Rebalancing assumptions can have a significant impact on the performance of a fundamental index. We propose blending multiple indices, rebalanced annually but at different dates, to construct a more robust fundamental index without increasing turnover.
In this article,1 we show that the performance of a fundamental index with annual rebalancing, as proposed by Arnott, Hsu, and Moore (2005), can be highly sensitive to the subjective choice of when to rebalance. For the year 2009, for example, a fundamental index rebalanced every March outperformed the capitalization-weighted index by over 10%, whereas a fundamental index rebalanced every September underperformed.
We provide intuitive and statistical evidence in support of the hypothesis that if two fundamental indices diverge, they do not subsequently tend to mean revert (i.e., the gap is likely to be permanent). The performance ambiguity is an undesirable feature for an index that is used for benchmarking purposes.
We introduce the idea of blending multiple underlying fundamental indices, each one rebalanced annually but at different dates, as an example of how to construct a more robust fundamental index without increasing turnover.
1Blitz, D.C., Van der Grient, B. and Van Vliet, P., 2010, ‘Fundamental indexation: rebalancing assumptions and performance’, The Journal of Index Investing.
This report is not available for users from countries where the offering of foreign financial services is not permitted, such as US Persons.
Your details are not shared with third parties. This information is exclusively intended for professional investors. All requests are checked.
Robeco Institutional Asset Management B.V. (DIFC Branch) is regulated by the Dubai Financial Services Authority (“DFSA”) and only deals with Professional Clients and Market Counterparties, and does not deal with Retail Clients as defined by the DFSA.
Neither information nor any opinion expressed on the website constitutes a solicitation, an offer or a recommendation to buy, sell or dispose of any investment, to engage in any other transaction or to provide any investment advice or service. An investment in a Robeco product should only be made after reading the related legal documents such as management regulations, prospectuses, annual and semi-annual reports, which can be all be obtained free of charge at this website and at the Robeco offices in each country where Robeco has a presence.