Additionally, our sector weightings are an indirect outcome of our bottom-up stock selection process. That is the core of our investment discipline. We focus on companies that are profitable, that generate cash flow and that trade at discounted valuation multiples. The Index structure may have changed, but how we invest did not. Banking and Diversified Financials (including REITS and specialized lending firms) drove this weighting shift.Ĭonsumer Discretionary weighting increased from 10.7% to 12.9% due to underperforming companies in the sector.Īdditionally, the number of unprofitable companies in the Index declined from 24.3% prior to reconstitution to 20.2%. As a result, its weight shifted from 10.1% to nearly 13%, with most of the increase reflected in the Capital Goods industry.įinancials grew from 31.3% to 34.1%. Since February, the Industrials sector has been hit hard with valuation declines. (Incidentally, all but two of those companies were unprofitable biotech or pharmaceutical firms). Most of that weighting difference can be attributed to the 78 companies that exited the Index due to size or valuation implications. Look at the scope of these sector changes. Second, sector weightings shifted significantly after the reconstitution. Due to the market decline over the past year, the weighted average market capitalization of the Index decreased from $578 million on Jto $486 million at this year’s reconstitution. The smallest company added to the Index was approximately $25 million. The first notable change pertains to market capitalization. Take the Russell Microcap® Value Index (“Index”), for example. While this activity seems trivial compared to other current events, there were some meaningful changes this year that will impact how investors measure performance of their managers and frame expectations for the coming twelve months.

Each year, at the end of second quarter, the Russell Indexes’ reconstitution takes place.

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