A Bottom-Up Take on the Russell 3000® Value Rebalance

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Will Nasgovitz

Nasgovitz is CEO and Portfolio Manager of the Select Value and Mid Cap Value Funds and their corresponding separately managed account strategies. He also is CEO of Heartland Funds. He has 16 years of industry experience, 13 at Heartland.

It’s always interesting looking at the annual rebalance for the Russell Indices®, and what really jumps out.

I would say this year versus last year there’s nothing real meaningful. I think last year, with Energy going larger in the Value benchmarks was notable. It certainly had implications for the Russell 3000® Value, as we saw a larger share of mid-cap Energy companies enter the benchmark, or increase the allocation there.

This year Consumer Staples is going up pretty meaningfully within the 3000® Value. That’s interesting to us because the group, generally speaking, looks more expensive than the broader market—and perhaps not as attractively valued versus other areas.

It’s always interesting trying to align what the capital markets see from a sector perspective versus the broader economy. If you look at the Russell 3000® Value, 20%+ of the Index is in Financials. Is that really representative of the broader U.S. economy? Perhaps it is. I’m not totally certain on that.

But one area that certainly jumps out to us is seeing Health Care come down a little bit year over year. And that’s interesting because Health Care, as we know, continues to take a larger share of GDP here in the United States and globally. So, does that make sense? Does that distortion make sense? Certainly their methodology is well known, looking at book-to-price and earnings and sales growth. And that is causing some shifts in the benchmark today that might suggest some distortions versus the broader economy.

It doesn’t change our process. We’re going to continue to look for opportunities across all sectors. It is interesting to see what sectors saw an uptick in their allocation in the benchmark and what went down.

The contrarian in us does look for those opportunities where, perhaps, the allocations are coming down. Health Care in the 3000® Value is coming down year over year. We’re not saying that’s the buy signal, but that’s interesting to us. Perhaps there’s going to be less passive interest in that space and might create some opportunities for us in the longer term.

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