Fundamental Indexation For Global Equities: Does Firm Size Matter?

Hsieh, Heng-Hsing; Hodnett, Kathleen; Rensburg, Paul van

doi:10.19030/jabr.v28i1.7154

Cited by 5 publications

(6 citation statements)

References 10 publications

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“…Using different levels of concentration (top 200, 100, 50 and 30 stocks), Hsieh et al (2012) construct fundamental indices based on the large established firms in the global equity market and compared these indices to market CW indices. They find that the FW indices outperform CW indices over the overall examination period and in two sub-periods.…”

Section: Literature Reviewmentioning

confidence: 99%

“…They find that the FW indices outperform CW indices over the overall examination period and in two sub-periods. Hsieh et al (2012) state that FW indices are mean-variance efficient proxies for the evaluation of large firms' performance. Their findings reveal that the level of portfolio concentration hardly affects the performance of FW indices due to the fact that removing the price element from the weighting of fundamental indices mitigates the small firm anomaly.…”

Section: Literature Reviewmentioning

confidence: 99%

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Do fundamental portfolios outperform in the MENA equity markets?

Abadi

Silva

2019

IMEFM

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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.

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Section: Literature Reviewmentioning

confidence: 99%

Section: Literature Reviewmentioning

confidence: 99%

Do fundamental portfolios outperform in the MENA equity markets?

Abadi

Silva

2019

IMEFM

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“…The mean-variance efficiency of market capitalization weighted indexes was justified by the assumption of the efficient market hypothesis which considered prices to be an efficient mechanism revealing a firms intrinsic value. However, given the overreaction of investors to recent information, markets could no longer be considered efficient (Hsieh, Hodnett and Van Rensburg, 2012). The observed inefficiency of capital markets arouses the need for priceinsensitive measures of firm value that are immune to investor overreaction to proxy for more mean-variance efficient portfolios.…”

Section: Mean-variance Efficient Portfolio Proxiesmentioning

confidence: 99%

“…Share prices are subject to market influences and investor overreaction, resulting in weights that do not truly reflect the fair price of the stock. Fundamental metrics are independent of price measures and other market and investor influences, making them a better reflection of size and performance of large established firms in the capital market (Hsieh, Hodnett & Rensburg, 2012).…”

Section: Better Measure Of Firm Sizementioning

confidence: 99%

Fundamental Indexes As Proxies For Mean-Variance Efficient Portfolios

Hodnett

Botes

Daswa

et al. 2014

JABR

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Mean-variance efficiency was first explained by Markowitz (1952) who derived an efficient frontier comprised of portfolios with the highest expected returns for a given level of risk borne by the investor. The assumed mean-variance efficiency of the market portfolio along with the fact that it is capitalization-weighted underlies the rationale for market indexes being constructed by market capitalization weights (Mar, Bird, Casavecchia and Yeung, 2009). The pioneers of the fundamental index approach to investing, Arnott, Hsu and Moore (2005), however differ, and argue that market capitalization-weighted indexes are not mean-variance efficient due to their price-sensitivity, which leads to the overweighting of overvalued stocks and the underweighting of undervalued stocks, creating a return drag. The authors constructed an index weighted by fundamental determinants of firm value such as earnings, book value and revenue, proving that their fundamentally weighted index causes the return drag inherent in capitalization-weighted indexes to disappear. The aim of this paper is to discuss the evidence for and the arguments against fundamentally-weighted indexes as proxies for mean-variance efficient portfolios. We conclude that since the market cap-weighted index is only mean-variance efficient given the efficiency of the market, whilst the fundamental index incurs higher turnover, and may contain a value bias, its resistance to investor overreaction makes it a more valid mean-variance efficient proxy in an inefficient market.

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“…In the past 13 years, several studies have been conducted on developed markets. Most of the empirical studies (Arnott and West, 2006; Hemminki and Puttonen, 2008; Walkshausl and Lobe, 2010; Hsieh et al , 2012; Basu and Forbes, 2014; Tomingas, 2016) on developed markets give priority to the FI portfolio provided the investors are risk-averse and stay invested for a longer horizon. At a global level too, FI portfolios have the edge over the CWI, and the abnormal returns are mostly attributed to value premium and size premium (Walkshausl and Lobe, 2010).…”

Section: Introductionmentioning

confidence: 99%

Does the fundamental indexation portfolio perform better? An Indian investigation

Kumar

Tiwari

2021

ARJ

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Purpose This study aims to compare the fundamental indexation (FI) portfolio vis-à-vis the cap-weighted index (CWI). It also explored the return-generating attributes of the FI portfolios. Design/methodology/approach This study extracted relevant data from the Centre for Monitoring Indian Economy’s Prowess database from March 1996 to March 2017 from a sample of National Stock Exchange (NSE) 500 companies. The FI portfolios were constructed with First_50 and Next_50 stocks using the latest and five years of trailing average aggregations. Further, the regression technique was used to identify the return-generating attributes of FI portfolios. Findings It was found that the FI portfolios based on First_50 and Next_50 stocks outperformed the CWI (i.e. NSE_First_50 and NSE_Next_50) in the Indian capital market, and between the two, the FI portfolios based on Next_50 stocks were superior to the FI portfolios based on First_50 stocks. The cross-sectional superiority of FI portfolios is obvious if they are sorted according to four fundamentals, namely, total income, sales, operating cash flows and profit before depreciation interest tax and amortisation. The return-generating process of FI portfolios is well-explained by market premium followed by value premium and investment premium. Practical implications This study may enable portfolio managers and investors to measure FI portfolios’ superiority in the Indian capital market and identify the return-generating attributes of FI portfolios so that the loadings can be switched amongst different priced factors for higher yield. Further, this study extends the FI literature, providing evidence from one of the world’s fastest-growing economies. Originality/value To the best of the knowledge, this is amongst the first few studies to explore the performance of FI portfolios vis-à-vis CWIs in India, and to use Fama and French (2015) asset pricing models to understand the return-generating attributes of FI portfolios. It is also novel in the sense that it considers the FI portfolios for a longer duration, predating 1997 and coinciding with the inception of CWIs, namely, NSE_First_50 (inception: 1995) and NSE_Next_50 (inception: 1996), reducing the apprehensions of data-snooping biases.

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Fundamental Indexation For Global Equities: Does Firm Size Matter?

Cited by 5 publications

References 10 publications

Do fundamental portfolios outperform in the MENA equity markets?

Do fundamental portfolios outperform in the MENA equity markets?

Fundamental Indexes As Proxies For Mean-Variance Efficient Portfolios

Does the fundamental indexation portfolio perform better? An Indian investigation

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