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Does fundamental indexation lead to better risk-adjusted returns? New evidence from Australian Securities Exchange

Authors


  • We are grateful to Henk Berkman, the editor, and an anonymous referee for their suggestions in improving the article. We would like to personally thank Rob Arnott and Jason Hsu for helpful discussions and comments on an earlier version of the paper and Phillip Turvey and Thanh Huynh for providing excellent research assistance. The comments of participants at the Macao International Symposium on Accounting and Finance 2011, India Finance Conference 2011 and Griffith Business School seminar are also acknowledged.

Abstract

We investigate the claims of superiority of fundamental indexation strategy over capitalisation-weighted indexation using data for Australian Securities Exchange listed stocks. While our results are in line with the outperformance observed in other geographical markets, we find that the excess returns from fundamental indexation in Australian market are much higher. On a rolling 5-year basis, the fundamental index always outperforms the capitalisation-weighted index. Our results suggest that superior performance of fundamental indexation could not be entirely attributed to value, size or momentum effects. The outperformance persists even after adjusting for slightly higher transaction costs related to turnover.

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