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Article

When Indexing Works and When It Doesn’t in U.S. Equities:
An Update of the Purity Hypothesis

William Thatcher
The Journal of Index Investing Winter 2012, 3 (3) 18-26; DOI: https://doi.org/10.3905/jii.2012.3.3.018
William Thatcher
is a principal at Mercer Hammond in St. Louis, MO.
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  • For correspondence: bill.thatcher@mercer.com
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Abstract

The Purity Hypothesis asserts that indexing tends to beat active management in the top-performing U.S. equity asset classes and tends to lose to active management in the worst-performing U.S. equity categories. Active managers often stray from their size and valuation style boxes, which can help or hurt their performance versus benchmarks. For example, a U.S. equity large growth manager may drift away from the large growth style by holding some midcap stocks. If the large growth style is the best-performing U.S. equity asset category, the manager’s midcap holdings may well erode fund performance. But if large growth is the worstperforming U.S. equity asset class, the manager’s midcap positions will likely lift fund returns.

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The Journal of Index Investing: 3 (3)
The Journal of Index Investing
Vol. 3, Issue 3
Winter 2012
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When Indexing Works and When It Doesn’t in U.S. Equities:
An Update of the Purity Hypothesis
William Thatcher
The Journal of Index Investing Nov 2012, 3 (3) 18-26; DOI: 10.3905/jii.2012.3.3.018

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When Indexing Works and When It Doesn’t in U.S. Equities:
An Update of the Purity Hypothesis
William Thatcher
The Journal of Index Investing Nov 2012, 3 (3) 18-26; DOI: 10.3905/jii.2012.3.3.018
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  • Article
    • Abstract
    • HOW WELL DID THE PURITY HYPOTHESIS WORK FROM 1998 TO 2011?
    • WHAT IS THE SHORTEST PERIOD FOR WHICH THE PURITY HYPOTHESIS WORKED CONSISTENTLY?
    • DOES THE PURITY HYPOTHESIS EXPLAIN THE CYCLICALITY OF INDEX VERSUS ACTIVE PERFORMANCE IN U.S. EQUITIES?
    • CONCLUSION
    • APPENDIX A
    • APPENDIX B
    • ENDNOTES
    • REFERENCES
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