Funds To Indexers

January 01, 2001

Corporate governance activists are urging index providers to consider modifying their component selection criteria to reflect mini-mum standards of corporate governance. Such moves, they argue, not only will provide global investors with better tools but also will improve regulation of the world's markets. Late in 1999, a group of fund managers representing about $3 trillion in invested assets sent let-ters to the major global index providers, requesting that they consider including corporate governance standards in their index methodologies and component selection. The letter was signed by representatives of the Teachers Insurance and Annuity Association-College Retirement Equities Fund (TIAA-CREF), Franklin/Templeton Group,  Fidelity Investments, the California Public Employees' Retirement System, the state of New York, the Vanguard Group, Tiger Management LLC and Morgan Stanley Dean Witter, among others.

A year later, there was a meeting in New York of fund managers and index providers to discuss the issue. 'The purpose of holding the meeting was to have our sort of investor community talk to the index-ers because they thought it would be helpful to understand how indexes are created and whether corporate governance is something that can be factored in,' said Holly Gregory, a partner in the corporate governance department at the New York-based law firm Weil, Gotshal & Manges LLP. The effort is spurred by an investor-responsibility task force sponsored by the World Bank and the Organization for Economic Cooperation and Development. The task force aims to promote common, minimum standards for corporate governance worldwide.

 

So far, the response from index providers has been receptive but skeptical. Most feel that if investors want it, a corporate governance index is not a bad idea. However, questions arise over how to define and quantify the concept of corporate governance and over the validity of representing only selective parts of the market.

'Many indexers feel that it is our responsibility to represent the market as it is and not as it should be,' said David Moran, president of Dow Jones Indexes, who attended the meeting. Peter Clapman, who co-chairs the investor-respon-sibility task force and is head of the corporate gover-nance program at TIAA-CREF, asserted: 'The purpose of an index is to provide for investors a universe of stocks and countries that they may reasonably be able to invest in. And since investor pro-tection and corporate governance aspects and issues are very important in the investment process, and may even affect whether it's prudent to invest in a country at all, then such factors ought to be taken into account in constructing an index by the index providers.

' Ms. Gregory cited a study by the consulting firm McKinsey & Co.that found investors worldwide were willing to pay higher prices for stocks of companies utilizing good corporate governance practices. 'After the Asian crisis, it became very apparent that one of the things that was lacking in a lot of the countries that were hardest hit was the corporate governance protections that help give investors confidence that their assets are being  rotected,' she said.

But what aspects of the corporate governance concept are most important to investors? According to Ms. Gregory, transparency and com-prehensive information about corporate perform-ance that has been audited according to broadly accepted standards are important factors.

 

Shareholder rights for minority shareholders is also a key issue. Included in this issue are such matters as open information about who the major share-holders in a corporation are, voting rights, and pro-tection against such possibilities as the dilution of shares. Responsible oversight of a company's management by a board of directors is another major factor.

 

Many of these issues are standard requirements in developed markets. In the U.S. and other markets, the issues are more 'sophisticated,' Ms. Gregory said, and involve such concepts as management responsiveness. One of the main problems for an indexer is that 'good corporate governance' is an ill-defined and largely subjective term. However, corporate gover-nance activists say there are thresholds. 'Clearly corporate governance is a very qualitative notion, and so quantifying it, I think, can be difficult,' Ms. Gregory said. 'But there are some elements of corporate governance that are either there or they're not. And certainly at a country level to start with. You can determine whether or not a country has some of the basic protections that are the hallmark of corpo-rate governance, and so at a baseline level there are some yes/no determinations that can be made.' Both Mr. Clapman and Ms. Gregory said that despite the problems of quantifying corporate gover-nance standards, index providers are better equippedthan investors to make such assessments. The major global index providers don't offer any indexes based solely on corporate governance standards. The Dow Jones Sustainability Group Index includes corporate governance as one of many factors in the component selection. The Domini 400 Social Index also takes corporate gov-ernance into consideration, but it gives the topic less weight than such factors as a company's track record with employee relations and the environ-ment and whether it is involved in the weapons, alcohol, gambling or tobacco industries.


MSCI Takes 'Phase-In' Approach To Free Float

Morgan Stanley Capital International announced Dec. 10 that it will switch its indexes to free-float- adjusted capitalization weighting. All the other major global index providers already had implemented or announced plans to implement free-float weighting in their indexes. But the MSCI announcement stirred broad interest because about $4 trillion is benchmarked against the MSCI indexes globally, making them the most widely used family of indexes in the world.

MSCI said it will convert its indexes to free float and increase the target market representation of its indexes to 85% from 60%. The changes will take place in two phases, with half being implemented on Nov. 30, 2001, and the remainder on May 31, 2002, essentially stretching out the transition period over nearly 18 months. Provisional indexes and components will be available to MSCI customers from June 2001 to ease the transition. By increasing the market representation, MSCI may help lessen the impact on markets by causing less money to flow out of low-float countries and be abrupt-ly injected into a limited pool of high-float companies. In MSCI's definition of available float, strategic holdings by corporations, governments, controlling shareholders and their families and management will be excluded from a company's float.

Restrictions on foreign investors will also be taken into account when calculating a company's float, MSCI said in a press release. Estimated float weightings will be rounded up to the nearest 5%, MSCI said. Companies with less than 15% available float will be excluded from the MSCI indexes unless MSCI believes their inclusion would 'significantly improve the index's ability to accurately repre-sent the investment opportunities in that country or industry,' the press release said. Such companies' float factors will be rounded to the nearest whole per-centage. Geographically, the greatest negative impact will be felt in Asia, where free floats can be low. In Japan, for example, only about 65% of most  companies' shares are freely available for trading. That looks good compared with many others in Asia: Hong Kong is at 46%, Malaysia at 30%. MSCI puts the average for Asia at about 42%. In the U.S., 94% of most firms' shares are freely tradable, according to MSCI, which estimates the available float on a global level at 84%. For investors, the impact will be greatest on stocks of any companies being added, dropped or reweighted. The company weighting changes will result in country-weighting changes, too. Under the new system, Greece, Israel, South Korea and Taiwan will get boosts, according to Credit Suisse First Boston. Chile, India, Malaysia and Turkey will lose ground. The technology sector stands to benefit because of its high free floats, the bank says. Conversely, the utility, telecommunications and energy sectors could incur drops.

 

These adjustments result in added expenses for an index fund, whose manager must buy and sell to match the weighting changes. Turnover in an aver-age year is 5% to 10%, says Binu George, an investment strategist at Barclays Global Investors in San Francisco. When the MSCI changes are imple-mented, turnover in affected index funds could reach 20% to 30%, he estimates. Mr. George does-n't think the extra transaction charges will be passed along to retail investors, which means reduced profits for fund managers. After all the changes go through, however, turnover in MSCI indexes should drop to less than 5% because of the increase in companies covered, ana-lysts say. That's because covering more companies reduces the number that move in and out over time. For the big index-fund providers, their real work began with this announcement. Justin Pascoe, director of investments at State Street Global Advisors Asia Ltd., said he has 10 major Asian clients in various SSGA funds, with a total of almost $10 billion under management in index funds. Lengthy discussions with those clients will now ensue as State Street considers various strategies to match the new index lineups.

 

Not deviating from the index even when big changes are made is very important to his clients, Mr. Pascoe says. For maximum accuracy, State Street would match the MSCI changes on the effec-tive dates, rather than gradually, but that could prove expensive. In talks with clients, Mr. Pascoe says, the bank will point out that to maximize your wealth, perhaps you would have to tolerate higher tracking error in the short run. Salomon Smith Barney, which has offered float-weighted indexes covering a larger portion of the market than MSCI since 1989, is trying to capitalize on the changes announced by MSCI, which it views as its chief rival. (MSCI is) the dominant index, says Salomon's Craig Lazzara, vice president of theGlobal Equity Index group at Salomon Smith Barney. It's just if you want people to start using your index, they've got to stop using someone else's index. And (MSCI is) where the money's at. In September 1999, Salomon released the Developed International Smaller-Cap Completion Index. It includes all shares in the ottom 40% of the Salomon Broad Market Indexes by float-adjusted capitalization, except for those included in the MSCI indexes. Salomon has marketed it to managers seeking to transfer from MSCI to Salomon indexes or those who want the additional coverage but find it too expensive a proposition to implement a switch between index provider s. In November, Salomon introduced its FloatWatch publication. The purpose is to monitor the perform-ance of stocks most likely to be affected by MSCI's adjustments and estimate the impact on the market of those adjustments as more information becomes available from MSCI. Salomon also tracks the per-formance of what it terms the Float Buys and Float Sells on its Web site. The idea was that we could make an estimate we thought of what would have to be sold and what would have to be bought to convert MSCI indices to float weighting, Mr. Lazzara says. The Dec. 13 issue of FloatWatch released only three days after MSCI announced its plans warned that passive investors tracking MSCI indexes will most likely underperform similar benchmarks from other index providers while active investors take advantage of the transition to  utperform MSCI indexes.

 

Mr. Lazzara acknowledged that the longer-than- expected timetable of MSCI's changes will  lessen the market impact, but he asserted that it won't be eliminated. If they'd said 'we're going to do all this stuff and it'll be done by March 2001,' it would have been a much worse impact than will take place. Certainly, tak-ing more time will lessen the immediate impact, but on the other hand, the arbitrage community isn't stu-pid. They know what's going to go out, and they can make some pretty good guesses on what's going to go in, he says. There may not be a quick buck in it for the hedge funds and the people who are going to try to trade around it, but there still may be a slower buck. Virginia Retirement System is a pension plan that switched its official benchmark from MSCI to Salomon at the end of 1999, long before MSCI addressed the issue of float.

 

Safa Muhtaseb, direc-tor of international equities for VRS, says the Salomon indexes were chosen because they best fit the criteria VRS had laid out. Float  eighting was among the factors that weighed in the decision, he said. What if MSCI had announced its plans earlier to float-weight its indexes? Mr. Muhtaseb said he was uncomfortable with such abstract suppositions, but added: Chances are we still would have made the same decision. The full replication is appealing to us as well. More recently, in November, MSCI lost out to FTSE on becoming the benchmark for the Hong Kong Investment Funds Association. Again, float-adjusted weightings were part of the appeal,  according to HKIFA representatives.

 

Actively Managed ETFs Introduced In Germany

In mid-November, the Deutsche Boerse surprised the exchange traded fund community by  announc-ing the launch of 11 actively managed ETFs by DWS, an asset-management unit of Deutsche Bank. Investors in Germany and a few other European countries can now trade shares of actively managed funds at continuously updated market prices throughout the day on the Frankfurt exchange. Transparency issues have stymied the introduction of actively managed ETFs in the United States. It's easy to determine the appropriate value of an ETF tracking a particular index, but an actively managed fund does not have a published list of its holdings, which can change at the manager's whim. Nor would an active manager want such a list to exist, lest other traders try to take advantage of the information at the fund's expense. On the other hand, how can investors buy and sell shares of an unknown basket of stocks? And how could professional floor traders hedge their trading positions in the fund against the fund's undisclosed stocks? bid-Germany these for ETF Boerse ETF less released can However, with specula-tion funds the and pro-viding worth. Jones Nasdaq-Jones Industrial investors, Exchange actively these mutual investments, Division speech added: managed access borrowed lower fund. and to stocks? The result of such information gaps is wider bid-and-ask spreads, which raises investing costs.

The less-strict regulatory environment in Germany allows for work-around solutions to these problems. In the matter of fund composition, for example, managers of the 11 Deutsche Bank ETF products pass along information to a Deutsche Boerse floor-trading team daily with a two-day lag. ETF investors receive portfolio holdings information less frequently, about once a month.

 

As for pricing, net asset values of the ETFs are released daily at the market's close, and the funds can be purchased at that price once a day. However, the funds also are traded during the day with prices determined largely by investor speculation and the direction of the sectors or regions the funds are invested in. The Web site for XTF, the market segment where the funds are actually traded, lists the individual funds and the indexes they are benchmarked against, pro-viding an additional tool for estimating the portfolio's worth. Those benchmark indexes include the Dow Jones Global Titans Index, the NEMAX All-Share, the Nasdaq-100, the Dow Jones EuroSTOXX 50, the Dow Jones U.S. Biotechnology Index and the Dow Jones Industrial Average, among others.

 

The new German shares aren't available to U.S. investors, and regulators at the Securities and Exchange Commission remain unconvinced that actively managed ETFs can work in U.S. markets. We must consider whether the development of these products would encourage investors to view mutual funds as something other than long-term investments, Paul Roye, director of the SEC's Division of Investment Management warned in a speech in November. Expressing further doubt, he added: Is there even a framework under which a managed exchange traded fund can work? One of the agency's concerns is investors' equal access to information. We want the investor to have the same fund disclosure as the professionals do, and at the same time, says Cynthia Fornelli, a senior adviser to Mr. Roye. The SEC also is looking into the influ-ence that actively managed ETFs would have on regular mutual fund sharehold-ers. Another worry: What effect would shorting ETF shares have that is, sellingborrowed shares in hopes of rebuying them later at lower prices on the regular shares of the mutual fund. With these concerns in mind, a troop of lawyers and Wall Street product-design specialists continue to labor on actively managed ETFs in the United States.

We're working to make sure we get the SEC's questions answered, says American Stock Exchange executive vice president Joseph Stefanelli. The timing will be determined by how comfortable the SEC is with the product." U.S. regulators probably won't be inclined to rush. The SEC took more than three years to approve the Standard & Poor's Depositary Receipts, or SPDRs, one of the first index investment portfolios to trade throughout the day. Many experts say the actively managed ETF brings new and more chal-lenging issues.

I'd be flabbergasted if anyone in the U.S. is able to launch an actively managed exchange trad-ed fund before 2002, said Gary Gastineau, a former AMEX official who now works on ETF products for Nuveen Investments, Chicago. He predicts the SEC will approve new products in baby steps, starting with funds that blend the estab-lished index products and active, stockpicker-led funds. Quantitative funds that use a consistent strategy, but don't necessarily follow an index, would likely be next. Only then, Mr. Gastineau said, would the SEC be likely to approve an ETF run by a portfolio manager.

AMEX Exports ETF Skill To Markets Outside U.S.

The American Stock Exchange is accelerating its drive to export exchange traded funds over-seas, trying to repeat its huge success with the product at home. The exchange has an ambitious plan of creating a truly global network for exchange traded funds that will enable investors from the United States, Asia and Europe to cross-list these funds and trade them 24 hours a day, said AMEX  Chairman and Chief E x e c u t i v e S a l v a t o r e Sodano. He spoke Oct. 10 at the launch of State Street G l o b a l A d v i s o r s ' ETFs based on two indexes from Fortune magazine. At the end of 2000, AMEX was readying a joint venture with the Singapore Exchange, fine-tuning an agreement in Europe and negotiating with exchanges in Japan. Just about every stock exchange (over-seas) has contacted us, Mr. Sodano said. The stakes are high for the AMEX, which currently has a near monopoly on ETF trading in the U.S. Currently, there are about 80 index share products trading on the AMEX, with total assets of more than $65 billion.

 

But the Chicago Board Options Exchange has launched what it hopes is the first of many ETFs, as has the New York Stock Exchange. The Big Board's ETF eventually will also trade in Japan and Europe. Mr. Sodano said that the AMEX has already cleared through most of the hurdles in Singapore and plans to launch the business there in the first quarter of 2001. AMEX will provide technical and marketing expertise for ETFs and help develop funds that invest in local stocks. The AMEX wants to make a maximum amount of funds available to investors in Singapore and other foreign countries. Rather than creating sepa-rate platforms of funds for foreign investors like its rivals are doing, it wants to offer the shares of exist-ing funds traded in the U.S. This will give investors an ability to tap into the liquidity we have in the U.S., Mr. Sodano said. Meanwhile, the AMEX also is pouring resources into developing the next generation of exchange trad-ed funds, including fixed-income funds and equity funds that will be actively managed by fund managers. In November, Deutsche Bank's DWS assetmanagement unit beat AMEX to the punch by launching 11 actively managed ETFs on the Frankfurt ETF exchange. But observers say those funds' design elements would never meet the transparency requirements of the U.S. Securities and Exchange Commission. Lawrence Larkin, AMEX's senior vice president in charge of index shares, said the exchange would be able to submit a filing to the Securities and Exchange Commission on actively managed stock funds before the end of the year 2000. The actual launch of such products, he added, will be years away.

Nuveen Unveils New ETF Tracking Earnings Growth

Nuveen Investments said it plans to launch its first open-ended exchange traded fund, which is expected to be followed by a series of new equity and fixed-income funds. Nuveen, a unit of John Nuveen Co. in Chicago, formally submitted a filing in October to the Securities and Exchange Commission for the new exchange traded fund, or ETF. The fund will track the  America's Fastest Growing Companies Index an index of 500 predominantly small-capitalization companies that meet specific earnings-growth criteria. Nuveen Managing Director Gary Gastineau said the new fund is unique in that it tracks an index that is designed to work well with a fund, rather than an index that predates index funds. Though the ETF field has been dominated by Barclays Global Investors and State Street Global Advisors, Nuveen Investments has relevant experi-ence in the field. It is a provider of customized individual accounts and mutual funds and currently offers closed-end funds with features to similar to those of ETFs.

 

Mr. Gastineau acknowledged the company's decision to formally file for its first open-ended fund was prompted by moves by its rivals, particularly that of Vanguard Group, which expects to launch ETF share classes of its popular index funds in the near future. We are anxious to get going, but obviously we can't do anything until we get formal SEC approval, Mr. Gastineau said. When approved, Nuveen's new fund will trade on the American Stock Exchange and carry a license from Individual Investor Group Inc. (IIGP) for its index. Mr. Gastineau said the index is particularly friendly to fund investors because it allows companies to stay in the index even if their capitalizations grow, as long as they meet earnings-growth criteria. One of the complaints people have about small-cap indexes is they knock out companies that do well," he noted. The fee for the fund hasn't been determined, but it will be competitive, he said. Nuveen has been signaling its intention to enter the ETF market since it renamed the series of its closed-end funds ETFs, even though the funds didn't have share creation and redemption features that are central to ETFs, said Edgar Cha, an analyst at Strategic Insight, a New York mutual fund research company.

 

Nuveen is developing a number of ETFs, includ-ing a few fixed income products. Mr. Gastineau said most will be equity funds with investor-friendly characteristics that are offered in the first fund. Before joining Nuveen, Mr. Gastineau led the development of ETFs at the American  tock Exchange.

 

ProFund Plans ETFs, Stirs Licensing Flap With S&P

ProFund Advisors LLC said that it plans to launch exchange traded share classes for its 30 index-based funds. It filed with the Securities and Exchange Commission in December. Should the funds gain approval, the launch would include the first leveraged ETFs. ProFund, of Bethesda, Md., specializes in mutu-al funds that track various market indexes. It offers more than 30 funds based on stock-sector indexes and several broad-based indexes. Most are lever- ged so that they go up and down more than the index would normally. ProFund currently has about $2.5 billion in assets under management. Five of the ProFund ETF offerings are expected to be based on the Standard & Poor's 500-stock index or the S&P Midcap Index. ProFund has  licens-es to use the two S&P indexes for its current index funds. As part of its 1999 licensing agreement under which it pays S&P an annual fee for the money it manages using S&P index-es, ProFund says it also can offer the ETF share classes for the index funds. S&P, however, argues that ProFund needs to negotiate a separate licens-ing agreement to launch exchangetraded classes on the index funds. There was some discussion at the end of (1999), said Michael Privitera, an S&P spokesman. And we told them specifically that they couldn't do this. ProFund officials said they are confident that the current license agreement (with S&P) covers ProFund adding a new class of shares. S&P's stance isn't new. In June 2000, it went to court to challenge another index-fund provider, giant Vanguard Group, after Vanguard  announced plans to launch similar exchange share classes called Vipers on its funds linked to S&P indexes. That legal action is continuing, though the SEC granted Vanguard the right to launch the Vipers despite S&P's objections. We fully expect to introduce the Vipers in the first quarter of 2001, said John Demming, a Vanguard spokesman. Several industry observers have speculated that S&P has contested the new ETF products because they may conflict with agreements that S&P reached with another big index-fund provider, Barclays Global Investors of San Fransicso, for that company's new line of ETFs. Both Barclays and S&P spokesmen declined to comment.

 

New York Board Of Trade Allows ETFs To Settle Futures

The New York Board of Trade's New York Futures Exchange decided to allow the use of exchange traded funds as the physical or cash component of an exchange-for-physical (EFP) transaction in the Russell 1000 Index Futures con-tract on NYFE. In an Oct. 5 press release, the exchange said there are no additional EFP transaction fees or min-imum contract-size requirements.The Commodity Futures Trading Commission already has approved the request, which went into effect immediately, the release said.

 

When there is a complementary trading relation-ship, or high correlation, between an ETF and the respective index, the ETF makes an acceptable cash or physical component of an EFP.

 

New York Board of Trade is the parent of the Coffee, Sugar & Cocoa Exchange, the New York Cotton Exchange, the NYFE and the Finex. It runs the Cantor Exchange of U.S. Treasury bond futures in conjunction with broker-dealer Cantor Fitzgerald L.P.

 

CBOE, NYSE Launch Their First ETF Products

The Chicago Board Options Exchange fired the first shot across the bow of the American Stock Exchange's domination of the U.S. exchanged traded fund market with the introduction on Oct. 27, 2000, of the iShares S&P 100 Index Fund (symbol: OEF). Based on the Standard & Poor's 100 Index of large-cap stocks, it became the first ETF to trade on a U.S. exchange other than the Amex. We are hoping that the OEF is the first of many, said Gary Compton, a spokesman for the CBOE. There are plans for more ETFs to be launched, but no dates have been announced, he added. The New York Stock Exchange fired the second shot when, on Dec. 8, it launched the iShares S&P Global 100 Index Fund. The S&P Global 100 Index, launched in February 2000, is the result of a collaboration between S&P, the NYSE, the Deutsche Boerse and the Tokyo Stock Exchange. It includes 100 multinational com-panies from 16 countries with a total market capital-ization of around $7 trillion. With 76 of the S&P Global 100 companies listed on the NYSE ... it is only natural that the iShares S&P Global 100 ETF trade on the NYSE, said NYSE Chairman and CEO Richard Grasso. It is expected that the ETF eventually will be listed on the Tokyo and Frankfurt exchanges as well.

 

More Exchanges List 'Mini' Index Futures

Mini index futures contracts are begin-ning to catch on with the world's deriv-atives exchanges in recent months. On Oct. 17, the London International Financial Futures and Options Exchange launched the Mini FTSE 100 Index futures contract. The new contract is designed for retail investors and is one-fifth the size of the original FTSE 100 futures contract. Also in October, the Hong Kong Exchanges and Clearing (HKEx) launched mini-Hang Seng index futures contracts, similar to the new contracts trad-ing on the Liffe. Trading volume in the Mini-HSI future increased to more than 2,000 contracts a day at the end of October, up from 988 contracts on the first day of trading, Oct. 9. The Brussels Exchange launched the mini-Bel20 contracts at the end of 1999 and the mini-Dow Jones Euro Stoxx 50 contracts in March 2000. Many other exchanges are understood to be considering mini-contracts, lured by the prospect that electronic trading can be expanded to retail investors over the Internet. Mini contracts are a fraction of the size of the existing exchange traded futures contract upon which they are patterned. They have become an extremely popular way for retail investors to gain exposure to the market.

 

Several New Bond Indexes Are Launched

Bond index providers have been unveiling new offerings and revamping old ones lately. J.P. Morgan, Lehman Brothers, Merrill Lynch, Deutsche Boerse and Deutsche Banc Alex. Brown have all announced new products or features in recent months.

As of Oct. 1, 2000, the Lehman Brothers Global Aggregate Index underwent some revisions. The liquidity constraint for inclusion in the index was raised to $300 million par amount outstanding for each eligible security, Lehman Brothers said in a press release. The current minimum thresholds for the U.S. and Pan-European Aggregate indexes are $150 million and 150 million euro, respectively. Also, the new global index includes a revised Asian-Pacific Aggregate Index, which includes non-government bonds as well as government bonds from 10 countries in the region. Another change involves the inclusion of eurodollar and euroyen cor- porate bonds, Canadian government securities and investment-grade 144a bonds in the index, bringing the total number of securities to more than 6,000. To ease the transition to the new Global Aggregate Index, Lehman Brothers is continuing to calculate the old version of the index that has a $150 million minimum liquidity constraint and excludes nongovernment Asian-Pacific bonds, euroyen and eurodollar bonds and 144a issues.Also on Oct. 1, Lehman Brothers began  calculat-ing a Global Aggregate 150 Index that includes all securities with a minimum liquidity constraint of $150 million. Later that same month, Lehman Brothers began calculating a Global Aggregate 500 as well, including all issues with a minimum par amount outstanding of $500 million. Additional changes to the Lehman Brothers indexes were announced at the end of November, with an effective date of Jan. 1, 2001. Lehman Brothers said it would begin calculating a real-time version of its Euro-Aggregate Index and a daily ver-sion of its U.S. Municipal Bond Index. It also said it would raise the liquidity constraints for its Emerging Markets Index to a $300 million min-imum from $150 million for corporate bonds and to $300 million for sovereign issues, up from $200 million. The $500 million threshold for Brady bonds was to remain in place. As a result of this methodology change, about 160 bonds were expected to fall from the index, resulting in a 12% reduction in the index's total market value, or about $30 billion. This enhancement will eliminate a number of illiquid, hard-to-price bonds from the index, said Steve Berkley, Lehman Brothers' head of Global Fixed Income Indices.

 

In addition, the Lehman Brothers Multiverse Index made its debut on Jan. 1. Lehman Brothers says it is the broadest measure of the global fixed- income markets available. The Multiverse Index combines the investment grade Global Aggregate Index and the noninvestment grade Global High Yield Index to create a broad benchmark covering more than 8,500 bonds and $12.8 trillion in market value. It cov-ers investment grade and high yield securities for all currencies across all sectors where Lehman currently publishes indexes, the company said. In September 2000, J.P. Morgan Securities Ltd. launched a new euro aggregate index to track the euro-denominated government bond, corporate and Pfandbriefe market. Called the J.P. Morgan Aggregate Index Euro, or Maggie, the index com-prises the firm's existing EMU Government Bond Index; an index of liquid bullet euro-denominated Eurobonds; and an index of Jumbo Pfandbriefe provided by Reuters PLC.

 

J.P Morgan said eligible bonds are included in the Maggie on the basis of their traded liquidity to ensure that the index properly and fairly reflects the environ-ment in which market professionals operate. The index currently contains some 1,750 bonds from the three market sectors based on market capitalization. The composition initially has government bonds comprising about 70% of the index, eurobonds 20% and Pfandbriefe 10%, though the percentage of gov-ernment bonds is expected to decline over time as eurobond and Pfandbriefe issuance grows. Also in September, Merrill Lynch launched its Global Broad Market Index, which includes 14,000 fixed-income securities from North America, Europe and Asia and represents about $13 trillion in invest-ment- grade debt. The Global Broad Market Index is part of a family of indexes that includes the Global Large Cap Index, which tracks the 4,000 largest bonds in the Global Broad Market Index, and the Global Broad Market Plus Index, which includes the Global Broad Market Index and additional smaller local-currency sovereign markets. The three main indexes are also subdivided into sector indexes. Deutsche Boerse and a group of investment banks formed a joint venture for the cre-ation of real-time bond indexes. The iBoxx indexes covering euro-denomi-nated government, corporate and Pfandbriefe bonds were launched Dec. 20. A sterling-denominated index was expected to launch in early 2001, the exchange said. The participating investment banks will provide pricing for the indexes. The live pricing will give investors greater transparency and more accuracy, a Deutsche Boerse spokesperson said.

 

Deutsche Boerse anticipates the creation of derivatives products based on the new indexes.

 

The joint-venture company is based in London and is 20%-owned by Deutsche Boerse with the remaining 80% divided among the seven banks ABN AMRO, Barclays Capital, BNP Paribas, Deutsche Bank, Dresdner Bank, Morgan Stanley Dean Witter and UBS Warburg. Deutsche Banc Alex. Brown unveiled its Deutsche Bank North Atlantic High-Yield Index in November 2000. The new index follows the junk bond market for much of the world. U.S. investors are putting more allocations into the European markets, and vice versa,said Walter McGuire, global high-yield strategist at DeutscheBank in New York. It makes a lot of sense to meas-ure the market as one meld it together and look at different components within it. The index measures more than 1,600 high-yield bond securities, covering the United States, Canada, the United Kingdom and International Monetary Fund-designated industrialized countries in Western Europe. It includes regional and country subindexes and also has ratings, yield-to-maturity, sector and size breakdowns. Such an index like this is a sign that, down theroad, high yield is a valid capital in the markets. And another measure of the market like this index is a good thing, said Prescott Crocker, high-yield port-folio manager for Boston-based Evergreen Funds.

Another Internet Index Makes Debut While Stocks Tumble

The Standard 100 Internet index is the creation of Standard Media International, which pro-duces the weekly news magazine The Industry Standard and the online publication The Standard at www.thestandard.com and investment bank Epoch Partners, based in San Francisco, CA. Launched Nov. 13, the Standard 100 is a relative latecomer to the Internet index party, but it has some distinguishing features. With 100 components, it has more than most Internet indexes that bill them-selves as benchmarks. The Dow Jones Composite Internet Index has 40. The Internet Stock Index, or Isdex, originally designed by Internet guru Steve Harmon, has 50. So does online publica-tion Interactive Week's @net. Morgan Stanley's Internet index, another new-comer, has 29 components. Components included in the indexes are either currently generating substan-tial revenue from Internet-related activi-ties or are expected to do so in the near future, according to TheStandard. Chosen companies fall into four cate-gories: consumer-oriented e-commerce companies, business-to-business e-commerce companies, Internet infrastructure equipment companies and Internet infrastructure connectivity companies.

Another difference is that the Standard 100 is weighted logarithmically rather than by straight market capitalization or float-adjusted market cap. The log-cap weighting is intended to keep large companies from dominating the index and overshadowing small-er companies, Standard Media said in a press release. The index is calculated by the American Stock Exchange under the ticker symbol XIS. Standard Media International anticipates licensing the index for use as the basis for derivatives. Starting an Internet index now might not be such a bad idea. After all, Internet stock prices are cur-rently in the basement and it seems like the only way they can go is up. Of the major Internet indexes, the best per-former of 2000 by far is [email protected] Week's @net index which fell only 51% over the year. Others fared much worse. The Goldman Sachs Internet Index, theStreet.com Internet Index, the Salomon Smith Barney T Series Internet Index and the CBOE Internet Index, all plummeted by more than 70%. In the middle of the pack were the Dow Jones Composite Internet Index, which dropped 66.03%; the Chase Hambrecht & Quist Internet Index, down 61.52%, and the Internet Stock Index, or Isdex, off by 57.99%.

 

E-commerce stocks were hit particularly hard. The Dow Jones Internet Commerce subindex fell 78.21%. The other subindex, the Dow Jones Internet Services, outperformed the composite index by about three percentage points. In a similar vein, theStreet.com E-Commerce Index dropped nearly 86%. TheStreet.com E-Commerce

 

 

2000

Index

Performance

   

@net

-51.24%

CBOE Internet

-72.93%

Chase H&Q Internet

-61.52%

DJ Composite Internet

-66.03%

DJ Internet Commerce

-78.21%

DJ Internet Services

-63.03%

Goldman Sachs Internet

-74.50%

Isdex

-57.99%

SSB T Series Internet

-71.90%

theStreet.com E-Commerce

-85.76%

theStreet.com Internet

-73.96%

Index, however, is not a subindex of theStreet.com Internet Index. Of the big Internet companies, Yahoo! fell more than 93%; Amazon.com sank 80%, and eBay dropped 74%. All three companies are classified as Internet-commerce companies by Dow Jones. Shares of America Online, classified by Dow Jones as an Internet-services company, performed slightly better, falling 54%.

Citigroup Division Launches No-Load Index Fund Family
SSB Citi Asset Management Group, a division of Citigroup, launched its first family of no-load index funds in November. The 13 new funds are sold under the Citi brand name and are available on Citigroup's new online investment serv-ice, Cititrade. The indexes tracked by the new funds include the Fortune 500 and e-50 indexes, the S&P 500 index, the Wilshire 5000 Index, the Russell 1000 and 2000 indexes, the Nasdaq-100 Index, the Dow Jones Global Titans Index, the MSCI EAFE Index, the Lehman Brothers Aggregate Bond Index and the Goldman Sachs Financials, Healthcare and Technology indexes.

FTSE News: More Technology Indexes
The FTSE eTX, a new family of European tech-nology indexes, was launched Oct. 2. The FTSE eTX All Share Index includes all European technology stocks with market capitaliza-tions greater than 110 million euro. The industries represented include computer services, telecommunications equipment, comput-er hardware, semiconductors, software, retailers e-commerce and Internet. The FTSE eTX All Share and its sub-indexes are liquidity-screened with float-adjusted weightings. The FTSE eTX Innovation Index is a pan-European index of small- and medi-um- cap technology stocks. It has two benchmark sub-indexes: the FTSE eTX 50, which includes technology stocks from all over Europe, and the FTSE eTX euro 50 of technology stocks from the Eurozone. Nomura International assisted FTSE in identifying Europe's technology companies, and Deutsche Asset Management is collaborating with FTSE on the launch of a related Web site. Themis Fund Management and Close Fund Management have both launched index funds based on FTSE eTX indexes. FTSE continued to expand its line technology and new economy oriented indexes by launching the FTSE TMT Index on Oct. 16. The index tracks about 40 U.K.  technology, media and telecommunications stocks.

Among the largest components are Britsh Sky Broadcasting, WPP Group, Reed International and Vodafone. The index's components are chosen from 13 subsectors of the FTSE Global Index Classification System such as Publishing & Printing, Retailers e-Commerce, Semiconductors and Wireless Telecommunication Services. Unlike most other FTSE indexes, it is neither float-weighted nor scheduled to adopt float weighting. The weights of components in the FTSE TMT Index are determined via a three-tiered weighting system. An exchange-traded fund based on the FTSE TMT Index was launched on London's extraMARK exchange on Oct. 17. The iFTSE TMT is the second ETF to be launched on the extraMARK.

Global Initiatives And Changes
FTSE is continuing to expand its international reach, announcing in late November that it had cre-ated a custom index for the Cyprus Stock Exchange. The FTSE/CySE 20 was launched on Dec. 1 and includes the 20 largest stocks trading on the CySE, representing more than 80% of the coun try's investable market. The benchmark is calculat-ed in real time and designed for use as the basis for index funds and derivatives. And on Dec. 14, FTSE launched the FTSE exUK 100 Index. The index includes the 100 largest European companies outside of the U.K. and is designed to be the basis for index-linked investment products. FTSE expects that there will be exchange traded funds based on the index available sometime in the future.

In addition, FTSE has been making some structur-al changes to its existing global indexes. On Sept. 15, FTSE announced that Greece would be included in the FTSE All-World Index as a developed country as of Jan. 1, 2001, in conjunction with the country's admittance to the European Union. Greece had been classified as advanced emerging by FTSE's standards.

Also in September, FTSE responded to user feed-back by tightening its banding structure to be used in weighting component stocks for free float. Previously, an eligible component's float inclusion had fallen into one of four bands 25%, 50%, 75% or 100%. The float bands were redefined at 20%, 30%, 40%, 50%, 75% and 100%. As before, companies with less than 15% available float are excluded from the index.

New Chinese Indexes
FTSE said it will create a joint venture with Hong Kong-based Xinhua Financial News for the creation and maintenance of real-time indexes covering China. FTSE/Xinhua Index Ltd. (FXIL) is expected to unveil new float-weighted indexes this year. In October 2000, Xinhua Financial News launched the composite index that will be the foun-dation for the development of additional indexes. It contains about 400 A-Shares trading on both the Shenzhen and Shanghai stock exchanges.

The new indexes are expected to be used in the creation of derivatives and exchange traded funds.

FTSE Licenses Index To Fund
T. Rowe Price Associates licensed the FTSE Developed ex. North America index for use as the basis of the no-load T. Rowe Price International Equity Index Fund. The index tracks 20 developed markets in Europe and the Asia Pacific region. This is the first time a subindex of the FTSE All World Index has been used as the benchmark for a U.S. mutual fund, which became available to investors in November.

S&P News: Initiatives Target Europe, Canada
Standard & Poor's signed an index develop-ment agreement with the Chicago Mercantile Exchange and MEFF, the Spanish Futures and Options Exchange. The agreement provides for the cre-ation of futures contracts based on the S&P Euro Index, the S&P Europe 350 Index and the S&P Europe 350's telecommunications, information tech-nology and financial subindexes. The CME has sublicensed the five indexes to trade on the MEFF, though the trades will actually clear through the CME Clearing House. MEFF members will clear through MEFF, which has joined the CME as a Special Clearing Member. The contracts will be the first futures products to trade on a U.S. exchange and clear on a European exchange.

In Canada, S&P introduced the S&P/TSE 60 Capped Index. Earlier in 1999, the company released a capped version of the S&P/TSE 300 Index in response to demand from fund managers.In both indexes, individual component weights are limited to 10% of the index.

Many Canadian investors and fund managers have become concerned by the large weighting of Nortel Networks Corp. in indexes, which in some cases exceeds regulatory portfolio diversification lim-its. Nortel is currently the only component in the new S&P/TSE 60 Capped Index with a capped weighting. Barclays Global Investors Canada has filed to create an exchange-traded fund based on the index. In Australia, S&P and the Australia Stock Exchange have decided against adopting free-float capitaliza-tion weighting for components in the indexes that S&P calculates for the ASX. They are not float-weighted and will remain that way for the foreseeable future.

Richard Humphry, ASX chief executive, said he thinks the changes would be too disruptive. I think the reforms we put in place...set the index up on a proper basis. I would not be supportive of any fur-ther major changes, he told reporters. Although it may have its problems, I think it's far preferable to people interfering with the market and arbitrarily set-ting values for companies.

An S&P spokesman confirmed that there were no plans to adjust the Australian indexes for  float, even though most of the indexes in the S&P Global 1200 are float-adjusted, with the notable exception of the S&P 500. An index is supposed to be about stabil ity. If it changes every couple of years it undermines the brand a little bit, the spokesman said. However, the ASX indexes will be undergoing a less significant change. S&P will re-classify the stocks in the indexes according to its new Global Industry Classification Standard (GICS). The new four-tier system with 10 economic sectors, 23 industry groups, 59 industries and 123 subindustries was developed jointly by S&P and Morgan Stanley Capital  International as part of an effort to promote a standardized classification sys-tem for index global indexes. The re-classification will be implemented in the second quarter of 2001. S&P began calculating U.S. indexes using the new classification system as of September 25, 2000. At the same time, it continued to calculate index values according to its old classification sys-tem as the official published values until the end of the year. On January 2, 2001, S&P formally adopted the GICS system for its U.S. indexes, though it has said it will continue to calculate indexes for both classification systems until the end of 2001 in order to ease the transition process for its customers. The GICS system has already been adopted by the benchmark S&P Global 1200 Index. S&P is also currently reclassifying the constituents of its emerg-ing markets indexes, the S&P/IFCI and S&P/IFCG indexes, under the new system.

S&P Changes S&P/IFC Indexes Methodology
On Nov. 1, Standard & Poor's changed parts of the methodology of its new emerging market indexes. S&P acquired the I n t e r n a t i o n a l F i n a n c e C o r p . indexes last year. The indexes will now be reviewed semi-annually rather than annually. Also,  S&P expanded the coverage of the indexes beyond the original 75% target to include  additional large, liquid stocks. It also tightened its liquidity criteria for the investable indexes and devel-oped a watch list for countries that do not meet S&P's minimum requirements for investability.

Countries on the watch list can be removed from the S&P/IFC indexes if their investability levels do not improve. Slovakia, Sri Lanka, Venezuela and Zimbabwe have been placed on the list because their markets each have fewer than five stocks that meet S&P's basic investability requirements. Pakistan and Jordan are included on the list because they represent fewer than 30 basis points in the S&P/IFC Investable Composite Index. If these markets do not see significant changes in the com-ing year, they will be removed from the S&P/IFC indexes at the November 2001 rebalancing. Another big change to the indexes is the fine-tuning of their definition of float to take into account strategic holdings. Ultimately, all single holdings greater than 20% will be removed from the indexes. However, S&P is phasing in the changes to reduce their market impact. All newly added stocks will be adjusted for strategic holdings, but changes to the weightings of existing components will be done in two phases, with a partial adjustment taking place in May. Final adjustments will be completed during the November review.

The changes to the indexes' coverage and investability requirements resulted in 111 addi-tions and 170 deletions to the S&P/IFC Investable Index, which now has 1,200 companies from 30 countries. The  S&P/IFC Global Index, which has looser inclusion criterion and is therefore broader, ended up with 1,931 components after losing 142 components and gaining 186 new entrants. We wanted to introduce a consistent method-ology to the series, said Ryan Carrier, director of market development at S&P. The changes are designed to make these indices easier to inte-grate with our developed-markets indices. Another change, announced simultaneously though non-structural, was the impending departure of Greece from the S&P/IFC indexes after it joined the Eurozone on Jan. 1. A separate stand-alone index will be calculated for the country, but it will not be included in the composite indexes after the May review. FTSE, which introduced its emerging-markets indexes at about the same time as S&P, has also announced that Greece will be reclassified as a developed market after joining the Eurozone. S&P completed its acquisition of the World Bank's Emerging Markets Data Base and the IFC indexes at the start of 2000. A few months later, in May, FTSE announced the introduction of its expanded index family with indexes covering emerging and developing markets as well as devel-oped markets for a total of 49 countries. The FTSE All World Index is the result of an alliance with ING Barings, which provides FTSE with its emerging markets data. For years before the developments in 2000, only two commercial global index providers offered emerging-markets coverage: Salomon Smith Barney and Morgan Stanley International. The IFC indexes were widely used before their acquisition by S&P, but they covered only emerging markets and were not part of a broader index family. Globalization is a general trend, and buying emerging-market indices is one way to expedite that pace towards global indices, said Sandeep Patel, head of global index analysis at S&P, of the company's purchase. Emerging markets don't add that much to index providers' revenue, Mr. Patel added, but they are good for completeness. Most of S&P's index revenues come from the United States, followed by Europe and then Asia, particularly Japan, he said. Peter Wall, formerly the head of emerging mar-kets at International Finance Corp. and in charge of the IFC indexes before and during their transfer to S&P, is now senior vice president, business devel-opment, with FTSE.

Dust-Up Down Under
Standard & Poor's came under fire from invest-ment managers Down Under, the Australian Financial Review reported in November. The index provider had proposed charging fees to funds using the indexes S&P acquired from the ASX in early 2000. Retail index funds would be charged 1 basis point of assets under management, while institutional index funds would be charged 0.1 basis point of assets under man-agement. While licensing fees are stan-dard in the United States, such is not the case in Australia. There, many investment professionals see the ASX indexes as public information that cannot be desig-nated as the intellectual property of a particular company. A proposal by the ASX to charge licensing fees on the indexes in 1998 was eventually rejected after angry opposition from fund managers.
Michael Privitera, an S&P spokesman, said the company had not yet reached a decision on the matter.

Other MSCI News: Taiwan, Total Return And Mortgage-Backed Securities Index
While the big story at Morgan Stanley Capital International is the float decision, that's notthe only activity there. In November, MSCI increased the weight of the MSCI Taiwan Index in the MSCI Emerging Markets Free Index and the MSCI All Country World Index Free series from 65% of its total market capitaliza-tion to 80%. The adjustment was made as the result of the continued liberalization of the Taiwan equity market and reductions in the limitations placed on foreign investors. Such changes include Taiwan's move to increase the investment ceiling for Qualified Institutional Foreign Investors to $1.5 billion from $1.2 billion and the simplification of document filing processes for foreign investors. Previously, MSCI had announced that the weighting of Taiwan would be increased in November should the country continue to open itself to foreign investment. An MSCI spokesperson had said in November that further liberalization could result in the MSCI Taiwan Index being included in the MSCI EMF and MSCI ACWI Free series at a full 100% weighting in May 2001. However, a December announcement from MSCI said this change would not happen because the lib-eralization hadn't gone far enough.

Daily Total Return
Starting Jan. 1, MSCI began providing daily total return index values instead of monthly. The Daily Total Returns (DTR) are a more accurate reflection of the marketplace because they account for dividends the day the securities become ex-dividend, MSCI said. The DTR index series will be calculated and distrib-uted daily and will cover both developed and emerg-ing markets and all sectors, industry groups and regions. The month-end total return indexes will be calculated and distributed through July 31 to maintain a smooth transition to the DTR.

European ETFs
MSCI, already an important name in the U.S. ETF industry as the benchmark provider for the original WEBS, now part of the iShares family, is hoping to generate similar enthusiasm in Europe with such products. MSCI and State Street Global Advisors teamed up to introduce new ETFs to the European market. The products will be listed and trade on a major European stock exchange; they will track MSCI's European regional and sector indexes. MSCI expects the new ETFs will be launched early this year.

CMBS Index
The MSCI U.S. CMBS Index was launched in December. The index tracks the total return of commercial mortgage-backed securities using prices from Morgan Stanley Dean Witter's CMBS trading desk. The index is a weighted average of returns on the 30 deals that are most actively traded by MSDW, an MSCI press release said. It tracks five rating classes from each of the 30 transactions for a total of 150 classes.

The MSCI CMBS Index is rebalanced semi-annually, based on the previous 12 months of trad-ing activity, and includes only fixed-rate, dollar-denominated transactions.

It is the first index in what MSCI says will be a family of U.S. domestic credit indexes within a Global Aggregate Credit Index.

New SSB Indexes Reflect Economy Size
Salomon Smith Barney launched two new index series tracking developed markets the Currency-Hedged Index Series and a GDP-weighted index series in December 2000.

The GDP-Weighted Developed World Index Series includes individual country indexes struc-tured in the same manner as the SSB Developed World indexes; the indexes are free-float weighted and contain the same components. However, indi-vidual country weightings for the world and region-al indexes are determined by each country's aggre-gate nominal purchasing-power-parity gross domestic product (PPP-GDP). GDP-weighted indexes are available for each of the broad, primary and extended market segments. Initial country weights are set in June during the annual index reconstitution using each country's PPP-GDP for the preceding year.

At the launch of the new index series, the U.S. had the heaviest weighting for the SSB GDP-Weighted World Broad Market Index, at 57.32% of the index, with the U.K. in second place with a weighting of 10.19%. Their weightings in the stan-dard SSB World Broad Market Index were 42.32% and 6.11%, respectively. The Currency-Hedged Index Series is designed specifically for investors who hedge their currency risk but not their underlying stock risk, an SSB report said. Price and total return indexes are available for all country and some regional developed-market index-es hedged into any developed-market currency. A GDP-Weighted, Currency-Hedged Index Series is also available, combining the application of the country hedging methodology with GDP-based country weightings.

Tracking Index People
Morgan Stanley Capital International has hired and promoted several people to sup-port its expansion plans.
Khalid Ghayur, previously a director at HSBC Asset Managment Ltd. and Advisor to the CEO in London, has joined MSCI's Princeton, N.J., office as Chief Investment Strategist and Global Director of Research. Mr. Ghayur will report to MSCI president Henry Fernandez and serve as a member of the MSCI Index Committee. Calvin Ho, formerly a lead portfolio manager at SSB Citi Asset Management in Singapore, has been appointed Vice President and Head of Research for Asia. Mr. Ho will be responsible for research and development activities and oversee-ing index maintenance and production in the Asia Pacific region. He also will serve as a member of MSCI's index committee. He will report to Mr. Ghayur and Charissa Smith, Managing Director, Geneva. Akihisa Suzuki, formerly of Barclays Investment Trust, was appointed MSCI's coverage manager for Japan and will be based in Tokyo. Karen Brindle was promoted to coverage man-ager for Asia, excluding Japan, with responsibility for leading the Hong Kong-based coverage and client service team. Keith Seilbert has joined MSCI as a principal from Morgan Stanley Dean Witter. He will work on special projects and report to Charissa Smith. Rick Bogdan also joins MSCI from MSDW, where he was Vice President of the Law and Compliance department. Mr. Bogdan will provide legal guidance as MSCI's General Counsel. Baer Pettit has been promoted to Head of Europe (ex. operations) from Head of European Sales.

Jackie Chung has joined as Vice President of Marketing. She will lead marketing efforts in Europe and provide additional support for marketing efforts in Asia. Ms. Chung was a vice president of Integra Capital of Toronto. Ted Niggli, formerly Marketing Director for Procter and Gamble in Brazil, has been appointed Vice President of Retail Marketing and Commercial Development. Both Ms. Chung and Mr. Niggli report to Rabbe Ekholm, Executive Director and Global Head of Marketing. FTSE International has established an office in Frankfurt, Germany. David Winkler, formerly of Reuters, has been appointed business manager and will work to promote the FTSE indexes among fund managers and as the basis for retail  products. London-based FTSE has additional offices in Paris and New York and plans to open two more in 2001: in Hong Kong and on the U.S. west coast.

Scott Stark succeeded Michael Schanz as Managing Director of Stoxx Ltd. Mr. Stark, an American national, has over 17 years of operational and marketing experience with stock exchanges and index products. Between 1990 and 1999, he was the Managing Director, Capital Markets, for Pacific Exchange (PSE), San Francisco. He left in 1999 to become Regional Director of Stoxx Ltd. and European Director of Dow Jones Indexes, based in London. He has an MBA from Golden Gate University, San Francisco and a BBA from the University of Oregon, Portland. Michael Schanz was hired as a consultant by Standard & Poor's. Mr. Schanz, previously Managing Director of Stoxx Ltd., will assist in the formulation of strategic policy and representing and promoting S&P Index Services within the invest-ment community.

Albert S. Neubert joined Dow Jones Indexes as D i r e c t o r, M a r k e t i n g and Business Development. His major objective will be to expand Dow Jones Indexes' market share and create commercial opportunities through an effective program to market DJI products to its target marketplace. Mr. Neubert previously was president of A.S. Neubert Index Business Consulting. As such, he helped Calvert Group in the development of its social index, developed and wrote a newsletter on index issues for Cantor Fitzgerald, and developed conferences for conference organizer Information Management Network (IMN) such as the Superbowl of Indexing, the World Cup of Indexing and the Masters of Indexing. He has written numerous articles for journals and industry publi-cations. He also edited and contributed to Indexing for Maximum Investment Results, pub-lished in 1998. Before becoming an independent consultant, Mr. Neubert was Director of Global Business Development at Standard & Poor's. In his 25 years with S&P, he was a member of the S&P Index Committee and was responsible for the develop-ment of the S&P MidCap 400, the S&P SmallCap 600, the S&P SuperComposite 1500 and the S&P REIT indexes. He was responsible for the manage-ment and maintenance of the S&P 500 and devel-oped the licensing programs for S&P 500-linked investment products.

This new column is devoted to synopses of research and other serious writing involving index-es. For inclusion in this column, authors or publishers of the research should forward the study to Heather Bell, Assistant Editor, Dow Jones Indexes, P.O. Box 300, Princeton NJ 08543, or email to [email protected].

Tracking Index Research
'Event Study: Quantifying the Effect of Being Added to an S&P Index,' by senior index analyst Roger J. Bos, CFA. (December 2000) Mr. Bos found that stocks added to the S&P 500 generally rise 8.52% between the announcement and effective dates, then drop an average of 1.94% in the 10 days following the effective date. In the year following the announcement date, stocks added to the index rose an average of 34.12%. But when adjusted for the upward bias of the market, the stocks rise an average of 8.49% between the announcement and effective dates, fall an aver-age of 3.23% in the ten days following the effec-tive date and rise an average of 8.89% in the fol-lowing year. Thus, most of the price jump that is caused by a stock's inclusion in the index occurs between the announcement and effec-tive dates. The study also looks at the S&P MidCap 400 and the S&P SmallCap 600. The study can be downloaded from http://www.spglobal.com.

'The Week in ETFs,' by Michael T. Porter and Brian Gendreau. Published weekly by Salomon Smith Barney, the review regularly stud-ies performance characteristics of iShares MSCI Country Index Funds and reports country asset allocation recommendations that can be imple-mented using the funds. Contact Mr. Porter at 212-816-3451 or at [email protected].

'Exchange-Traded Fund Report' (Issue No. 1 November 2000). Published monthly by Managed Account Reports, Inc. (212-213-6202 or http://www.marhedge.com), this new publi-cation reports news about ETFs and some analysis gathered from brokerage firm research.

'Benchmark Study,' published semi-annu-ally (year-end and mid-year) by the Quantitative Research Group at Prudential Securities. Comprehensive performance and behavior sta-tistics and analysis of benchmark indexes are provided in each issue. For further information, contact Steven DeSanctis at 212-778-5044 or [email protected].

Dow Jones Stoxx Starts Total Market Series Based on Europe As a Region
Dow Jones Stoxx launched its own series of total market indexes on Nov. 8, a few weeks after Dow Jones Indexes integrated its own total market indexes into the Dow Jones Global Index family. The new Stoxx indexes are fully compatible with the Dow Jones Global Indexes.

The Dow Jones Stoxx Total Market Indexes cover 95% of the investable free-float market capitalization of
the European equity market and include approximately 1,150 companies. Total mar-ket subindexes are cal-culated for the Eurozone, the Nordic region, Europe ex. U.K. and Europe ex. the Eurozone.

Total market size indexes are calculated for all of Europe and each region. The large-cap indexes cover the top 70% of each market's investable free float market capitalization, the mid-cap indexes cover the next 20%, and the small-cap indexes include the next 5%.

Sector and country total market indexes also are being calculated. Regional sector total market indexes
are available for the Eurozone and Europe ex. the U.K.

DJI Launches The Asian Titans,Expanding Its Titans Index Family
In early December, Dow Jones Indexes launched the Dow Jones Asian Titans Index, becoming the first index provider to offer a blue-chip index for the Asia/Pacific region. The new index is the second in the Dow Jones Titans index series and uses the same basic methodology as the popular Dow Jones Global Titans Index, which tracks 50 of the world's largest multinational companies. The 50 companies in the Dow Jones Asian Titans are selected from the Dow Jones Asia/Pacific Index for their large sizes and high liquidity. Like the Global Titans Index, the new index is float-weighted with a 10% cap on any single stock.Index weights are reviewed quarterly, but components are selected annually.

Japan's influence on the Asian Titans index is limited to 25 components with the remaining com-ponents coming from the rest of the Asia/Pacific region. Even with this limit, however, Japan accounts for roughly 75% of the index's market value. The index also currently includes nine companies from Australia, eight from Hong Kong, one from Malaysia, two from Singapore, three from South Korea and two from Taiwan. Its biggest holdings are all Japanese: Toyota Motor Corp., Sony Corp., NTT DoCoMo, Matsushita Electric Industrial Co. and Bank of Tokyo-Mitsubishi Ltd. By limiting the number of Japanese companies to 25, we ensure broad exposure throughout the Asia/Pacific region, said Michael A.Petronella, managing director of Dow Jones Indexes.

The Dow Jones Asian Titans Index offers investors around the world a very liquid and easy way to gain exposure to the Asia/Pacific region. An essential benefit of using this index as the basis of financial products for investors is reducing the risk associated with investing in a single country.

At the start of 2000, the Dow Jones Asian Titans Index had a total market capitalization of $1.213 trillion, or about 36% of the Dow Jones Asia/Pacific Index.

DJI Launches Global Food 100
Just looking at the component list can bring on hunger pangs. The Dow Jones Global Food 100 includes the stocks of companies that manufacture such yummies as Big Macs, canned soups and dessert cakes.The purpose of the index is to reflect the stock movements of global food and agriculture-related businesses, said Sheldon Gao, Director of Product Development at Dow Jones Indexes.

The Dow Jones Global Food 100 Index was launched Oct. 10. It is comprised of 100 stocks of companies that generate at least 50% of their revenues from food-related businesses. Its largest components include Coca-Cola, Nestle, PepsiCo, McDonald's, Unilever, Kroger, Diageo and Anheuser-Busch. While over one-third of the components are from the United States, 18 other countries are represented in the index.

As with the Dow Jones Internet Indexes, no single stock in the Global Food 100 can exceed a 10% weighting in the index. Dow Jones created the customized benchmark at the request of R.J. O'Brien & Associates, a leading global food and agriculture commodity trading firm. The company has opened the R.J. O'Brien-Dow
Jones Global Index Fund, an investment fund based on the index. The fund has a minimum initial investment of $250,000.

Nasdaq-100 Pre-Market Indicator Helps Traders
The Nasdaq Stock Market launched the Nasdaq-100 Pre-Market Indicator to help investors assess pre-market trends and predict opening prices for the market based on actual pre-market data.

Available since mid-October, the index is calculated from 8:30 am to 9:30 am, Eastern Time, and updated
every sixty seconds. It uses the most recent prices of the Nasdaq-100's component securities in pre-market trading.Component stocks that do not trade in the pre-market are priced at the previous day's close.

Before, investors looking to track the market's sentiment before the opening of regular hours trading
had to turn to the futures markets or to pre-market activity in individual stocks, Nasdaq noted. 'By
providing investors with current, real-time, pre-market data,' said Pat Campbell, Nasdaq's chief operating
officer, investors might better prepare for the trading day ahead and track their stocks more precisely.

In the 30 trading days following its launch, the PMI was 100% accurate in predicting which direction the market would open. Also, its close over that time period differed from the open of the Nasdaq-100 Index by an average of less than 0.1 point.

Market watchers using the futures contracts as an indicator would have found that they were wrong on at least two occasions and that, in general, they differed from the open of the Nasdaq-100 by a much larger margin, according to Nasdaq data.

J.P. Morgan Chase Joins DJIA
On Jan. 2, 2001, J.P. Morgan Chase & Co. was added to the Dow Jones Industrial Average. J.P. Morgan merged with Chase Manhattan Corp. on Dec. 31, 2000, to form the new company.
J.P. Morgan was originally added to the industrial average on May 6, 1991. The average's components are determined by the editors of The Wall Street Journal, published by Dow Jones & Co.
As a result of the addition, the DJIA divisor was changed to 0.15369402 from 0.16482447.

Dow Jones Global Titans Now Calculated Using ADR Prices During U.S. Trading
In November, Dow Jones Indexes announced that during U.S. trading hours, the Dow Jones Global Titans Index would be calculated using the prices of the American depositary receipts (ADR) for all non-U.S. companies included in the index. Previously, only trades executed in a company's primary market were used to calculate the index.

According to Michael Petronella, managing director of Dow Jones Indexes, the use of ADR prices for non-U.S. components will provide investors with the most up-to-date measure of the global market. Moreover, funds tracking the index will now be able use ADRs rather than buying stocks on international markets.

A global closing value for the DJGT is calculated using the closing price of each component on its local market. In addition to the Americas closing value using the ADR prices, closing values for Asia/Pacific and Europe are now calculated as well.

The DJGT Index is a 50-stock index containing the world's largest multinational companies. It has a total market capitalization of $7.4 trillion.

Dow Jones Indexes Signs Major Licensing Deals
Dow Jones Indexes signed an agreement in October with the Osaka Securities Exchange, allowing the exchange to list exchange-traded funds, options and futures based on the Dow Jones Industrial Average. The new products are expected to begin trading early this year.

In addition to the licensing agreement, Dow Jones Indexes and the OSE signed a memorandum of understanding that covers the listing of additional products tracking other Dow Jones indexes such as the Dow Jones Global Titans Index. The memorandum also lays out the framework for the eventual development of new indexes for the Japanese market as well as related investment products.

In December, Dow Jones Indexes announced that it had signed a licensing agreement with ProFund Advisers LLC. The company launched a group of 21 leveraged index funds based on the Dow Jones U.S. sector indexes and other Dow Jones industry indexes. The license gives ProFund certain exclusive rights to market leveraged mutual funds and leveraged ETFs based on those indexes, as well as non-exclusive rights to market traditional index funds based on them.

We believe that the Dow sectors indexes are the best-defined and organized indexes for tracking economic sectors and do an excellent job in reflecting the state of the 'new and old' economy in the United States, said Michael L. Sapir, Chairman of ProFund Advisers. Unlike some other available indexes, we view the Dow sector indexes as 'investable,' meaning their returns can be replicated by investment managers.

Sustainability Index Marks One Year
In September, the Dow Jones Sustainability Group Indexes celebrated their first birthday and announced the results of the first full review of component stocks.

Sustainability is a corporate management philosophy in which the basic business strategy includes commitments to sound environmental practices, fair and equitable treatment of all stakeholders and
investments to create sustainable products and services for the future. DJSGI is a global index that
tracks the stock-market performance of the top 10% of sustainability-practicing companies worldwide.

DJSGI is produced jointly by Dow Jones Indexes and SAM Sustainability Group, a sustainability research firm based in Zurich, Switzerland. The 230 companies in DJSGI are chosen based on their scores in the annual Corporate Sustainability Assessment conducted by SAM. The assessment considers how companies manage a variety of economic, social and environmental opportunities and risks, such as the utilization of new technology, research and development initiatives, environmental policies, stakeholder involvement, and social concerns such as child labor.

The DJSGI family of indexes consists of a World and a U.S. index, as well as regional indexes cover-ing
the Americas, Asia and Europe. An additional four subindexes for each geographic area are calculated
excluding alcohol or gambling or tobacco stocks, or all three.

Changes to DJSG Indexes became effective Oct.6. Components and rules are available on the Web site at http://indexes.dowjones.com.

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