Analyzing Diversification Effects, Sector Allocations, Market Conditions, and Factor Tilts

Description

Capitalization-weighted indices are known to suffer from problems associated with higher concentration; they fail to take full advantage of the diversification opportunities offered by equity markets.  A large number of alternative equity beta strategies, which include low risk, fundamental, equal-weighted, and other types of strategies, try to improve performance relative to their cap-weighted counterparts.  However, investors who are interested in such alternatives should obtain detailed information on the sources of outperformance of such indices.  In this paper, we consider the question of performance drivers for a particular strategy, Efficient Indexation, which draws on portfolio construction techniques to provide risk/return tradeoffs better than those of their cap-weighted counterparts.