With the global proliferation of index strategies investors are becoming wary of the range of ideas targeting an optimal risk return outcome. However, one tried and tested alternative weighting index strategy continues to demonstrate a superior outcome, equal weighting.
Equal weighting is simple. It takes the investable universe and gives each security an equal weighting, thereby mitigating size biases and sector concentration that can be found in a market capitalisation approach.
The performance benefits of equally weighting have been widely published by the academic community, with the main outperformance drivers being:
- A bias to value and smaller stocks; and
- Contrarian trading.
For example, the Australian equity market, as represented by the S&P/ASX 200 Accumulation Index, is dominated by its top 10 securities which make up 47% of the index – it is one of the most concentrated equity markets in the world. The Financials sector alone represents over 46%. The MVIS Australian Equal Weight Index has outperformed the Australian benchmark S&P/ASX 200 Accumulation across all key periods.
Source: Bloomberg, as at 31 March 2016. Past performance is not a reliable indicator of future performance.
More than often the simplest ideas are the best.
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