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Decomposing fundamental indexation?

Decomposing fundamental indexation?

22-03-2017 | From the field

Previous studies have shown that the value added by fundamental indexation strategies is entirely driven by their implicit exposure to the classic value premium. This article* compares fundamental index strategies with strategies that start with the market index and then tilt towards value stocks.

  • David Blitz
    David
    Blitz
    Head Quantitative Equities Research

The authors find that the tilted strategies involve similar returns, volatility and turnover to the corresponding fundamental index, but that they have higher information ratios and lower tracking error. Using the same methodology, they go on to show that a modified index strategy that incorporates multiple distinct quantitative factors generates much higher information ratios than the fundamental index strategy, with similar turnover.

We agree with the conclusions of this study: fundamental indexation is a value strategy that is designed for its simplicity and appeal, but it is not the most efficient way of capturing the value premium.

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From the field
From the field

Our researchers publish many whitepapers based on their own empirical studies; they also follow quantitative research done by others. Head of Quant Equities Research David Blitz comments on notable external papers.

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