FTSE Creates Style Indexes

October 01, 2002

FTSE Group launched a series of value and growth indexes with an eye on the possibility of style funds tracking the new indexes. Relying on the cumulative experience of other style indexes, and not to be outdone by Dow Jones' six factor analysis or the eight factors taken into consideration for the new MSCI style indexes, the FTSE offerings will use nine measures to determine whether stocks are classified as growth or value.

For the new indexes, each stock is assigned an overall style ranking using the nine factors. Companies are then assigned to either the growth or value indexes, with a band to reduce turnover during rebalance. At rebalance the underlying index is divided evenly between growth and value. In some cases, a constituent may have its market capitalization split across more than one band. The 50% value-50% growth breakdown keeps the indexes in line with Russell indexes, which are in a loose alliance with FTSE, and allows for completion of portfolios using one style or the other.

The FTSE style indexes were developed in conjunction with Style Research, Ltd. The nine style factors used include four for value and five for growth. The variables are listed in the table below.

Value Criteria

Growth Criteria

Price/Book

3 year historic sales growth

Price/Sales

3 year historic EPS growth

Dividend yield

2 year forward sales estimates

Price/Cash flow

2 year forward EPS estimates

Equity growth rate

ROE x (1-payout ratio)

The new style indexes will cover the full range of FTSE's 29 country and 31 regional indexes. FTSE also intends to apply the style indexes to large, medium and small-cap indexes, emerging markets and the FTSE U.K. All-Share Index. The new series will include a total of 480 indexes.

Will Oulton, deputy chief executive at FTSE, said, "The design means that it works equally well for asset allocation, performance measurement and investment monitoring."

The move recognizes recent demand in Europe for indexes that cover growth and value, long institutional and mutual fund investment staples in the U.S. With a spate of style-based exchange-traded funds (ETFs) in the U.S. covering every style and capitalization size combination multiple times, and with European ETFs now outnumbering their U.S. counterparts, the move into European style indexes seemed inevitable.

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