Performance of fundamental indices in African capital markets

Abstract

This research study aims to establish whether fundamental indices outperform cap-weighted indices in African emerging markets using data from 2003 to 2017. The risk-return characteristics of indices are compared using mean-variance analysis techniques to account for variations in risk. The sources of any excess returns are further investigated by analysing single factor fundamental indices. The results indicate that fundamental indices outperformed cap-weighted indices in African emerging markets, even after accounting for risk. The outperformance was not always significant. The fundamental factors contributing most to the outperformance are cash flow and revenue. Keywords: Fundamental Indexation; Cap-weighted Indices; Indexation; Value Bias; Value Investing; Price Noise; JSE; Egyptian Exchange; Nigerian Stock Exchange; Nairobi Securities Exchange; Stock Exchange of Mauritius.