Russell Pioneers ‘Stability’ Indexes

February 04, 2011

Russell pushes the envelope on style investing with new stablility indexes.


Russell Investments, one of the largest index providers globally, is launching a series of indexes that zooms in on “stability,” which it characterizes as a third dimension of investment style that blends various fundamental factors with market volatility.

On the one hand, stability includes variables such as leverage, return on assets and earnings at a company level, the Seattle-based company said in a press release. That metric is then combined with both short- and long-term stock market volatility indicators to track a firm’s sensitivity to changing economic or credit cycles.

Unlike growth and value style factors, stability doesn’t seek to determine whether a company has a low valuation or whether it’s likely to see future growth. All in all, the so-called three dimensions of style are complementary and are designed to give investors “detail and specificity,” the company said on its website.

“We detected a need to extend the Russell Indexes’ style set as clients and investors seek indexes that, while independent from other definitions of style, are still cap-weighted and encompass the overall [investible] market,” Russell’s Director of Index Research and innovation Rolf Agather said in the press release.

“The Russell Stability Indexes offer investment professionals additional style investing tools that reflect market volatility as well as current economic and credit cycles,” he added.

The lineup of stability indexes includes the U.S. Large-Cap Russell 1000 Defensive and Russell 1000 Dynamic, the U.S. Small-Cap Russell 2000 Defensive and Russell 2000 Dynamic, and the U.S. Broad Market Russell 3000 Defensive and Russell 3000 Dynamic indexes.

Index Construction

The new stability benchmarks, which are designed with both passive and active managers in mind, are created by splitting existing Russell indexes in half based on quality and volatility characteristics.

What the company deems as the more “stable” half becomes the Defensive Index, with the less stable half called the Dynamic Index. They are cap-weighted.

The securities in the dynamic mix not only tend to be more exposed to risk, they also tend to outperform their “defensive” counterparts in times of fast upward market action. Those in the defensive portfolio perform better in weak market environments, the company said.

“Introducing this third dimension of style effectively turns the traditional two-dimensional style box that considers market-cap and growth/value designations into a three-dimensional cube that can help to better explain performance differences among equity managers, especially at critical points in the market,” Agather said.



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