Annual process ensures investment benchmarks reflect market realities
TACOMA, WASH., June 12 /CNW/ - Russell Investment Group has posted its
official lists of companies that will join or leave the broad-market Russell
3000(R) Index when its industry-leading U.S. equity indexes are reconstituted
on June 22. These lists of U.S. companies--and lists of additions and
deletions for the Russell Global Index--are posted on www.russell.com.
The combined market capitalization of stocks in the Russell 3000, which
reflects about 98% of the investable U.S. equity universe, has increased more
than $3 trillion from $15.3 trillion at this point last year to $18.5 trillion
"After surging 22.6% in total return for the year ending May 31, the
Russell 3000 has gained some weight," said Steve Wood, senior portfolio
strategist for Russell. "But not all stocks moved upward and some sectors
didn't fare as well as others. The annual reconstitution process captures
those changing fortunes and recalibrates the indexes to accurately measure
current market realities. This process gives investors truly representative
benchmarks to better gauge the performance of their stock portfolios or 401k
With the launch of Russell Global Indexes earlier this year, the
reconstitution process has become a world-wide undertaking. The Russell Global
Index, which offers comprehensive coverage of the investable global market,
will include more than 10,700 stocks from 63 countries. Countries with the
largest number of additional companies joining the index include Australia
(109), the United Kingdom (93), Hong Kong (92), Canada (90) and India (66).
The Russell 3000 is the U.S. component of the global index.
Today's "additions" list for the Russell 3000 shows that 277 companies
will move into the broad-market index--more than last year's 237 additions but
far less than the 10-year average of 405. About one-third of this year's
additions are in two sectors: financial services (57) and health care (48).
Alternatively, only seven stocks in the consumer staples sector will flow into
the index this year.
Among the total of 12 sectors, slight changes are expected in terms of
weighting within the index. The energy services sector likely will increase
from 3.9% at this point last year to 4.6%, while the health care sector
(despite the number of additions) likely will decline in weighting from 12.1%
to 11.9%. Financial services (22.4%) and consumer discretionary (13.4%) will
remain the largest sectors.
"Turnover is always low in the broad-market Russell 3000, and it is
expected to be similar to prior years at between 2% and 2.5% this year," said
Lori Richards, client service director for Russell indexes. "Turnover in more
specific capitalization segments, such as the small-cap Russell 2000(R) Index,
is expected to be lower this year as well given the low market volatility
between large and small cap stocks. This is also due, in large part, to our
rules-based methodology that adds IPOs on a quarterly basis and several other
recent enhancements such as percentile banding."
Since last year's reconstitution process, 92 IPOs have joined the Russell
3000. An additional 36 IPOs that came to market during the second quarter will
be added June 22 as part of the reconstitution process. The total of 128 for
this year slightly tops last year's 122. In 2003 only 28 IPOs flowed into the
Russell's index reconstitution process is followed closely by many
investors because its U.S. indexes currently have $4 trillion in assets
benchmarked against them and account for an industry-leading 52% of
institutional benchmarked products.
"Reconstitution is a key feature of truly representative benchmarks,"
said Richards. "Russell's unique process completely recalibrates Russell's
U.S. indexes to today's market realities, ensuring that stocks are moved into
the right 'buckets' to truly represent small-cap, midcap, large-cap and
microcap stocks. It also serves as a clear measure of the shifts in relative
valuations of value and growth stocks over the past year."
The majority of stocks ranking smaller than the largest 3,000 U.S
companies will settle mostly into the Russell Microcap(R) Index, which was
introduced to the market two years ago. A total of 184 companies will move
completely out of Russell's index universe. Of the 310 companies that will
flow into the Russell Microcap, 67 are dropping into the index from the
Today's preliminary lists of additions and deletions represent the first
public step in Russell's annual reconstitution process. Any updates to these
lists will be posted June 15 and 22. The final membership lists for the
Russell 3000, Russell 2000 and Russell 1000 will be posted June 25.
For the fourth year, Russell offers "provisional" index returns on
www.russell.com in order to give passive fund managers more flexibility in
determining when to make their portfolio transitions, spanning a two-month
window of opportunity. Performance figures for the emerging reconstituted
indexes are available each weekday in addition to performance data for the
existing indexes. Similarly, Russell will post "legacy" index returns after
June 22 in order to show the performance returns for the aged indexes as well
as the reconstituted indexes each weekday through the month of July.
New measures implemented this year as part of Russell's ongoing effort to
enhance the methodology and/or eliminate unnecessary turnover, include: 1)
Benefit-driven incorporations were reviewed for eligibility, and 2) Existing
index members on the border between new market cap breakpoints will remain in
their existing index.
"The percentile band is 2.5% above and below the market-cap breakpoint,
which assures movement between two indexes is limited to stocks experiencing
significant size changes rather than relying solely on its rank order. This
reduces turnover and better reflects investment manager processes," Richards
Companies deleted from today's preliminary lists due to corporate actions
or delisting will not be replaced prior to reconstitution. This change, which
was based on recommendations last year from Russell's Client Advisory
Board--comprised of plan sponsors, active and passive managers as well as
brokers--is intended to reduce possible trading risks related to
uncontrollable corporate activity during June. Similarly, two years ago
Russell moved the effective date of annual reconstitution to the last Friday
in June, instead of the last day in June (except when that Friday falls on the
July 4 weekend when liquidity is low, such as this year). This change has
given the industry additional time over the weekend to manage any increase in
stock trading volumes that occurs as fund managers adjust for the new
membership of the respective indexes.
Membership in Russell's U.S. equity indexes--widely used as benchmarks
for both passive and active investment strategies--is determined by objective
rules, such as market capitalization rankings. Accurate benchmarks are an
integral part of Russell's ongoing process to monitor more than 8,000
investment manager products worldwide for Russell's $200 billion active
investment management business. Interest in Russell's index reconstitution
process begins early in the spring when some large brokerage and investment
firms preview it and attempt to predict subsequent changes to the indexes.
Since Russell employs an objective and transparent rules-based methodology in
building its indexes, their reports once again proved to be generally
Russell Investment Group aims to improve financial security for people by
providing strategic advice, world-class implementation, state-of-the-art
performance benchmarks and a range of institutional-quality investment
products. With more than $200 billion in assets under management, Russell
serves individual, institutional and advisor clients in more than 40
countries. Russell provides access to some of the world's best money managers.
It helps investors put this access to work in corporate defined benefit and
defined contribution plans, and in the life savings of individual investors.
Founded in 1936, Russell is a subsidiary of Northwestern Mutual Life
Insurance Company and headquartered in Tacoma, Wash. Russell has principal
offices in Amsterdam, Auckland, Hong Kong, Johannesburg, London, Melbourne,
New York, Paris, San Francisco, Singapore, Sydney, Tokyo and Toronto.
Russell Investment Group is a Washington, USA corporation, which operates
through subsidiaries worldwide.
Russell indexes are unmanaged and cannot be invested in directly.
For further information:
For further information: Intermarket Communications Stephanie DiIorio,
212-754-5181 or Russell Investment Group Steve Claiborne, 253-594-1858