Fundamental Indexation: An Australian Investigation

Joanne Mar, Ron Bird, Lorenzo Casavecchia, Danny Yeung

Research output: Contribution to journalArticlepeer-review

13 Citations (Scopus)

Abstract

Capitalisation-weighted indexes provide the basis for passive investment strategies designed to capture market performance. However, these cap-weighted indexes are claimed to be sub-optimal because of their tendency to overweight overvalued shares and underweight undervalued shares. U.S. evidence suggests that fundamental indexes, which select, rank and weight stocks according to fundamental measures of size such as book value and revenue, outperform cap-weighted indexes. This study examines fundamental indexation in an Australian context over the period 1995 to 2006 and finds support for the U.S. results. However, we also find that the superiority of fundamental indexation is largely explained by its inherent bias towards value stocks, which raises the question as to whether a more overt value tilt may not provide a superior means for exploiting mispricings in markets.

Original languageEnglish
Pages (from-to)1-20
Number of pages20
JournalAustralian Journal of Management
Volume34
Issue number1
DOIs
Publication statusPublished - 2009
Externally publishedYes

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