Fundamental Indexation Smart Beta Strategy on the Swedish Market- Enhancing risk-adjusted performance with Fundamental Indexation

Abstract

Smart Beta strategies’ ability to combine the benefits of active- and passive investing has caught the attention of the Asset Management industry – propelling a surge in new Smart Beta products. These strategies offer a novel approach to factor investing by not weighting assets according to the typical cap-weighting scheme, instead applying weighting methods such as fundamental indexation, yielding a new dimension to factor-oriented strategies. This thesis examines the Fundamental Indexation Smart Beta strategy on the Swedish market by comparing the constructed portfolios versus the OMX Stockholm All-Share index from 2006 to 2021. The aim is to investigate whether risk-adjusted cross-sectional returns can be found using a heuristic portfolio generation procedure based on previous literature of the Capital Asset Pricing Model, Factor Investing, and contemporary Smart Beta research. Value, Low Volatility, Quality, and Momentum are the chosen Smart Beta portfolios. The portfolio generation procedure is divided into three steps: screening, scoring, and weighting. The findings reveal significant outperformance in three out of four Smart Beta portfolios versus the benchmark index on a risk-adjusted basis.