The new Dow Jones/Wilshire system doesn't have a monopoly on sophistication. As there is no one definition of "growth" and "value," there is no one system that defines those terms better than the rest. Still, different style indexes may well serve certain investment purposes better.
MSCI
MSCI uses eight criteria to divide stocks into growth and value, three to define the value characteristics of a stock and five to define the growth characteristics.
The value criteria are:
- Book value/price ratio
- 12-month forward earnings expectations
- Dividend yield/price ratio
The growth criteria are:
- Long-term forward earnings per share growth expectations (based on analyst estimates)
- Short-term forwards earnings per share growth expectations (based on analyst estimates)
- Current internal growth rate
- Long-term historical earnings per share growth rate
- Long-term historical sales per share growth rate
|
Index |
Style Emphasis |
|
Dow Jones Total Market |
Earnings |
|
Dow Jones /Wilshire |
Earnings |
|
Intellidex |
Earnings |
|
Morningstar |
Earnings |
|
MSCI |
Mixed |
|
Russell |
Mixed |
|
S&P/Barra |
Book Value |
|
Wilshire |
Book Value |
Clearly, MSCI's system puts an emphasis on earnings as opposed to book value: Earnings-related measures account for more than half of the growth/value analysis. Moreover, within the growth section, long-term forward earnings growth is given a double weighting - a signal that MSCI believes this to be the single most important determinant of the "growth" characteristics of a stock.
Unlike the Dow Jones/Wilshire methodology, MSCI's system allows stocks exhibiting both growth and value characteristics to be split up, with part of their market capitalization applied towards the growth index and part towards value.
MSCI's system makes use of buffer zones in an attempt to limit turnover. Once classified as either growth or value, stocks must make a major transition to qualify for reclassification.
