Advertisement

Fundamental Indexation: An Active Value Strategy in Disguise

  • David Blitz
  • Laurens Swinkels
Chapter

Abstract

Arnott et al. (2005) propose a novel investment approach, which they call fundamental indexation. The main idea behind fundamental indexation, or fundamental indexing, is to create an index in which stocks are weighted by economic fundamentals, such as book value, sales and/or earnings, instead of by market capitalisation. An important argument put forward by fundamental indexers is that capitalisation-weighted indices are inferior because they necessarily invest more in overvalued stocks and less in undervalued stocks. This is, however, disputed by, among others, Perold (2007), who argues that capitalisation weighting does not, by itself, create a performance drag. At present, the debate between proponents and critics of fundamental indexing continues to rage on.1

Keywords

Sharpe Ratio Financial Analyst Economic Fundamental Growth Stock Information Ratio 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  1. Arnott, R. D., Hsu, J. and Moore, P. (2005) ‘Fundamental Indexation’, Financial Analysts’ Journal, 61(2), 83–99.CrossRefGoogle Scholar
  2. Arnott, R. D. and Markowitz, H. M. (2008) ‘Fundamentally Flawed Indexing: Comments’, Financial Analysts’ Journal, 64(2), 12–14.CrossRefGoogle Scholar
  3. Asness, C. (2006) ‘The Value of Fundamental Indexation’, Institutional Investor, (October), 94–99.Google Scholar
  4. Blitz, D. C. and van Vliet, P. (2007) ‘The Volatility Effect’, Journal of Portfolio Management, 34(1), 102–113.CrossRefGoogle Scholar
  5. Chan, L. K. C, Jegadeesh, N. and Lakonishok, J. (1996) ‘Momentum Strategies’, Journal of Finance, 51(5), 1681–1713.CrossRefGoogle Scholar
  6. Estrada, J. (2008) ‘Fundamental Indexation and International Diversification’, Journal of Portfolio Management, 34(3), 93–109.CrossRefGoogle Scholar
  7. Fama, E. F. and French, K. R. (1992) ‘The Cross-Section of Expected Stock Returns’, Journal of Finance, 47(2), 427–465.CrossRefGoogle Scholar
  8. Fama, E. F. and French, K. R. (1998) ‘Values versus Growth: The International Evidence’, Journal of Finance, 53(6), 1975–1999.CrossRefGoogle Scholar
  9. Hemminki, J. and Puttonen, V. (2008) ‘Fundamental Indexation in Europe’, Journal of Asset Management, 8(6), 401–405.CrossRefGoogle Scholar
  10. Hsu, J. (2006) ‘Cap-Weighted Portfolios are Sub-Optimal Portfolios’, Journal of Investment Management, 4(3), 44–53.Google Scholar
  11. Hsu, J. (2008) ‘Why Fundamental Indexation Might — or Might Not — Work: A Comment’, Financial Analysts’ Journal, 64(2), 17–18.CrossRefGoogle Scholar
  12. Jegadeesh, N. (1990) ‘Evidence of Predictable Behavior of Security Returns’, Journal of Finance, 45(3), 881–898.CrossRefGoogle Scholar
  13. Jegadeesh, N. and Titman, S. (1993) ‘Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency’, Journal of Finance, 48(1), 65–91.CrossRefGoogle Scholar
  14. Kaplan, P. D. (2008) ‘Why Fundamental Indexation Might — or Might not — Work’, Financial analysts’Journal, 64(1), 32–39.CrossRefGoogle Scholar
  15. Perold, A. F. (2007) ‘Fundamentally Flawed Indexing’, Financial Analysts’ Journal, 63(6), 31–37.CrossRefGoogle Scholar
  16. Perold, A. F. (2008) ‘Fundamentally Flawed Indexing: Author Response’, Financial Analysts’ Journal, 64(2), 14–17.CrossRefGoogle Scholar
  17. Sloan, R. G. (1996) ‘Do Stock Prices Fully Reflect Information in Accruals and Cash Flows About Future Earnings’, Accounting Review, 71, 289–315.Google Scholar
  18. Treynor, J. (2005) ‘Why Market-Valuation-Indifferent Indexing Works’, Financial Analysts’ Journal, 61(5), 65–69.CrossRefGoogle Scholar
  19. Treynor, J. (2008) ‘Fundamentally Flawed Indexing: Comments’, Financial Analysts’ Journal, 64(2), 14.CrossRefGoogle Scholar

Copyright information

© The Editor(s) 2016

Authors and Affiliations

  • David Blitz
    • 1
    • 2
  • Laurens Swinkels
    • 2
    • 3
    • 4
  1. 1.Coolsingel 120RotterdamThe Netherlands
  2. 2.Quantitative Strategies Department of Robeco Asset ManagementThe Netherlands
  3. 3.Erasmus School of Economics in RotterdamThe Netherlands
  4. 4.Erasmus Research Institute of ManagementThe Netherlands

Personalised recommendations