Mean-variance optimization often leads to unreasonable asset allocations. This problem has forced scholars and practitioners alike to introduce portfolio constraints. The scope of our study is to verify which type of constraint is more suitable for achieving efficient performance. We have applied the main techniques developed by the financial community, including classical weight, flexible, norm-based, variance-based, tracking error volatility, and beta constraints. We employed panel data on the monthly returns of the sector indices forming the MSCI All Country World Index from January 1995 to December 2020. The assessment of each strategy was based on out-of-sample performance, measured using a rolling window method with annual rebalancing. We observed that the best strategies are those subject to constraints derived from the equal-weighted model. If the goal is the best compromise between absolute return, efficiency, total risk, economic sustainability, diversification, and ease of implementation, the best solution is a portfolio subject to no short selling and bound either to the equal weighting or to TEV limits. Overall, we found that constrained optimization models represent an efficient alternative to classic investment strategies that provide substantial advantages to investors.

Following the criticism surrounding capitalization-weighting, both academic and practitioner communities have developed alternative approaches to portfolio construction. We analyze one of these approaches, fundamentals-based weighting, which identifies the weights of portfolio constituents on the basis of their market multiples and accounting ratios. Our analysis is carried out on four fundamentals-weighted portfolios (FW) based on four different weighting variants, the capitalization-weighted portfolio (CW), and the equally-weighted (EW) portfolio, from January 2004 to December 2020, and in two subperiods (2004–2011 and 2011–2020). We find that in the first subperiod, the EW portfolio shows the highest risk-adjusted performance, followed by the FW portfolios. In contrast, in the second subperiod and in the period as a whole, the CW portfolio outperforms the other portfolios in terms of risk-adjusted performance. Overall, we conclude that both FW portfolios and the EW portfolio do not exhibit superior results when compared with the classic CW portfolio. Therefore, we have shown that FW and EW techniques provide superior risk-adjusted performance only during a period of exceptional financial turmoil. However, under normal conditions, they cannot be recommended as a rational investment strategy. JEL classification numbers: G11, G14. Keywords: Fundamental weighting, Capitalization weighting, Equal weighting, Value investing, Indexed investing.