John Spence

FTSE Introduces Global Style Indexes

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.

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