Russell Recon And Best Practices

June 13, 2007

It’s good to see Russell adopting emerging best practices in the index industry. Both of the major changes they’ve adopted this year make a lot of sense.

Buffer zones, for instance, are a triumph of practicality over theory. Drawing an arbitrary line in the sand and shuffling companies back and forth based on tiny changes in market capitalization makes no sense.

Buffer zones also show that indexers are catering more and more to fund managers and less to benchmarking requirements … or, at least, they are taking index fund assets into consideration. If you’re talking about an absolute benchmark, a strict cut-off might work. But once you have money tracking these indexes, buffer zones make sense: they limit turnover; they dampen the index effect; etc.

As for including companies registered outside of the U.S., that seems like a no-brainer. The industry has had huge debates over this issue before, but portfolio managers treat these companies as domestic companies, and so should the indexers. The only caveat is that it introduces a level of subjectivity, but in most cases, the choices are obvious.

I’d love to hear other suggestions for best practices that the industry should adopt? Jim?

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