Wreaked by the Crisis
January 12, 2009
A related challenge in this year’s performance reviews is the classification of Financial stocks, which have been decimated by the crisis, especially in the last half of the year. While these stocks have suffered price reductions, their earnings have also plummeted, and in many cases Price/Earnings ratios have increased substantially as a result. Many Financial stocks have morphed from Value stocks to Growth stocks in the second half of the year, but this fact is not recognized by the Russell indexes because they are rebalanced only once a year, in June. By contrast, Surz style classifications are reset quarterly.
The following graph demonstrates the impact of the shifting profiles of Financial stocks. In mid year 2008, Financials represented 25% of the Surz large Value index, but this percentage decreased by more than half to 12% by year end. By contrast, the Russell large Value index maintained roughly the same 25% weight in Financials throughout the second half of 2008. Where did Financials move to in the Surz classifications? To Core and Growth. In the same timeframe, the Financial component of the Russell Growth indexes has remained level at 4%, rather than increasing. Similar peculiarities can be found in the Health Care and Industrial sectors, and to a lesser extent with S&P’s sector allocations.
Why does this Financial allocation matter? Index huggers will have kept their sector allocations in line with the Russell indexes, with the consequent impact on performance, namely worse Value performance and better Growth performance than a liberated non-index-hugger. Performance reviewers should be careful to understand these differences, and to attribute success or failure accordingly. Complicated? You bet, but these are extremely complex times.
Display article as PDF for printing.
Would you like to send this article to a friend?
Remember, if you have a question or comment, send it to .
