FTSE 100, in terms of their total market capitalisation and constituent members. They have positive and significant alphas in 3- and 4-factor performance attribution models, showing that the performance cannot be explained by value, size, market beta or momentum tilts alone.

Keywords: indexing, passive investing, fundamentally weighted index, market capitalisation weighted index, noise in price

JEL Classification: G11

Suggested Citation

Balatti, Mirco and Brooks, Chris and Kappou, Konstantina, Fundamental Indexing in the UK (February 18, 2017). Available at SSRN: https://ssrn.com/abstract=2742141 or http://dx.doi.org/10.2139/ssrn.2742141

Mirco Balatti (Contact Author)

Henley Business School - ICMA Centre ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA, RG6 6JE
United Kingdom

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Chris Brooks

University of Bristol - School of Economics, Finance and Management ( email )

School of Accounting and Finance
15-19 Tyndalls Park Road
Bristol, BS8 1PQ
United Kingdom

Konstantina Kappou

University of Reading - ICMA Centre ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom
+44 7793405682 (Phone)
+44 1189314741 (Fax)

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