Do fundamental portfolios outperform in the MENA equity markets?

Rasha Tawfiq Abadi and Florinda Silva

International Journal of Islamic and Middle Eastern Finance and Management, 2019, vol. 12, issue 2, 265-281

Abstract: Purpose - This study aims to investigate the performance of fundamental weighted portfolios (using sales, cash flows, dividends, book values and a composite of all these variables), an equal weighted portfolio and a smoothed cap-weighted (CW) portfolio in Middle East and North Africa (MENA) markets. The performance of these portfolios is compared with that of a CW portfolio for the period 2005 to 2015. Design/methodology/approach - The portfolios are formed using different concentration levels, different construction schemes and different sub-regions. The performance is assessed using a large set of risk-adjusted performance measures, including more robust measures in the context of multi-factor models, such as theFama and French (1993) three-factor model, theFama and French (2015) five-factor model and a seven-factor model. Findings - The results show that the fundamental portfolios, with the exception of the sales portfolio, underperform the CW portfolio using either the traditional or more robust risk-adjusted performance measures. The underperformance of the fundamental portfolios is found to be robust using different concentration levels, different construction schemes and different sub-regions. The results also show that the equal weighted portfolio outperforms the CW portfolio using traditional risk-adjusted measures. However, after controlling for additional risk factors, this outperformance disappears. Practical implications - The failure of fundamental indexation in the emerging markets could help the researchers and the academics to search for the best weighting method that could be used as an alternative to the CW indexation method. Originality/value - The results of the study add evidence to the debatable propositions on the performance of fundamental portfolios in emerging markets. Furthermore, the findings may help domestic and international investors, practitioners and decision-makers to deepen their knowledge in terms of the best portfolio construction scheme in the MENA region.

Keywords: MENA Region; Cap-weighted portfolios; Equal weighted portfolios; Fundamental weighted portfolios; Smoothed cap-weighted portfolios (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eme:imefmp:imefm-07-2018-0230

DOI: 10.1108/IMEFM-07-2018-0230

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