Do fundamental portfolios outperform in the MENA equity markets?

Abstract

Purpose This study aims to investigate the performance of fundamental weighted portfolios (using sales, cash flows, dividends, book values and a composite of all these variables), an equal weighted portfolio and a smoothed cap-weighted (CW) portfolio in Middle East and North Africa (MENA) markets. The performance of these portfolios is compared with that of a CW portfolio for the period 2005 to 2015. Design/methodology/approach The portfolios are formed using different concentration levels, different construction schemes and different sub-regions. The performance is assessed using a large set of risk-adjusted performance measures, including more robust measures in the context of multi-factor models, such as the Fama and French (1993) three-factor model, the Fama and French (2015) five-factor model and a seven-factor model. Findings The results show that the fundamental portfolios, with the exception of the sales portfolio, underperform the CW portfolio using either the traditional or more robust risk-adjusted performance measures. The underperformance of the fundamental portfolios is found to be robust using different concentration levels, different construction schemes and different sub-regions. The results also show that the equal weighted portfolio outperforms the CW portfolio using traditional risk-adjusted measures. However, after controlling for additional risk factors, this outperformance disappears. Practical implications The failure of fundamental indexation in the emerging markets could help the researchers and the academics to search for the best weighting method that could be used as an alternative to the CW indexation method. Originality/value The results of the study add evidence to the debatable propositions on the performance of fundamental portfolios in emerging markets. Furthermore, the findings may help domestic and international investors, practitioners and decision-makers to deepen their knowledge in terms of the best portfolio construction scheme in the MENA region.

Effect of Index Concentration on Index Volatility and Performance

“…Different market sizes and characteristics can affect Chelley-Steeley ( 2008 ) results as literature shows small South African market shows the effect of index concentration on portfolio risk(Van Heerden & Saunderson, 2008 ). Moreover, examining the relationship between index concentration and performance becomes more significant in an era where index funds are getting popular, and researchers explored that the equal-weighted index outperforms the market-weighted index (Tabner, 2009 ; Amenc et al, 2016 ; Malladi & Fabozzi, 2017 ; Abadi & Silva, 2019 ) and look to use it for optimization of portfolio performance (Taljaard & Maré, 2021 ). Passive investors invest their money to perceived diversification in an index-based fund, but the index concentration can ruin their expectation to increase idiosyncratic risk.…”