Bye-Bye Barra Style

October 01, 2005

Standard and Poor’s officially launches its “next generation” style indexes; BGI to convert its funds to the basic “Style” benchmark.

Standard and Poor's (S&P) officially launched their "next generation" style indexes on September 26, as they began distributing constituent and index-level data for the new products.  S&P is replacing its venerable S&P Barra style index family with two net sets of style indexes, the "Style" and "Pure Style" index lines.  The transition will be completed on December 16, when the Barra indexes are dropped as S&P's "official style index," and the new products take over.  

The writing has been on the wall for the S&P Barra style indexes since last year, when S&P-rival MSCI bought out Barra for $817 million.  Rather than simply replacing the Barra indexes with look-alikes, however, S&P decided to strike out for new ground and try to reinvent the category, launching not one but two sets of style benchmarks:

  • The "Style" index series offers a traditional breakdown of the entire market into the classic "growth" and "value" segments.  For these indexes, the market capitalization of any given capitalization segment (small, mid or large cap) is divided equally between the two component indexes.
  • The "Pure Style" index series excludes companies that exhibit neither strong growth nor strong value characteristics.  Each Pure Style index (growth and value) represents approximately 33 percent of the broader market universe, with the middle third of companies excluded altogether.

To further accentuate the "Pure Style" indexes, S&P applies a "style weighting" methodology, assigning the highest weights to companies with the strongest style scores. 

"Historical data shows that the Pure Style index series is better able to discriminate between value and growth, and has constituent attributes more sharply reflective of their respective investment style," says David Blitzer, Managing Director and Chairman of the Index Committee at Standard & Poor's.

The only other style index family to offer a similar product is Morningstar, which divides its style indexes into three buckets: growth, core and value.  Morningstar does not, however, use "style weighting."

The "Pure Style" indexes may represent an attempt by S&P to stay out in front of an emerging criticism of style-based investing.  While the style strategy of investing is more popular than ever, there has been mounting concern in academic circles that the terms "growth" and "value" don't really mean anything anymore, and that the groups are too similar to offer much in the way of diversification benefits.  Most correlation studies of "growth" and "value" indexes puts the correlation ratio between paired indexes above 0.9; far higher than, say, the correlation between international stocks and domestic equities, much less between stocks and bonds.  By exaggerating the differences between the indexes, S&P's "Pure Style" indexes may help to save the category.

BGI To Move Funds to "Style" Indexes

Barclays Global Investors has announced that it will transition its six S&P Barra-based exchange-traded funds (ETF) to the new "Style" indexes.

That's not a surprise, as 1) the S&P Barra style indexes will no longer be calulated as of December 16, and 2) the the "Style" indexes are much closer to the Barra products than the new "Pure Style" series. 

There will underlying component changes, however, as the "Style" and Barra indexes use markedly different methodologies, as explained here (/index.php?section=6&id=954), with the Barra products relying solely on price/book ratios and the new indexes resting more heavily on earnings-related data. 

When asked if a "Pure Style" ETF was in the works, BGI spokesperson Lance Berg said, "We never say never, but I am not aware of anything in registration at this point."

 

There will underlying component changes, however, as the "Style" and Barra indexes use markedly different methodologies, as explained here (/index.php?section=6&id=954), with the Barra products relying solely on price/book ratios and the new indexes resting more heavily on earnings-related data. 

 

When asked if a "Pure Style" ETF was in the works, BGI spokesperson Lance Berg said, "We never say never, but I am not aware of anything in registration at this point."

 

 

 

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