| FTSE
Introduces Global Style Indexes
By John Spence
September 5, 2002 |
|
Index provider FTSE Group yesterday launched a new family of
global growth and value equity benchmarks. They include new country-specific
style indexes covering developed and advanced emerging markets
nations, as well as regional and global benchmarks for both growth
and value.
After consulting with investment managers, FTSE (co-owners include
the London Stock Exchange and Financial Times) came up
with a 9-factor system for determining style. Four style indicators
will be used for value: price/book, price/sales, dividend yield,
and price/cash flow. Five metrics will be employed for growth:
3-year historic sales growth rate, 3-year historic EPS growth
rate, 2-year forward sales growth estimates, 2-year forward EPS
growth estimates, and equity growth rate.
Each stock is measured for value and growth and assigned an overall
style ranking. A company's total market capitalization is then
allotted to value or growth according to the ranking. A "band"
system is used to cut down on turnover, and at rebalance the underlying
index is divided evenly 50% growth and 50% value.
The new FTSE global style indexes are adjusted for free-float
weighting.
Peter Wall, an executive at FTSE Americas, sat down to answer
some of our questions (detailed information on the indexes can
be found at the FTSE website).
Q: Is there more communication between index providers
and the industry nowadays?
A: Yes. The investor and index-user base has become broader,
with more types of investors and new needs and expectations from
benchmark providers as part of the investment process - from research
to strategy to manager evaluation. Index providers recognize there
are more voices to be heard. Technology reduces the costs of collecting
market feedback and of offering alternative or custom benchmarks,
if this is desirable. Index producers must necessarily stay close
to users' needs and preferences, and they have an obligation to
help index users make informed choices.
Q: Many index investors have been calling for international
style index funds for quite some time now. There just aren't a
lot of passive options out there for these asset classes. When
might investors see funds based on these indexes?
A: Soon, but not tomorrow. Two things are needed to enable
product launches - research and understanding of the indexes'
results, and favorable market conditions. As you noted, investors
and analysts have been eager for improved international style
indices. However, they'll first need to absorb the significance
of the FTSE Global Style Index series' results, which will take
the global market time to fully explore. Also, we expect any investment
product launches will depend, to a great extent, on the demand
outlook for U.S. and international equities. Since this is now
not very favorable, we believe market participants will spend
some time getting familiar with the [index] results.
Q: Index providers are using more complex metrics to
determine style - value and growth. Why?
A: First, there is a need for index providers to "get
it right" - to consider the concepts of value and growth
as fund managers and asset owners commonly do, which is to use
more metrics, among other techniques. Since how investors determine
style is an evolutionary process, index providers have to keep
current.
Next, the use of more style metrics tends to add more accuracy
and stability to a company's style categorization, which is important
in reducing turnover of stocks flipping between value and growth
categories based on volatile stock price conditions or other aberrations.
This is something we heard constantly during market consultations:
Limit frivolous turnover.
Finally, databases are improving to permit use of more, and more
meaningful, metrics. So there's a predisposition to use more metrics
if they add value to the outcomes.
***
ETFs gain ground
According to the latest data released from Investment Company
Institute and Lipper, exchange-traded funds are catching up in
assets with traditional index funds and closed-end funds.
| Type of fund |
Assets |
| Open-end index funds |
$370 billion |
| Closed-end funds |
$130 billion |
| Exchange-traded funds |
$88 billion |
Source: Monthly Mutual Funds Review,
The Wall Street Journal. Assets as of 7/29/2002.
Essentially, ETFs now have 68% of the assets in
closed-end funds, and about 24% of the assets in open-end index
funds.
***
August 2002 index returns
| Standard & Poor's
Indexes |
| Index |
August 2002 |
3 months |
YTD |
| S&P 500 |
0.66% |
-13.80% |
-19.40% |
| S&P 500/Barra Value |
0.69% |
-15.86% |
-18.69% |
| S&P 500/Barra Growth |
0.63% |
-11.89% |
-20.42% |
| S&P MidCap 400 |
0.50% |
-15.88% |
-12.15% |
| S&P MidCap 400/Barra Value |
0.88% |
-14.67% |
-6.44% |
| S&P MidCap 400/Barra Growth |
0.11% |
-17.28% |
-18.00% |
| S&P SmallCap 600 |
0.95% |
-17.79% |
-13.32% |
| S&P SmallCap 600/Barra Value |
-0.13% |
-20.11% |
-11.80% |
| S&P SmallCap 600/Barra Growth |
2.00% |
-15.54% |
-15.30% |
| S&P 100 |
0.58% |
-12.55% |
-20.34% |
| S&P 1000 |
0.64% |
-16.48% |
-12.51% |
| S&P SuperComposite 1500 |
0.66% |
-14.11% |
-18.68% |
| S&P REIT Composite |
-0.02% |
-2.49% |
7.88% |
Source: Standard &
Poor's Indexes
| Russell Indexes |
| Index |
August 2002 |
3 months |
YTD |
| Russell 3000 |
0.47% |
-14.17% |
-18.84% |
| Russell 3000 Value |
0.67% |
-14.07% |
-12.65% |
| Russell 3000 Growth |
0.28% |
-14.57% |
-25.24% |
| Russell Midcap |
0.55% |
-15.35% |
-14.44% |
| Russell Midcap Value |
1.16% |
-12.81% |
-6.13% |
| Russell Midcap Growth |
-0.35% |
-19.96% |
-27.76% |
| Russell 2000 |
-0.25% |
-19.52% |
-19.30% |
| Russell 2000 Value |
-0.44% |
-17.11% |
-9.09% |
| Russell 2000 Growth |
-0.05% |
-22.58% |
-30.08% |
| Russell 1000 |
0.52% |
-13.79% |
-18.85% |
| Russell 1000 Value |
0.76% |
-13.86% |
-12.98% |
| Russell 1000 Growth |
0.30% |
-13.98% |
-24.91% |
| Russell Top 200 |
0.52% |
-13.29% |
-20.24% |
| Russell Top 200 Value |
0.59% |
-14.34% |
-15.84% |
| Russell Top 200 Growth |
0.45% |
-12.49% |
-24.17% |
