Capturing the Value Premium

Apr 20, 2011

MSCI Value Weighted Indices are systematic indices that aim to reflect the value premium by employing an alternative weighting scheme that tilts the index towards stocks with lower valuation ratios. In this paper, we review the theoretical aspects of value weighted indices and through empirical studies we discuss the important facets of index construction that underpin the design of MSCI Value Weighted Indices. They are based on an objective and transparent methodology by which all the constituents of a standard MSCI parent index are re-weighted using four common accounting measures: book value, sales, earnings and cash earnings -- thereby adding a value tilt to the parent MSCI index towards stocks with relatively lower valuation ratios. MSCI Value Weighted Indices are complementary to capitalization weighted indices and could serve as tools in strategic asset allocation to enable investors to gain exposure to market beta with a value tilt.