Sponsored by: Style Investing: What's the Best Approach for ETF Investors?:

Transcription

1 Sponsored by: Style Investing: What's the Best Approach for ETF Investors?:

2 Speakers: Paul Baiochi ETF Analyst IndexUniverse Matt Hougan President, ETF Analytics Global Head of Editorial IndexUniverse Ron Rough Director, Portfolio Management Financial Services Advisory (FSA) Tony Davidow Managing Director Rydex SGI

3 The History of Style Indexes

4 The History Of Value Investing Benjamin Graham and David Dodd: Security Analysis (1934) and The Intelligent Investor (1949) Margin of Safety: How far below instrinsic value an investor is paying for a stock

5 The Evolution of Value Investing Ships will sail around the world, but the Flat Earth Society will flourish... and those who read their Graham and Dodd will continue to prosper Fund Manager Fund Period Fund Return Market return WJS Limited Partners Walter J. Schloss % / 16.1%[4] 8.4% (S&P) TBK Limited Partners Tom Knapp % / 16.0%[4] 7.0% (DJIA) Buffett Partnership, Ltd. Warren Buffett % / 23.8%[4] 7.4% (DJIA) Sequoia Fund, Inc. William J. Ruane % 10.00% Charles Munger, Ltd. Charles Munger % / 13.7%[4] 5.0% (DJIA) Pacific Partners, Ltd. Rick Guerin % / 23.6%[4] 7.8% (S&P) Perlmeter Investments, Ltd Stan Perlmeter % / 19.0%[4] 7.0% (DJIA) Washington Post Master Trust 3 different managers % 7.0% (DJIA) FMC Pension Fund 8 different managers % 12.6% (Becker Avg.)

6 The History of Growth Investing T Rowe Price s Strategy Centered Around: Post WWII Boom Earnings and Dividends Growth Greater than Inflation Superior growth in EPS

7 The Evolution of Growth Investing The Fama/French Model Old & Busted Expected return = Risk Free Rate + Market Premium + Risk Premium relative to market (Beta) + Skill (Alpha) + Random stuff (error) New Hotness Expected return = Risk Free Rate + Market Premium (Beta) + Size Premium + Value Premium + Skill (Alpha) + Random stuff (error)

8 Common Sense Style Definitions Growth High P/B Value Low P/B

9 Real World Style Definitions

10 Classic Combined with Forward Looking P/B Long Term forward Growth Estimates Market Cap shared between growth and value

11 Value Factors P/B P/S P/FCFE Dividend Yield Growth Factors Long and short term project EPS growth rates Projected sales growth Payout ratio ROE Long term historical EPS Growth Trend Long Term historical sales per share growth trend

12 Uses 8 Criteria to Divide Market Value: P/B 12-month forward earnings expectations Dividend yield/price ratio. Growth criteria: Long-term forward EPS growth expectations Short-term forward EPS growth expectations Current internal growth rate Long-term historical EPS growth rate Long-term historical sales per share growth rate.

13 Traditionally used Classic Style Metrics P/B P/E With P/B given 3X weight of P/E

14 December 2004: Introduced Total Market Style With new methodology Trailing earnings growth Trailing revenue growth Price/book ratio Dividend yield Projected forward price/earnings ratio Projected future earnings growth

15 Traditional Style Index series: Split entire market between Growth and Value Companies are Market Cap weighted Overlap Between Growth and Value May 2005: Switched from Old Style of 50/50 Split between high and low P/B Stocks Introduced New Methodology and 2 Sets of Style Index Types: Growth factors: Sales growth, earnings change to price and momentum Value factors: Book value to price ratio, sales to price ratio and dividend yield

16 Pure Style Index Series: Top 33% of Value companies Make up Pure Value Index Universe Top 33% of Growth companies make up Pure Growth Index Universe Middle 34% excluded from either index Indexes are "style weighted": Companies with the highest growth or value scores will be given the highest weightings.

17 Fundamental US Style Indexes: Breaks Market out into 9 Style Boxed Large, Mid Small Caps X Growth, Core, Value Companies are Fundamentally Weighted Growth Factors: 5 year percent change in Sales, Cash Flow, Dividends, and Book Value Value Factors: P/S, P/FCF, Dividend Yield, P/B

18 Intellidex Quantitative Methodology Incorporating: Earnings Growth Forecasts Sales Growth Book Value Growth Earnings Growth Forward P/E estimates P/S P/FCF P/B Dividend Yield

19 Tilts & Performance

20 Sector Tilts IWD: Russell 1000 Value Index RPV: S&P 500 Pure Value Index 8.05% 2.72% 5.06% 11.59% Basic Materials Communications 19.60% 23.75% Basic Materials Communications 9.23% 24.27% 11.94% 6.47% 20.81% Consumer Cyclical Consumer Non-Cyclical Energy Financial Industrial Technology Utlities 1.68% 5.43% 22.27% 9.41% 3.13% 10.96% 25.14% Consumer Cyclical Consumer Non-Cyclical Energy Financial Industrial Technology Utlities IVE: S&P 500 Value Index 7.67% 2.57% 7.67% 3.62% 8.73% 10.96% 17.95% 22.46% 18.28% Basic Materials Communications Consumer Cyclical Consumer Non-Cyclical Energy Financial Industrial Technology Utlities

21 Specific Company Tilts IWD IVE RPV CHEVRON CORP 2.96% EXXON MOBIL CORP 7.00% CONSTELLATION ENERGY GRP 3.19% AT&T INC 2.86% CHEVRON CORP 3.75% DEAN FOODS COMPANY 2.48% GENERAL ELECTRIC CO 2.80% GENERAL ELECTRIC CO 3.35% COVENTRY HEALTH CARE INC 2.29% PROCTER & GAMBLE CO/THE 2.77% PFIZER INC 2.83% NRG ENERGY INC 2.26% PFIZER INC 2.39% BERKSHIRE HATHAWAY INC-CL B 2.43% HUMANA, INC. 2.17% JOHNSON & JOHNSON 2.33% JPMORGAN CHASE & CO 2.40% TESORO CORPORATION 2.15% JPMORGAN CHASE & CO 2.04% AT&T INC 1.99% SUPERVALU INC 2.02% INTEL CORP 2.04% WAL-MART STORES INC 1.86% TYSON FOODS, INC. 1.86% BERKSHIRE HATHAWAY INC-CL B 2.02% WELLS FARGO & CO 1.88% CONOCOPHILLIPS 1.78% PROCTER & GAMBLE CO/THE 1.82% AETNA INC 1.84% VALERO ENERGY CORPORATION 1.78%

22 Size Tilts IWD IVE RPV Average Market Cap ($MM) 63,600 82,024 13,793 Median Market Cap ($MM) 32,246 44,008 7,187

23 P/E & P/B Tilts IWD IVE RPV P/E P/B P/S P/FCF

24 Performance Differences

25 Performance Differences

26 Correlations Large Cap Growth Vs. Value IWD vs. IWF PWB vs. PWV RPG vs. RPV Correlation Small Cap Growth Vs. Value IWN vs. IWO IJS vs. IJT RZG vs. RZV Correlation

27 Current ETF Offerings

28 Total Market Growth/Value Ticker Name AUM ($MM) IWZ ONEQ FAD OTR RPX* FAB IWW *From 10/11/10 to 9/26/11 One Year Return (As of 9/26/11) ishares Russell 3000 Growth % Fidelity NASDAQ Composite Tracking Stock % First Trust Multi Cap Growth AlphaDEX % Guggenheim Ocean Tomo Growth % Columbia Growth Strategy % First Trust Multi Cap Value AlphaDEX % ishares Russell 3000 Value %

29 Large Cap Growth/Value One Year Return (As of Ticker Name AUM ($MM) 9/26/11) QQQ PowerShares QQQ 22, % IWF ishares Russell 1000 Growth 12, % IVW ishares S&P 500 Growth 6, % VUG Vanguard Growth 5, % MGK RPG Vanguard Mega Cap 300 Growth % Rydex S&P 500 Pure Growth % IWD ishares Russell 1000 Value 9, % VTV Vanguard Value 4, % IVE ishares S&P 500 Value 3, % PWV PowerShares Dynamic Large Cap Value Portfolio % RPV Rydex S&P 500 Pure Value %

30 Mid Cap Growth/Value Ticker Name AUM ($MM) One Year Return IWP ishares Russell Mid Cap Growth 2, % IJK ishares S&P Mid Cap 400 Growth 2, % VOT Vanguard Mid-Cap Growth 1, % RFG Rydex S&P MidCap 400 Pure Growth % JKH ishares Morningstar Mid Growth % IWS ishares Russell Midcap Value 2, % IJJ ishares S&P MidCap 400 Value 1, % VOE Vanguard Mid-Cap Value % JKI ishares Morningstar Mid Value % RFV Rydex S&P MidCap 400 Pure Value %

31 Small Cap Growth/Value Ticker Name AUM ($MM) One Year Return IWO ishares Russell 2000 Growth 3, % VBK Vanguard Small-Cap Growth 1, % IJT ishares S&P SmallCap 600 Growth 1, % SLYG SPDR S&P SmallCap 600 Growth % RZG Rydex S&P SmallCap 600 Pure Growth % IWN ishares Russell 2000 Value 3, % VBR Vanguard Small-Cap Value 1, % IJS ishares S&P SmallCap 600 Value 1, % SLYV SPDR S&P SmallCap 600 Value Index % RZV Rydex S&P SmallCap 600 Pure Value %

32 International/Regional Growth/Value Ticker Name AUM ($MM) One Year Return EFG* ishares MSCI EAFE Growth 1, % DNL WisdomTree Global ex- U.S. Growth 5, % AADR WCM/BNY Mellon Focused Growth ADR % EMGX* Global X Russell Emerging Markets Growth % EFV* ishares MSCI EAFE Value 1, % EMVX* Global X Russell Emerging Markets Value % * 3/31/11-9/26/11

33 Q&A: Paul Baiochi ETF Analyst IndexUniverse Matt Hougan President, ETF Analytics Global Head of Editorial IndexUniverse Ron Rough Director, Portfolio Management Financial Services Advisory (FSA) Tony Davidow Managing Director Rydex SGI

34 Thank you. For More Information: Indexuniverse.com Rydex-SGI.com FSAInvest.com