• Companies whose share prices have appreciated significantly but whose earnings have not kept pace would tend to see their weights decreased. If firms have seen their earnings go negative, they are deleted.
• Companies whose earnings have increased but whose share prices haven’t responded correspondingly would tend to see their weights increased. If firms have become profitable, they are eligible to be added.
This approach retains sensitivity to relative value. Additionally, we can see impacts in sector weightings, which are important in assessing how WTIND may respond to shifts or reforms in monetary or fiscal policy.
Showcasing WTIND’s Sector Positioning
• Cashing In on Strong Gains: The Industrials sector was WTIND’s best-performing sector between rebalances, returning 137.8%. As a result, the sector saw the largest weight reduction at the 2014 rebalance—in the area of 3%. Of the 71 companies that carried over from the prior rebalance, 15 saw reductions in weight. This sector represents the best example of taking weight from stocks that have grown expensive and redeploy it to opportunities that haven’t appreciated as strongly.
• High Exposure to Economically Sensitive Sectors: WTIND has an 83.9% weight to the cyclical sectors. As we discussed in a prior blog post, these sectors tend to coincide with areas of the economy that have the potential to benefit from the reform agenda set forth by prime minister Narendra Modi and his government. The Industrials sector, mentioned earlier, is certainly a beneficiary. Indeed, we see that over the past year, the cyclical sectors have led the rally in the markets, beating the broad WT India Earnings Index by 10.2%, while the defensive sectors have underperformed WTIND by 18.1%. Although the weight to cyclicals didn’t change much in aggregate, what transpired was that weight was taken from Financials and Industrials and largely distributed to Information Technology, a sector that didn’t benefit as strongly from the rally.1