Fundamentally Weighted Global Small Companies

Abstract

The author presents an empirical analysis into the issue of universe definition for a fundamentally weighted, global small-company equity strategy. Consistent with previous research on fundamental indexing for large companies, the author confirms the performance advantages of weighting securities by fundamental measures of company size, as opposed to market capitalization, for a variety of global small-company strategies. Beyond these results, the author provides evidence that small-company strategies that define their universe by market capitalization criteria, in the manner of traditional small-cap indices, enjoy a performance advantage over those that use fundamental-ranking criteria. Although this improvement in risk-adjusted performance is accompanied by marginally increased total risk and turnover, rudimentary adjustments to the market cap-defined universe counteract both effects.