Like with ETF construction
The largest holding in the Russell 1000 & 1000 Growth indices is Apple
The largest in the Russell 1000 Value index is Berkshire Hathaway
Whose largest portfolio holding is…
Apple
$108bn of their $447bn equity value
How does that make sense?
“Russell style indexes are built using three highly representative growth & value characteristics. Our style indexes use one value characteristic, book-to-price ratio (B/P) & two growth characteristics, medium-term forecast earnings growth rate based on I/B/E/S two-year forecasts & sales-per-share growth rate based on five-year historical sales.”
Berkshire is at 1.5x book value, in the lower 50% of the 1000 shares so you’d expect it to be included
on this simple basis
Except that
Apple itself is trading at 31x price to book
And other holdings
Coke is at 12x book
Moody’s is 32x
And a Bloomberg analysis shows that 45% of Berkshire’s portfolio is technology
So “book” is the MARKET VALUE of these holdings, not the underlying book value of these holdings
Ie. This methodology doesn’t work with investment holding companies
But how is Disney the 5th largest holding in the Russell Value at 48x forward earnings & a 0.4% FCF yield?
Well, it’s 3.7x book value which makes the cut
Except in 2019, Disney bought 21st Century Fox for $70bn
$50bn of which is goodwill and included in “book”
ie. it’s only book, not tangible book..
Yet excludes HPQ, presumably because they have bought back so many shares that their “book” (equity) is now negative
despite being on only 9x earnings
As long as you don’t think these Value ETFs represent Value