Meeting investors’ requirements for modernized Value and Growth indexes

Introduction

In an earlier note we examined Size as an investment style for US stocks and demonstrated how a segmentation via capitalization breakpoints yields superior results to those based on stock count. Size is not the only style that asset managers seek to analyze. Since the late 1980s, when Russell introduced their Value and Growth indexes, benchmarking against these two investment styles became standard practice. In the 30 or so years since their introduction, the understanding of the financial characteristics that are used to represent Value and Growth has become more sophisticated.

From our modern vantage point, the use of simple single factors based only on trailing data seems inappropriate. Indeed, he factors used to create the Russell indexes have evolved through time. Initially, book-to-price was the sole measure used to assess the Value/Growth characteristics of a stock. More recently, additional growth measures based on long term sales growth and medium-term forecast earnings growth are used. In this note, we introduce four new style indexes for the US market: Large Cap Value, Large Cap Growth, Small Cap Value and Small Cap Growth. We believe they improve upon the existing indexes as they are based on more robust, up to date definitions of Value and Growth and their construction offers better transparency and analysis.