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Apple makes a “Buffett shift” at reconstitution

Apple makes a “Buffett shift” at reconstitution

By: Mat Lystra, Sr. Research Analyst

Famed value investor Warren Buffett recently made news when his company, Berkshire Hathaway, bought a stake in Apple, arguably the world’s best known growth stock. As a high flying tech stock, Apple isn’t the kind of company Buffett has normally sought to own.1 But as the 2016 FTSE Russell reconstitution of the Russell US indexes begins, it appears that once again Buffett knew something the rest of us didn’t. Apple’s style allocation will shift from 100% growth to 92% growth and 8% value. So it turns out that Buffet was buying a value stock after all (however small the allocation might be).

Apple’s style allocation over time

Source: FTSE Russell. Data as of May 31, 2016

The FTSE Russell reconstitution of the Russell US indexes takes place annually in June in order to capture, amongst other things, the very type of change that Buffett sensed. But for those of us without the “Oracle of Omaha’s” powers of perception, reconstitution provides the blueprint as to what it means to be a small stock or a large one, a growth stock or a value stock. These blueprints are used by investors the world over to analyze their own portfolios and to consider a US stock market and economy that look very different from just 12 months ago.

Consider that after several years of robust expansion, the market overall as represented by the Russell 3000 Index fell from a total index constituents market capitalization of $25.3 trillion at last year’s reconstitution to $24.1 trillion this year. The breakpoint between the Russell 1000 Index and the Russell 2000 Index is expected to decline for the first time since 2012, to an expected $2.9 billion, nearly 15% lower than last year. Oil prices have continued to dominate the headlines over the last twelve month as well as contribute to the Energy sector’s woeful performance across both the Russell 1000 Index (-12.8%) and the Russell 2000 Index (-42.4%). 

The Russell US Indexes’ methodology is also updated around each reconstitution and these updates often go on to become industry standards for index design. This year, influenced by the move among more companies to offer multiple large and liquid share classes, all secondary share classes must be able to pass rules for eligibility standing alone or be removed from a company’s share total.

The Russell US Indexes rebalance is a critical index design element that ensures market changes do not go unnoticed. If Apple regains its mojo it may again become a “pure” growth stock, and Mr. Buffett will have yet again proven his knack for “buying low”. Whatever Buffett’s investing secrets might be, reconstitution makes identifying and analyzing market changes that much easier for the rest of us.

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1 Stewart, J.B. (2016). Warren Buffett Stake Suggests Apple is All Grown Up. The New York Times, access on 6/9/2016 at: http://www.nytimes.com/2016/05/20/business/buffett-stake-suggests-apple-is-all-grown-up.html?_r=0

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