Abstract
For many years researchers have been arguing on whether active investing is superior to passive investing by giving theoretical and empirical rationale underlying their beliefs. A desire to over-perform passive investing by utilising fundamentally-justified methodology has led to the development of numerous active and semi-active strategies, such as Fundamental indexation established in 2005 by Arnott et. al. In their research, the authors suggested constructing investment portfolios by assigning the weights of each asset concerning the values of its fundamental indicators. This approach has met heavily critique for the lack of theoretical rationale, by not being able to connect the values of selected fundamental indicators to the future performance of the portfolio. In this research, the thesis of passive investing superiority has been challenged by constructing an active investing strategy based on Fundamental Index described by Arnott et al. (2005) - Modified Fundamental Index and testing it on the UK stock exchange companies. The resulted portfolio showed superior performance compared to the cap-weighted index while also having lower risks and higher diversification. Also, I suggested some ideas for further research concerning MFI.
Highlights
For decades researchers and practitioners have an intense discussion, whether the active or passive approach to investing is superior, giving solid rationales for both sides of the argument
Passive investing by developing and utilising fundamental indexation strategy for the retail industry. It utilises a financial analysis of a certain business model throughout the industry to establish a solid theoretical rationale for fundamental index strategy
To identify the theoretical rationale underlying fundamental indexation and critically evaluate typical approaches, as well as parameters used for fundamental index construction;
Summary
For decades researchers and practitioners have an intense discussion, whether the active or passive approach to investing is superior, giving solid rationales for both sides of the argument The difference between those is in a way, how investments are managed concerning an overall market or what is called “index”. The goal of current research is to check the hypothesis whether active investing is superior to passive investing by developing and utilising fundamental indexation strategy for the retail industry. It utilises a financial analysis of a certain business model throughout the industry to establish a solid theoretical rationale for fundamental index strategy. Back testing of a strategy developed and checking, whether active investment might be superior over passive
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