Proponents of “fundamental indices” claim that an investment-management revolution is afoot. Traditional indices and the funds based on them are market-capitalization-weighted; they give investors exposure to markets, usually at a very low, all-in cost.
However, Fundamental Indexers contend that because capitalization-weighted indices assign higher weight to higher-priced stocks, they systematically overweight expensive stocks and underweight cheap ones. The Fundamental Indexers contend investors can do better by taking price out of the equation. How? By using new indices based on measures of economic import — such as book value, dividends, earnings or sales — that are not contaminated by the irrationalities of price.
Is this idea anything new? The answer is no. The fundamental indexing “revolution” is driven by nothing we do not already know. We already have a characterization for this in the investment management industry: It is called value investing. More precisely, in this form it is called a quantitative active value tilt.
Fundamental indexing is really just a relabeling of the most debated, and most promising, side bet out there: value investing. As such, it may be an attractive investment product. But fundamental indexing is certainly nothing even remotely new. Instead, it is just a catchy term for a long-established discipline.
The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of AQR Capital Management, LLC, its affiliates or its employees.
This information is not intended to, and does not relate specifically to any investment strategy or product that AQR offers. It is being provided merely to provide a framework to assist in the implementation of an investor’s own analysis and an investor’s own view on the topic discussed herein. Past performance is not a guarantee of future results.