Advanced

The Puzzle of Fundamental Indexation

Nurmi, Karri LU and Andersson, Oliver LU (2018) NEKN02 20181
Department of Economics
Abstract
As passive investing has grown in popularity, the number of available passive investment strategies have risen as well. This paper strives to investigate one of these investment strategies, namely fundamental indexation. More specifically, the aim of this study is to investigate if fundamental indices are more mean-variance efficient compared to capitalization-weighted indices. Given that the superior returns yielded by fundamental indexation have been criticized for being premiums for common risk factors, this study also focus to dig deeper into whether the performance of fundamental indices is driven by these factors. The objective of the paper was accomplished by examining the mean-variance efficiency of fundamental indexation versus... (More)
As passive investing has grown in popularity, the number of available passive investment strategies have risen as well. This paper strives to investigate one of these investment strategies, namely fundamental indexation. More specifically, the aim of this study is to investigate if fundamental indices are more mean-variance efficient compared to capitalization-weighted indices. Given that the superior returns yielded by fundamental indexation have been criticized for being premiums for common risk factors, this study also focus to dig deeper into whether the performance of fundamental indices is driven by these factors. The objective of the paper was accomplished by examining the mean-variance efficiency of fundamental indexation versus the capitalization-weighted OMXS30 for the period between 2002 and 2016. In addition, factor regressions were used in order to locate the drivers behind the returns. The study extends previous research since it shows that it is possible to outperform the capitalization-weighted benchmark by constructing fundamental indices based on metrics which are not solely related to firm size. The conclusion reached in this paper is that fundamental weighting is a more efficient way to construct portfolios compared to capitalization-weighting, which questions the efficiency of capitalization-weighted portfolios and their applicability as a passive investment strategy. However, the performance drivers of fundamental indexation remain unknown since the performance cannot be fully attributed to the size, value and momentum factors. (Less)
Please use this url to cite or link to this publication:
author
Nurmi, Karri LU and Andersson, Oliver LU
supervisor
organization
course
NEKN02 20181
year
type
H1 - Master's Degree (One Year)
subject
keywords
Fundamental indexation, Indexing, Passive investing, Mean-variance efficiency
language
English
id
8944683
date added to LUP
2018-07-02 15:39:18
date last changed
2018-07-02 15:39:18
@misc{8944683,
  abstract     = {As passive investing has grown in popularity, the number of available passive investment strategies have risen as well. This paper strives to investigate one of these investment strategies, namely fundamental indexation. More specifically, the aim of this study is to investigate if fundamental indices are more mean-variance efficient compared to capitalization-weighted indices. Given that the superior returns yielded by fundamental indexation have been criticized for being premiums for common risk factors, this study also focus to dig deeper into whether the performance of fundamental indices is driven by these factors. The objective of the paper was accomplished by examining the mean-variance efficiency of fundamental indexation versus the capitalization-weighted OMXS30 for the period between 2002 and 2016. In addition, factor regressions were used in order to locate the drivers behind the returns. The study extends previous research since it shows that it is possible to outperform the capitalization-weighted benchmark by constructing fundamental indices based on metrics which are not solely related to firm size. The conclusion reached in this paper is that fundamental weighting is a more efficient way to construct portfolios compared to capitalization-weighting, which questions the efficiency of capitalization-weighted portfolios and their applicability as a passive investment strategy. However, the performance drivers of fundamental indexation remain unknown since the performance cannot be fully attributed to the size, value and momentum factors.},
  author       = {Nurmi, Karri and Andersson, Oliver},
  keyword      = {Fundamental indexation,Indexing,Passive investing,Mean-variance efficiency},
  language     = {eng},
  note         = {Student Paper},
  title        = {The Puzzle of Fundamental Indexation},
  year         = {2018},
}