Abstract
We examine the benefits of fundamental indexation using European data. Our findings suggest that by re-weighting a capitalisation-weighted market index by certain fundamental values, it is possible to produce consistently higher returns and higher risk-adjusted returns. Some of these fundamental portfolios produce consistent and significant benefits compared to the capitalisation-weighted portfolio. Thus, our results are in line with Arnott et al. (2005) from the US markets.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
Notes
Arnott et al. (2005) provide an extensive list of relevant literature on the topic. There is a vast stream of literature on ‘Value’ strategies that call for buying stocks with a low price relative to earnings, dividends, book assets, cash flow, or other measures of fundamental value. In addition to the literature in Arnott et al. (2005), one may add Chan and Lakonishok (2004), Lakonishok et al. (1994), and Fama and French (1998, 2004) as cornerstone articles in the field.
References
Arnott, R. D., Hsu, J. and Moore, P. (2005) ‘Fundamental Indexation’, Financial Analysts Journal, 61 (2), 83–99.
Chan, L. K. C. and Lakonishok, J. (2004) ‘Value and Growth Investing: Review and Update’, Financial Analysts Journal, 60 (1), 71–86.
Fama, E. F. and French, K. R (1998) ‘Value Versus Growth: The International Evidence’, Journal of Finance, 53 (6), 1975–1999.
Fama, E. F. and French, K. R. (2004) ‘The Capital Asset Pricing Model: Theory and Evidence’, Journal of Economic Perspectives, 18 (3), 25–46.
Hsu, J. C. (2006) ‘Cap-Weighted Portfolios are Sub-Optimal Portfolios’, Journal of Investment Management, 4 (3), 1–10.
Lakonishok, J., Shleifer, A. and Vishny, R. W. (1994) ‘Contrarian Investment, Extrapolation, and Risk’, Journal of Finance, 49 (5), 1541–1578.
Treynor, J. (2005) ‘Why Market-Valuation-Indifferent Indexing Works’, Financial Analysts Journal, 61 (5), 65–69.
Acknowledgements
We thank Robert Arnott and Antti Pirjetä for comments.
Author information
Authors and Affiliations
Corresponding author
Additional information
1graduated as MSc (Econ) from Helsinki School of Economics (major in finance). He works as a project controller at ABB.
Rights and permissions
About this article
Cite this article
Hemminki, J., Puttonen, V. Fundamental indexation in Europe. J Asset Manag 8, 401–405 (2008). https://doi.org/10.1057/palgrave.jam.2250090
Received:
Revised:
Published:
Issue Date:
DOI: https://doi.org/10.1057/palgrave.jam.2250090