Q: What’s your investment philosophy?

A: The founders of PowerShares believe in the concept of intelligent indexing. An Intelligent index selects securities for inclusion based on investment merit— rather than the traditional benchmark index approach—which typically selects stocks to create a representative sampling of the overall market. The Intellidex index methodology has become the basis for 35 PowerShares ETF portfolios. The specialized indexes evaluate stocks on 25 different criteria such as fundamental growth, valuation, timeliness, and risk factors. The securities with the highest capital appreciation potential are selected for inclusion in the index quarterly to assure a consistent and accurate representation of a specific market segment.

PowerShares was founded in 2002 by Bruce Bond and a small group of financial service executives that viewed exchange-traded funds (ETFs) as an industry changing investment vehicle. Tax efficiency, relatively low costs, ease of trading and transparency were seen as real advantages when compared to existing products available. They also envisioned a real opportunity for innovation through intelligent indexing.

Q: What are the key elements of the strategy that you use?

A: PowerShares was founded on this opportunity that we refer to as “Leading The Intelligent ETF Revolution,” Invesco PowerShares does this in three ways. The first is with ETF portfolios that replicate quantitative rules-based indexes. This means that whether it is core exposure or size and style exposure to the market you seek, there are PowerShares available that deliver a more intelligent way to access that type of exposure.

For example, the Russell family of indices was built to gauge how they were doing as an institutional consultant. The Russell 1000 Growth & Value Indexes use two factors to separate growth and value. Not only do they have 30% overlap, but they actually have an 80% correlation to each other. For people who are doing size and style investing, these types of investment characteristics would be inappropriate.

The size and style family of PowerShares were developed to provide investors a more precise exposure to markets. The ETF portfolios have zero overlap, and they use 10 different factors to separate growth and value. The PowerShares Intellidex correlation is closer to 45% versus 80%. These ‘power tools’ are for advisors that are looking to get a well-rounded asset allocation portfolio.

A second area where PowerShares leads the Intelligent ETF Revolution is in fundamental indexing. Fundamental indexes provide an alternative to cap weighted in dexes, and use sales, cash flow, dividends, and book value to more accurately measure a company size and resulting weight within an index. This methodology was developed by Rob Arnott of research Affiliates.

Q: What’s the premise to this index?

A: The premise of the Fundamental Index is that in cap weighting you have a tendency to overweight overvalued companies and underweight undervalued companies. Fundamental Indexing looks at a company’s sales, cash flow, book value, and dividends and weights a company based on these fundamentals.

So, if you were to take the PowerShares FTSE RAFI US 1000 ETF, which is U.S. core exposure, it would have most of the same constitutes as the Russell 1000, and it would be very highly correlated to the Russell 1000 or the S&P 500; however, you would not weight the companies by their capitalization. You break that link between price and its weighting, and you have an index that has given a 2% outperformance historically dating back to 1960 with a lower standard deviation. The methodology was developed so you don’t participate in every bubble, as with cap based indexes.

Q: And what’s the other area where PowerShares is leading the intelligent ETF revolution?

A: The last area is what we call ‘Intelligent Access’. There are areas of the market that are difficult to access, and even though advisors and their clients want exposure to these areas, they might not have the right investment vehicle. We provide intelligent access to areas such as alternatives to clean energy or thematic macro trends such as the scarcity of water and water resources. The PowerShares water resources portfolio - PHO - is based on a U.S. based water index, and we also have a global version PIO - the PowerShares Global Water Portfolio. These ETFs for example both provide investors a way to access a macro theme which is the scarcity of water and effectively capitalize on the growing need of supplying clean water.

Invesco PowerShares has a full series of these ‘intelligent access’ ETFs as well. our formula is to add value for investors by using a more intelligent index and the benefit rich ETF structure.

Q: Could we discuss some of your large products by asset base?

A: I’ll give you an example from each of our categories. The exchange traded fund, PWC is our broad-based fund with the U.S. exposure. It’s benchmarked to the S&P Index and has close to $650 million in assets. It was launched in may 2003 and it has outperformed the S&P 500 by about 250 basis points over those five years with almost the same beta and a lower standard deviation. It uses 25 different factors and starts with a universe of 2,000 stocks and delivers a portfolio of 100 securities that rebalances on a quarterly basis. This quantitative rulesbased index is designed to outperform the S&P 500.

An ETF from the intelligent exposure category is PowerShares FTSE_RAFI US 1000 Portfolio (PRF) which has approximately $850 million in assets. For institutions or advisors using a core satellite approach, this is a core fundamental-weighted ETF portfolio that provides U.S. exposure only. We also have the international version of the FTSE RAFI, based on a developed markets ex-U.S. index, and it would be benchmarked to the MSCI EAFE Index.

One of our big success stories is the PowerShares Wilderhill Clean Energy Portfolio (PBW) which provides investors access to the clean energy theme. The ETF invests in companies involved with alternative sources of energy whether they be bio-fuels, solar, wind, all the companies that are driving the alternatives to either carbon-based or oil energies. Performance until this year has been exceptional, averaging probably 20% plus per year. Another big product is the PowerShares water resources Portfolio (PhO). The ETF provides exposure to companies in water filtration, desalination, and other technologies that are providing clean water for individuals. It’s also an infrastructure play as well because, even in the U.S., the infrastructure of water needs tremendous amounts of investment.

Recently, in March, we launched The PowerShares India Portfolio (PIN), which is based on the Indus India Index. Foreign ownership of Indian securities has traditionally been very challenging due to strict foreign ownership limits. Once those limits are reached foreign investors cannot purchase additional shares. PIN is based on an intelligent rules based index that considers the amount of shares available for foreign investment in its construction. Additionally, companies that have reached their foreign investment limits are immediately removed maintaining an index that can be faithfully replicated by US based portfolio managers. The ETF launched on March 6th and has already garnered over $40 million in assets.

Q: Do fundamental weighted indexes also suffer from overweight of companies with rising earnings as capital weighted indexes suffer from overweight of stocks that are popular at the time?