This paper* compares classic and new smart-beta indices that are designed to capture the value premium. Classic value indices segment the market into value and growth stocks, and then apply capitalization weighting to the value segment of the market.
The study observes that the first such indices were already introduced around twenty years ago, but have since failed to outperform the market in the US. Fundamentally weighted indices, on the other hand, have succeeded in capturing the value premium. The author attributes this to the use of a more effective rebalancing mechanism. We wonder if this may also be related to the strong dependence of capitalization-weighted indices on the performance of just a few of the very largest stocks. Publicly available data for value strategies provided by Professor Kenneth French shows that cap-weighted value strategies have failed to outperform the large-cap segment of the US market. However, this same data also demonstrates that, when not inhibited by cap-weighting restrictions, on average, value stocks have outperformed growth stocks by a solid margin.
*Hsu, “Value Investing: Smart Beta versus Style Indices”, Journal of Index Investing, 5 (2014), pp. 121-126.
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.