Everybody’s Styling

April 21, 2005


In 1964, Supreme Court Justice Potter Stewart famously defined hard-core pornography by saying, "I know it when I see it."

Many in the investment community feel the same way about "growth" and "value"- otherwise known as style classification. While everyone seems to "know" what the terms mean, few can agree on a specific way to define them. And so, not surprisingly, they get thrown around with a nonchalance that's maddening.

The problem is particularly acute in the word of active mutual funds, where there are "growth funds" invested in utility companies and "value funds" invested in high-octane tech stocks. But even in the world of index investing, one man's growth may be another man's value.

The problem of defining growth and value has come front-and-center thanks to the growing popularity of asset allocation strategies using style-based index funds and exchange-traded funds (ETFs). There are now at least six major index providers offering eight different style breakdowns of the U.S. equity market, each using a different definition of growth and of value. For a sophisticated investor, understanding these differences can play a key role in executing a fine-tuned asset allocation strategy.

The Curious Case of Dow Jones and Wilshire

Before proceeding to a full-blown comparison of all eight methodologies, it pays to consider one special case.

In December of 2004, Dow Jones Indexes and Wilshire Associates announced plans to roll out a new set of style indexes covering the full range of the U.S. stock market. The new indexes would break all 5,000 stocks in the Dow Jones Wilshire 5000 into one of five categories: Large Cap Growth, Large Cap Value, Small Cap Growth, Small Cap Value and Micro Cap.

Here's what Dennis Tito, CEO of Wilshire Associates, said at the time: "With the introduction of the new Dow Jones Wilshire Style Indexes, financial professionals will now have comprehensive benchmarks for not only the broad U.S. market but also for the U.S. market segments that matter to them most -- growth and value."

What's curious about Tito's statement is that Wilshire already had its own set of style indexes. In fact, Wilshire has offered style breakdowns of the Wilshire 5000 for close to a decade.

Significantly, however, the new style indexes use a different methodology to divvy up the marketplace. Whereas Wilshire previously relied on just two measures to define growth and value, in the new collaboration with Dow Jones, they'll be using six. That change suggests that, in creating the new indexes, Wilshire believed that the old definitions could be improved.


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