Rip Van Winkle Indexing

Posted: 8 Feb 2017

See all articles by Robert D. Arnott

Robert D. Arnott

Research Affiliates, LLC

Noah Beck

Research Affiliates, LLC

Vitali Kalesnik

Research Affiliates Global Advisors

Date Written: July 1, 2015

Abstract

A simulated portfolio deliberately based on stale price data — a Rip Van Winkle index fund — has both substantially higher performance and lower volatility than a portfolio that uses up-to-date cap weights. This holds true over the past 67 years in the United States and over shorter timespans in the world’s developed and emerging economies. An examination of the term structure of the stale price anomaly demonstrates that, beyond one year (when short-term momentum prevails), the older the data, the better the performance. In addition, a portfolio based on 20-year-old stale prices adds fully one-third as much risk-adjusted alpha as a hypothetical portfolio based on 20 years of look-ahead clairvoyance. Stale cap weighting is not a sensible strategy, but it sheds more light on the rather stark inadequacies of weighting a portfolio in proportion to a firm’s current price or market capitalization.

Suggested Citation

Arnott, Robert D. and Beck, Noah and Kalesnik, Vitali, Rip Van Winkle Indexing (July 1, 2015). Journal of Portfolio Management, Vol. 41, No. 4, Summer 2015, Available at SSRN: https://ssrn.com/abstract=2913302

Robert D. Arnott

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Noah Beck

Research Affiliates, LLC ( email )

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United States

Vitali Kalesnik (Contact Author)

Research Affiliates Global Advisors ( email )

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London, W1J 8DZ
United Kingdom
+44 2039299880 (Phone)

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