If you’re thinking about locking in gains with Growth and switching into Value via ETFs, ask this:


Which benchmark is used and how is it constructed? You may be surprised by what you find.

I used the 30/09/20 factsheets for the common benchmarks to make these observations

The MSCI World Value index’s 3 largest holdings were J&J, P&G and Home Depot on 18x, 25x and 25x fwd consensus earnings – hardly value. Financials were the largest sector with 21% holding.

The MSCI World Value Weighted Index weight the holdings by fundamental data – sales, book value, earnings & cash earnings – Apple is the largest holding at 35x fwd consensus earnings and Microsoft is position # 5 at 32x? “Cash earnings” most likely excludes share option expenses.

The MSCI World Enhanced Value Index uses 3 valuation variables including EV to Cash flow from operations (CFO).

The problem is that CFO excludes share-based comp, possibly explaining why IT is the largest sector at 20%.

EV to CFO doesn’t work for financials or companies with financing arms because all the “action” takes places in the lower 2 sections of the CF statement.

And Micron is the 5th largest company with a $58bn market cap ahead of Pfizer with a market cap of $211bn?

All a little confusing.