U.S. Equity Index Benchmark Usage

December 03, 2003

A study by Russell Indexes indicates assets are flowing into its style benchmarks.

December 3, 2003

Background

In the October 1998 issue of MarketPlace News, Nelson Information published a study that measured the most frequently used benchmarks by U.S. equity investment products. The study listed the top 25 benchmarks used among the 3,333 primarily institutional products, including index funds, in the Nelson database.  Their analysis showed that eight of the top ten fastest growing benchmarks between 1996 and 1998 were Russell indexes.  In addition, the study noted that usage of the S&P 500 Index as a benchmark had declined significantly since 1996.  While Nelson did not set out to measure market share in this study, it is easily derived by simply combining benchmark usage data for each index provider.    

Since this was a one-time study done by Nelson, Russell researchers decided to replicate Nelson's basic methodology in June 2002 and January 2003 and found the trend Nelson originally identified had continued.  More and more institutional investment products use Russell indexes as their benchmark. This study is the latest installment in the series, using data as of June 30, 2003.     

Methodology

Using Nelson's MarketPlace Web database, Russell researchers found 3,675 U.S. equity products as of June 30 of which 2,524 (roughly two-thirds) reported a benchmark, a ratio consistent with previous research. 

One limitation Russell researchers noticed in using Nelson's method to calculate market share was that they included the 1/3rd of products with unreported benchmarks in their calculations, causing the percent of products reporting use of a given provider's index as a benchmark to be under-stated. Using this method, in effect, gives the unreported benchmark category a "market share" of around 33%.  To overcome this, Russell researchers adopted a common market share calculation method by basing it only on the investment products for which a benchmark was reported.   

In addition, Russell researchers included a look at equity style products claiming a growth or value oriented benchmark in order to determine usage of Russell indexes in this important sub-market. 

Findings

As expected, overall usage of Russell indexes continues to increase, while usage of S&P indexes continued to decline. In fact, Russell surpassed S&P for institutional product  market share for the first time.

As shown in Table 1, 45.5% of the institutional U.S. equity products reporting a benchmark indicate a Russell index as their benchmark, up from 39.3% in June 2002, 27.9% in 1998 and 18.5% in 1996.  This growth came primarily at the expense of S&P, whose current overall usage has fallen to 42.5%, down from 49.9% in June 2002, 64.6% in 1998 and 73.6% in 1996.  In addition, Wilshire, NASDAQ, Lipper, and Dow Jones indexes continued to experience relatively flat or declining market share over the same period, while Russell was the only provider to gain significant market share.

Table 1: Index Provider Market Share: Percent of Products


 

Percent of U.S. Equity Investment Products Reporting A Benchmark

Index Provider

1996

1998

June '02

Dec '02

June '03

Russell

18.5

27.9

39.3

41.4

45.5

S&P

73.6

64.6

49.9

46.7

42.5

Wilshire

1.1

1.2

1.6

1.9

1.7

NASDAQ

2

1.2

0.8

0.6

0.6

Lipper

1.4

1.5

0.8

0.7

0.6

Dow Jones

0.5

0.5

0.3

0.3

0.3

Other

2.8

3.2

7.3

8.4

8.8

Total

100

100

100

100

100

As seen in Table 2, S&P continues to hold the top position in benchmarked assets at just under 50% compared to Russell's 38.9%.  This gap is noticeably smaller than the 62.5% to 28.1% gap measured in June 2002.  If this trend continues at the same rate, assets benchmarked to Russell indexes likely will exceed those benchmarked to S&P indexes in the next 12 months.   This trend is even more striking when considering that index funds, for which the S&P 500 is well known, are included in the data.   

Table 2: Index Provider Market Share: Percent of Assets Benchmarked

Percent of US Equity Investment Product Assets Reporting A Benchmark
Index Provider
June '02
Dec '02
June '03
S&P
62.5
57.4
49.8
Russell
28.1
32.3
38.9
Wilshire
0.8
1.5
1.3
NASDAQ
0.3
0.3
0.4
Lipper
0.4
0.4
0.2
Dow Jones
0.1
0.1
0.1
Other
7.9
8.1
9.3
Total
100
100
100

Compiled by Russell Marketing Research & Information using data from Nelson Information's MarketPlace Web database and/or 1998 Survey of Performance Benchmarks.   See Table 4 and associated footnotes in the Appendix for more detail.

In the style investing arena, Table 3 shows how dominant Russell is as a provider, accounting for around 90% or more of all growth and/or value oriented products and assets benchmarked.

Table 3: Russell's Style Investing Market Share  

Investing Style
Total Benchmarked To A Style Index
Total Benchmarked To A Russell Style Index
Products
Assets ($bil)
Products
% of Style Benchmarked Products
Assets ($bil)
% of Style Benchmarked Assets
Growth
407
281.5
380
93.4
269.5
95.7
Value
368
327.5
323
87.8
302.8
92.4
Total
775
609
703
90.7
572.3
94

Source: Nelson MarketPlace Web  database.  See Appendix for the list of style benchmarks included.

As for specific indexes benchmarked against, Table 5 in the appendix shows the S&P 500 and Russell 2000 indexes firmly entrenched in the top two positions respectively, as they have been since 1996.  The decline in overall S&P index market share noted previously is clearly due to the dramatic decline in usage of the flagship S&P 500, which has dropped from 1,379 products in 1996 to 924 products now.  Russell researchers also note that although usage of the Russell 2000 is up compared to 1996, it has been experiencing a gradual decline since 1998. 

Looking further down the list of most frequently used US equity benchmarks reveals Russell indexes account for eight of the top 10 slots.  Increased usage of Russell's small cap and large cap growth and value index suites is particularly notable and has strongly contributed to Russell's overall increase in market share.  Usage of other Russell indexes has also increased, but at a slower rate. In fact, since 1996, every Russell index shown in Table 5 has seen increases in the number of products using them as a benchmark, a claim no other provider can make.

Conclusion

Russell indexes are now the benchmark of choice for a large number of investment managers of institutional U.S. equity funds, who are selecting them in unprecedented numbers. We suspect there are several reasons behind this dramatic shift. One may be an increase in the overall popularity of equity style investing, for which Russell provides many benchmark solutions.  However, the relatively flat usage of S&P style indexes since June of 2002 (see Appendix, Table 5) suggests there may also be an increased preference for Russell's transparent index creation and management process. Ultimately, the market is accepting Russell indexes as the method of choice to measure the performance of active investment management.

Appendix

Table 4: Raw Data Used to Derive Market Share for Tables 1 & 2

Index Provider
Products Benchmarked
Assets Benchmarked ($bil)
1996
1998
June '02
Dec '02
June '03
June '02
Dec '02
June '03
Russell
372
623
922
1,006
1,148
842
789
924.2
S&P
1,481
1,444
1,170
1,134
1,072
1,873.80
1,402.70
1,185.10
Wilshire
23
26
37
45
43
24.1
36.6
31
NASDAQ
40
26
19
15
16
10.4
7.7
9.9
Lipper
28
33
18
18
16
12.4
9.8
4.2
Dow Jones
11
11
8
8
7
1.7
1.3
2
Other
57
71
172
203
222
235.6
197.5
222.2
Total Reporting Benchmark
2,012
2,234
2,346
2,429
2,524
3,000.00
2,444.60
2,378.60
Not Reported
914
1,099
1,266
1,284
1,151
419.8
306.7
255
Total Database
2,926
3,333
3,612
3,713
3,675
3,419.80
2,751.30
2,633.60

 

Table 5:  Most Frequently Used US Equity Benchmarks

Index Benchmark Name
Number of Products Benchmarked
Assets Benchmarked ($Bil)
1996
1998
June '02
Dec '02
June '03
June '02
Dec '02
June '03
S&P 500
1,379
1,306
1,009
980
924
1,679.80
1,265.70
1,096.90
Russell 2000
216
299
289
283
255
198.2
164.4
140.7
Russell 1000 Value
25
41
130
144
177
172.1
202.7
227.5
Russell 2000 Growth
31
81
116
135
174
81
65.3
69.7
Russell 1000 Growth
23
47
78
96
128
145.9
123.8
165.2
Russell 2000 Value
6
17
65
75
103
38.5
43.3
54
Russell Mid-Cap Growth
5
25
41
55
75
33.8
36.2
32.1
S&P Mid-Cap 400
73
89
84
78
73
72.3
48.6
43.9
Russell 2500
23
42
53
52
55
38.7
33
128.5
Russell Mid-Cap
12
28
41
43
50
31.2
37.4
28.5
Russell 1000
19
20
29
39
43
47.6
34.6
37.3
Russell Mid-Cap Value
n/a
n/a
33
38
41
21.2
16.7
20.7
Russell 3000
12
23
39
39
39
30.2
28.6
16.7
S&P/BARRA Value
10
21
37
37
35
84.4
67.7
21.1
S&P/BARRA Growth
14
18
18
16
16
16.5
7.2
9
Wilshire 5000
16
18
16
17
15
16.8
16.1
12.7
S&P Small-Cap 600
5
10
11
12
12
4.9
2.3
2.2
NASDAQ Composite
31
20
12
9
11
4.5
3.3
2.7
Dow Jones Industrials
11
11
8
8
6
1.7
1.3
1.9
Lipper Growth & Income Fund Average
14
16
5
5
4
0.5
0.4
0.2
Total Database
2,926
3,333
3,612
3,713
3,675
3,419.80
2,751.30
2,633.60


Source: Nelson MarketPlace Web database and Nelson 1998 Survey of Performance Benchmarks, October 1998.    Products analyzed are primarily institutional oriented mutual funds, separate accounts, and commingled funds.  Products using REIT based indexes as a benchmark were excluded.

Nelson's 1998 study did not provide a complete data table for 1996 and 1998, but rather reported the 25 most frequently used benchmarks along with the total number of products in the database.  Therefore, the number of products in the "Not Reported" category had to be derived for those two years and is slightly overstated relative to later years, while the number reported as "other" is slightly understated for the same years.
Nelson did not calculate benchmarked assets for 1996 and 1998. 

********************

Copyright© Frank Russell Company 2003. All rights reserved.

This material is proprietary and may not be reproduced, transferred or distributed in any form without prior written permission from Frank Russell Company.

Frank Russell company, a Washington, USA corporation, operates through subsidiaries worldwide and is a subsidiary of The Northwestern Mutual Life Insurance Company.

The indexes are unmanaged and cannot be invested in directly.

Frank Russell Company and Standard & Poor's Corporation are the owners of the trademarks, service marks, and copyrights related to their respective indexes.

 

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