Weighting

The performance derby between actively managed portfolios and passive benchmarks is strongly influenced by market conditions.  Active manager success rates are cyclical, but not random, and are driven by slippage created from style, size, and weighting considerations that result from the imperfect slotting of active portfolios into single style boxes.  Moreover, this slippage can be defined and measured, and shows a clear correlation with relative return spreads between benchmarks and their opposite boxes.

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Are the Dow Industrials benefiting from trivial weighting? Slicing our Leuthold 3000 universe into market cap deciles shows different performance results than commonly followed market indices.

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In 2006, the capitalization weighted S&P 500 was up 13.6%, excluding dividends. The average return for the 500 stocks (S&P equally weighted) was up 14.2%.

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S&P 500 Energy weight is misleading. Adding the largest multi-national integrated oil companies to the S&P’s 10% energy weight doubles it to 20%.

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The S&P 500’s largest and most rapidly increasing sectors.

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Small caps continue to be the market leaders over large caps. This trend is expected to continue into 2005, as our small cap leadership model has recently improved, and is now rated slightly positive.

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The near term is becoming more uncertain for Health Care stocks, as HC groups have experienced an erosion in GS Score strength.

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We view Health Care as a key theme in 2004. The sector is defensive and sports high growth rates thanks to the large (and growing) demand from elderly Americans.

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There was a brief pause last month in our Health Care scores, and we were proceeding with caution. This month, our GS Score work regained some of that lost momentum.

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Comparing the sector weights between the NASDAQ and the S&P 500.

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Conceptually we think that the big drug stocks are poised to rebound, but they have yet to rank Attractive in the Group Selection Scores.

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The broad Tech sector has rallied significantly from lows and is not cheap by tradi­tional valuation measures. Upside driver is earnings momentum, which continues to be strong.

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A look at favoritism shifts in broad economic sectors, 1977 to date. Large weights prone to correction.

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Each month, we get a number of client questions via meetings, phone calls, and e-mails regarding various aspects of our research.

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We always welcome the chance to hear what’s on our readers’ minds, and have often found that seeking answers to these questions can lead to new research topics, interesting charts, and new ways of looking at things.

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History shows us a number of economic sectors besides technology which have also experienced broad swings as the tide of investor enthusiasm ebbs and flows.

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Expect the S&P 500 financial weighting to fall to 14% or so over the next two years, as they underperform the overall S&P 500 index.

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Worse than expected Q2 earnings (losses) beat down the tech sector in July. The bad news just won’t end.

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After weathering a big correction in March and early April, Tech stocks have recently acted pretty well considering the dismal earnings and worsening outlook.

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Tech stocks struggled again as a torrent of disappointing news showered the group in May.

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