The Index Is Dead. Long Live The Index.

June 24, 2013

Value and growth style index breakpoints and categorization present different theoretical issues. Numerous academic articles exploring the differences in returns between stocks have shown that value managers are on to something—stocks that are "cheaper" than their peers based on scaled price ratios tend to have higher future returns. These "value" stocks tend to move together, as do stocks at the opposite end of the spectrum, the "growth" stocks. The co-movement seen in these value and growth stock portfolios provides evidence of a "value" factor in stock returns. Still, "value" remains ill defined.

Common academic valuation frameworks dictate that value and growth are negatively correlated. CRSP, too, believes that value and growth are two distinct categories. We go slightly further, however, and specify that value and growth should be determined relative only to other securities in the universe, rather than against some cap-weighted aggregate metric for a universe. Our specification means a security's placement is a statement of cap-specific relative value and/or growth versus other stocks.


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