The impact of analyst forecast errors on fundamental indexation: the Australian evidence

Lorenzo Casavecchia, Gerhard Hambusch () and Justin Hitchen ()
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Gerhard Hambusch: University of Technology Sydney, UTS Business School
Justin Hitchen: University of Technology Sydney, UTS Business School

Journal of Asset Management, 2022, vol. 23, issue 5, No 4, 400-418

Abstract: Abstract Evidence from many developed markets suggests that fundamental indices outperform capitalisation-weighted indices. Existing studies suspect a story of market mispricing, yet a mechanism has not been identified. Using Australian data, we study the relation between analyst forecast errors and the performance of various fundamental indices. We find that fundamental indices contain a relatively higher exposure to stocks with low analyst long-term growth forecasts. Valuations for these stocks are ex ante overly pessimistic and drive the statistical significance of alphas produced by fundamental indexation. We show how hedging against analyst forecast errors can generate additional alpha for investors using fundamental indexation.

Keywords: Fundamental indexation; Smart beta; Cap-weighted index; Analyst forecast errors; French Fama alpha (search for similar items in EconPapers)
JEL-codes: G11 G12 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1057/s41260-022-00276-y

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