An exposé of why equally weighted equity portfolios appear capable of consistently outperforming other passive strategies has won S&P Indices’ first annual award for excellence in research on index-related topics.

Yuliya Plyakha, Raman Uppal and Grigory Vilkov of Goethe University in Frankfurt and the Edhec Business School in London won the $50,000 Spiva (S&P Index Versus Active) Award for their paper “Why does an equal-weighted portfolio outperform value- and price-weighted portfolios?

The trio’s analysis of a random selection of stocks from the S&P 500 over the past 40 years found an equal-weighted portfolio generated an annual return 271 basis points above that of a value-, or market capitalisation-weighted portfolio, and 112 basis points higher than a price-weighted one (ie constructed along the lines of the Dow Jones Industrial Average).

The paper concluded that 58 per cent of the outperformance vis a vis the value-weighted portfolio stemmed from an “excess systematic component” driven by the equally weighted portfolio’s greater exposure to smaller and value stocks, factors long shown to lead to outperformance over a cycle.

The remaining 42 per cent stems from “alpha”, or excess returns generated by the monthly rebalancing required to maintain equal weights, which is a contrarian strategy involving buying the losers and selling the winners.

The paper found 96 per cent of the outperformance against the price-weighted portfolio was due to this alpha element.

“Theoretically, the market value-weighted portfolios should do the best, but it turns out they do the worst,” said Prof Uppal of Edhec Business School.

“The contrarian strategy exploits the tendency of stocks that have risen to come down, and those that have gone down to rise, and this reversal is the sole reason for the alpha.”

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