Each quarter, the PowerShares DWA Technical Leaders Indexes are reconstituted. These indexes are designed to thoroughly evaluate their respective investment universes (U.S equities and U.S. Small-Cap equities) and build an index of stocks with superior relative strength characteristics. Today we’ll examine the relevant changes that have taken place within the portfolios of PDP & DWAS over the past quarter. The performance (shown above) remains generally solid for RS strategies. DWAS concluded its first full quarter and lagged its benchmark (IJR) by 1.42%. PDP outperformed its own benchmark (SPY) by 2.42% in Q4 2012, and 3.69% in 2012 as a whole. The longer-term performance numbers (3 year, 5 year, and Since Inception) continue to make a strong case for RS strategies as well.
Our quarterly reconstitution routine allows the ” Technical Leaders ” indices (and the products that follow them) to adapt to new market leadership, and move away from trends that have weakened. This quarter the PowerShares DWA Technical Leaders Portfolio [ PDP ], which tracks our US Large and Mid Cap Index, has 18 new faces among its 100 holdings. Some are making their official debut within the portfolio, such as Pulte Group [ PHM ], while others return after a short leave of absence, such as International Paper [ IP ].
On the other hand, one of the best examples of a sustained leadership trend in recent years, Apple Computer [ AAPL ], is absent from this index for the first time since Q1 2009. AAPL thus endured 15 quarterly evaluations, passing each one of them to remain within the portfolio, and producing returns of 385% along the way (thru 12/28/12). AAPL was not added at the bottom, nor was it removed at “the top,” but during its holding period it certainly supported the ability for this portfolio to substantially outperform the S&P 500 Index.
Large & Mid Cap Technical Leaders [ PDP ]:
Cumulatively, this quarterly process can have a material impact on the sector allocations within Technical Leaders portfolios. Over the past quarter the largest positive sector exposure change came from the Industrial group, which had its allocation rise roughly 8% to 23.51% of the portfolio. That gain came almost exclusively at the expense of Healthcare exposure, which fell 8% to 5.45% and an underweighted position relative to the broader market.
Small Cap Technical Leaders [ DWAS ]:
As for the DWA Small Cap Technical Leaders Index , it had a more substantive turnover experience over the past week, seeing a thorough face-lift with 75 new positions among its 200 holdings.
In the end, the sector weightings did not shift as dramatically as did thos of the PDP portfolio. Consumer Cyclical exposure rose more than 3% this quarter, making it the largest sector weighting gain. On the other hand, Healthcare fell nearly as much, and was the most notable reduction in sector allocation. Technology remains a significant underweight, while Consumer Cyclical remains the important overweight, and in that sense the portfolio has not seen a total overhaul despite 75 new symbols moving into the portfolio.