Abstract
Purpose – This article analyzes fundamental indexation in Brazil relative to the IBrX 100 and selected stock funds in the period between June 2003 and May 2015. This strategy relies on weights based on fundamental indicators and not on market prices. Design/methodology/approach – Fundamental indices built with the IBrX 100 stocks were weighted according to fundamental indicators. The fundamental weighting method sets the weight of each stock as proportional to a previously determined fundament value. This article also considers an ordinal weighting. Findings – The results indicate that fundamental indices do not display positive and statistically significant returns and alphas after adjusting a five risk factor model and transaction costs. The ordinal weighting suggests that fundamental indicator outliers do not drive results. The evidence also suggests that fundamental indices might perform better in bear markets. Originality/value – In general, fundamental indices behave like value stocks and do not present abnormal returns. This is consistent with the absence of fundamental index products in the Brazilian market.
Highlights
Portfolios weighted by the market value of stocks will not necessarily lead to an efficient relationship between risk and return. Haugen and Baker (1991), for example, showed that there are alternatives that lead to the same expected returns, but with lower volatility. Markowitz (2005) argues that even if the restrictions of long and short positions in the real world were taken into account, the market portfolio, often represented by a stock index weighted by market value, will not be efficient
STehues ordinal regtoeornmoestrmicéadvioersaggeeoremtuértrniscoasreahniugahleizratdhoasn stãhoosme aiores wdoeigqhuteinogsddepoicItBerdXby1E00q,uaàtieoxnce2çdãooesdonot show of the IBrX 100 except for the index weighted distinct results and suggests that extreme and ínbdyicseharpeohnodlderearsd’obopoekloequviatylo. rHopwaterviemr,oonnialyl.thCeontudon, egsoatmiveenvtealuoes oínf dthiceefufnudnadmaemnetanltainlidsitcaators do fundamental index calculated with free cash flow, not affect the results obtained with the original weighted acRcoRrdevin
This article analyzed portfolios composed according to fundamental indexation in Brazil between June 2003 and May 2015 for companies present in the theoretical portfolio of the IBrX 100
Summary
Portfolios weighted by the market value of stocks will not necessarily lead to an efficient relationship between risk and return. Haugen and Baker (1991), for example, showed that there are alternatives that lead to the same expected returns, but with lower volatility. Markowitz (2005) argues that even if the restrictions of long and short positions in the real world were taken into account, the market portfolio, often represented by a stock index weighted by market value, will not be efficient. Arnott, Hsu, and Moore (2005) proposed portfolios weighted according to the fundamental indicators of companies and not on the basis of market prices. They claim that the traditional weighting by market value method is sub-optimal because prices may introduce noise and not fully reflect the fundamentals of the companies. For example, that the fundamental indicator selected is the company’s revenue, whose amount is R$ 10 million, and the sum of the revenue of the companies being considered is R$ 100 million, the weight of this asset in the fundamental index (or portfolio) would be 10 percent in the period
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