For decades, the general assumption has been that market-cap-weighted index vehicles provided investors with an optimal method of pursuing returns. But Smart Beta strategies, such as revenue weighting are challenging that idea.
We believe current S&P 500 Index valuations are forecasting muted future returns, and that market-cap weighted strategies are now overvalued relative to historical averages. The data also suggests the stage could be set for outperformance among revenue-weighted strategies. S&P 500 valuations are well above their 5-year average, but the last time price-to-sales ratios were near this level was before the tech bubble, a period when revenue-weighted strategies outperformed by 4.8% per year.
OppenheimerFunds’ suite of revenue-weighted strategies own the same stocks as an index – such as the S&P 500 – but weight companies by their revenue. Historical evidence suggests this approach can deliver better long-term returns, generating outperformance when stock valuations are high.
We believe quarterly rebalancing such strategies by revenue may offer investors three compelling benefits:
- Maintains focus on lower-valued companies.
- Reduces exposure to overpriced stocks.
- Could cause underperformance in a bubble, but holds the potential for better returns during the rebound and over the long term.
Explore more why revenue weighting may be a better way to access the entire market.
Sources: Ned Davis Research, CRSP, Kenneth French Data Library, 12/31/15. The performance results for factor-weighted S&P 500 Index represent hypothetical back-tested performance to illustrate how the factor-weighted index may have performed. Back-tested index results are not intended to depict the performance of any existing index or any investment product. Past performance does not guarantee future results.
Alternative weighting approaches (i.e., using revenues as a weighting measure), while designed to enhance potential returns, may not produce the desired results.
These views represent the opinions of OppenheimerFunds, Inc. and are not intended as investment advice or to predict or depict the performance of any investment. These views are as of the publication date, and are subject to change based on subsequent developments.
For Institutional Use Only. This material has been prepared by OppenheimerFunds Distributor, Inc. for institutional investors only. It has not been filed with FINRA, may not be reproduced and may not be shown to, quoted to or used with retail investors.