Les performances relatives de l'indexation - synthèse en anglais

Abstract

The insights from the celebrated Capital Asset Pricing Model have led many to champion capitalization-weighted “equity market portfolios” as mean-variance optimal. Armed with these insights, investment managers and consultants have created a trillion dollar industry, based on investing in passive capitalization-weighted indexes, such as the S&P 500 and other indexes constructed by Russell, MSCI, The Financial Times, Wilshire, Forbes and Fortune to name a few. Trillions more in actively managed equity portfolios are benchmarked against these same capitalization-weighted indexes. But, the CAPM literature already rejects the mean-variance efficiency of capitalization-weighted equity market indexes. This suggests that it should be possible to construct stock market indexes that are more mean-variance efficient than those based on market capitalization.

In this paper, we examine a series of equity market indexes weighted by fundamental metrics of size, rather than market capitalization. We find that these indexes deliver consistent and significant benefits relative to standard capitalization-weighted market indexes. These indexes exhibit similar beta, liquidity and capacity compared to capitalization-weighted equity market indexes and have very low turnover. They show annual returns that are on average 213 basis points higher than equivalent capitalization-weighted indexes over the 42 years of the study. They contain most of the same stocks found in the traditional equity market indexes, but the weights of the stocks in these new indexes differ materially from their weights in capitalization-weighted indexes. Selection of companies and their weights in the indexes are based on simple measures of firm size such as book value, income, gross dividends, revenues, sales, and total company employment.

While price inefficiency could lead to the observed alpha, as capitalization weighting assuredly overweights the overvalued stocks and underweights undervalued stocks, the superior performance may also be attributable to superior mean-variance portfolio construction or to hidden risk factors (in an APT or Fama-French framework), none of which violates the assumption of price efficiency. Regardless of the exact reason, these Fundamental Indexation indexes appear to provide long-term performance superior to that of comparable capitalization-weighted equity indexes. We offer them not as substitutes for capitalization-weighted indexes, but as simple alternatives, that may offer superior return and risk characteristics.

© 2004 Research Affiliates, LLC. Patent Pending. All Rights Reserved.

Duplication or dissemination prohibited without prior written permission.

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Is the S&P500 mean-variance efficient?

The CAPM says that the “market portfolio” is mean-variance optimal. While this model is predicated on an array of assumptions, most of which are arguably not quite accurate, it leads to the conclusion that a passive investor/manager can do no better than holding a market portfolio. The finance industry, with considerable inspiration and perspiration from Harry Markowitz, Bill Sharpe, Jack Bogle, Burton Malkiel, Bill Fouse, Dean LeBaron and many others, has translated that investment advice into trillions of dollars invested in or benchmarked to capitalization-weighted market indexes such as the S&P500 and the Russell 1000.

Many academic papers reject the idea that capitalization-weighted indexes are good CAPM market proxies.iii This is equivalent to rejecting the mean-variance efficiency of these indexes.iv The rejection of capitalization-weighted equity market indexes as mean-variance efficient suggests that more efficient indexes exist. However, the exercise to identify a better index may be moot if ex ante identification is impossible or if capitalization-weighted equity market indexes are almost optimal.v

The ex ante construction of a mean-variance efficient portfolio is a difficult problem; forecasting expected stock returns and their covariance matrix for thousands of stocks, which is necessary for applying Markowitz’s mean-variance portfolio construction, is intellectually challenging and resource intensive. This is precisely why CAPM remains so powerful: if one can find the “market” portfolio, one simultaneously identifies a mean-variance optimal portfolio.

Our industry and MBA programs have promoted the belief that capitalization-weighted equity market indexes is sufficiently representative of the CAPM “market portfolio” to be very nearly mean variance efficient. This assumption reduces the complicated problem of optimal portfolio construction to essentially buying and holding a capitalization-weighted index such as the S&P500 or Russell 1000. We demonstrate in this paper that investors can do much better than capitalization-weighted market indexes; and we provide fundamental equity market indexes, that deliver superior mean-variance performance.

In this study we construct indexes using gross revenue, book equity, gross sales, gross dividend, gross earnings and total employment as weights. If capitalization is a “Wall Street” definition of © 2004 Research Affiliates, LLC. Patent Pending. All Rights Reserved.

Duplication or dissemination prohibited without prior written permission.

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the size of an enterprise, these are clearly “Main Street” measures. When a merger is announced, the Wall Street Journal may cite the combined capitalization, but the New York Post will focus on the combined sales and total employment. We show that these non-capitalization-based indexes consistently provide higher returns and lower risks than the traditional capitalization-weighted equity market indexes. In a sense, our work suggests that indexes constructed using “Main Street” measures of company size are measurably better than the capitalization-weighted “Wall Street” indexes.

Additionally, we show that these “Fundamental Indexes” deliver better risk-adjusted performance than traditional capitalization-weighted equity market indexes in various macroeconomic regimes, such as in rising and falling rate environments, in bull and bear markets and in expansions and recessions. We believe these results are not mere accidents of history but are likely to persist into the future. We offer our interpretations of the results and explain why the results should not be dismissed as active management anomalies or the product of data mining or data snooping. Ultimately, we hope to persuade the reader that our proposed Fundamental Indexes improve upon the capitalization-weighted indexes like S&P500 and Russell 1000.

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