PT - JOURNAL ARTICLE AU - Roger Clarke AU - Harindra de Silva AU - Steven Thorley TI - Practical Applications of When Does Capitalization Weighting Outperform? <em>Factor-Based Explanations</em> AID - 10.3905/pa.6.3.300 DP - 2019 Jan 31 TA - Practical Applications PG - 1--5 VI - 6 IP - 3 4099 - https://pm-research.com/content/6/3/1.6.short 4100 - https://pm-research.com/content/6/3/1.6.full AB - In When Does Capitalization Weighting Outperform? Factor-Based Explanations, from the Fall 2018 issue of The Journal of Index Investing, Roger Clarke of Ensign Peak Advisors, Harindra de Silva of Analytic Investors, and Steven Thorley of Brigham Young University weigh in on the active/passive debate from a factor-investing perspective. Specifically, they examine whether the underperformance of actively managed mutual funds relative to capitalization-weighted indexes over the past 25 years can be explained by the actively managed funds’ disproportionate exposure to specific equity market factors such as value, momentum, size, low beta, and profitability. The authors posit that the aggregate holdings of actively managed mutual funds have some similarities to an equal weighting of securities within the population of large-cap equities. This implies a significant tilt toward the size factor by actively managed funds. Such funds also currently display tilts toward the momentum and profitability factors. Together, the factor tilts explain roughly half of the underperformance of actively managed mutual funds relative to the capitalization-weighted indexes.TOPICS: Mutual fund performance, factor-based models