Nothing Lasts Forever (and Everywhere): Fundamental Indexation at the Global Level

Abstract

Fundamental indexation is commonly employed to form portfolios of stocks, but can we also use it to form portfolios of countries? The authors investigate whether fundamental weighting can be applied to enhance the profits from international diversification. To this end, they form and evaluate fundamental indexation strategies within an up-to-date sample of equity benchmarks covering 71 countries for the years 1995–2017. The fundamentally weighted portfolios indeed outperform capitalization-weighted indexes, but significant benefits are largely limited to emerging and frontier markets and almost disappear from the post-2007 period. The abnormal returns result from additional exposure to country-level value and size effects, which have delivered disappointing performance in the past decade.

TOPICS: Fundamental equity analysis, portfolio construction, global