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When Indexing Wins and When It Doesn’t in US Equities: Updating and Extending the Purity Hypothesis

William Thatcher
The Journal of Beta Investment Strategies Winter 2018, 9 (3) 18-23; DOI: https://doi.org/10.3905/jii.2018.9.3.018
William Thatcher
is a portfolio manager at the AZ Public Safety Personnel Retirement System in Phoenix, AZ
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Abstract

Indexes tend to beat active managers in the top-performing US equity asset classes and trail active management in the worst-performing US equity categories. It is hypothesized that the reason for this performance pattern concerns style differences between index and active funds. Indexes are more style pure than corresponding actively managed funds. As a result, indexes are harder to beat when their style is in favor and easier to beat when their style is out of favor. This idea is called the Purity Hypothesis. Data is presented showing that the Purity Hypothesis constitutes a reasonable explanation for the performance differences between index and active funds.

TOPICS: Passive strategies, performance measurement

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The Journal of Index Investing: 9 (3)
The Journal of Beta Investment Strategies
Vol. 9, Issue 3
Winter 2018
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When Indexing Wins and When It Doesn’t in US Equities: Updating and Extending the Purity Hypothesis
William Thatcher
The Journal of Beta Investment Strategies Nov 2018, 9 (3) 18-23; DOI: 10.3905/jii.2018.9.3.018

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When Indexing Wins and When It Doesn’t in US Equities: Updating and Extending the Purity Hypothesis
William Thatcher
The Journal of Beta Investment Strategies Nov 2018, 9 (3) 18-23; DOI: 10.3905/jii.2018.9.3.018
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  • Article
    • Abstract
    • HOW WELL DID THE PURITY HYPOTHESIS WORK THROUGHOUT THE 2003–2017 PERIOD?
    • CAN THE PURITY HYPOTHESIS EXPLAIN THE PERFORMANCE OF LARGE GROWTH AND LARGE VALUE ACTIVE FUNDS VERSUS BENCHMARKS FROM 1979–2017?
    • CONCLUSION
    • ACKNOWLEDGMENTS
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