Russell Set to Add 95 IPOs to Reconstituted Indexes: Annual Process Keeps Benchmarks Tuned to Market Realities (Russell.com)

Russell Set to Add 95 IPOs to Reconstituted Indexes
Annual Process Keeps Benchmarks Tuned to Market Realities

June 11, 2004 — Russell Investment Group has posted its preliminary lists of companies that will join or leave the broad-market Russell 3000® Index when Russell's family of 21 unmanaged U.S. equity indexes is reconstituted June 25. Final index membership will remain in place for one year.

The preliminary "additions" list indicates 95 initial public offerings will join the newly reconstituted Russell 3000 this year, surging from 28 in 2003. The research shows 10 of these IPOs will jump directly to the large-cap Russell 1000® Index.

These annual updates to the Russell indexes are closely followed by investors because the Russell indexes are now used as a model for more than $365 billion in passive investment funds; increasing 60% in 2003. Another measure, exchange-traded funds based on Russell indexes, shows similar growth. They garnered $4.4 billion in 2003 and now total close to $18 billion.

The "additions" list indicates 323 companies will move into the Russell 3000 — more than last year's 289 companies but far less than the 10-year average of 440.

The total market value of the Russell 3000 will likely increase to $13.3 trillion in total capitalization, which means the broad market rose by $2.3 trillion from this point last year.

Among the 12 sectors that comprise the Russell 3000, the weighting of each will remain relatively consistent after the index is reconstituted. The weighting of financial services-related stocks, for example, is expected to remain unchanged at 22.8%.

In the Russell 2000® Index, though, some sector weights reflect a slight shift in the market. The financial services sector will comprise 22.8% of the index, increasing from 21.9%, while the producer durables sector will decrease from 8.3% to 7.6%. The weighting of the technology sector will increase from 13.6% to 14%, while health care will decrease from 13.8% to 13.1%. These weightings reflect the current concentration of those sectors within the stock market.

"The reconstitution process reflects what we saw in the U.S. market this year — mostly fine tuning and relatively small changes in the makeup of Russell indexes," said Dennis Jensen, senior research analyst. "Throughout the year the markets gave us a low spread in terms of index returns and sector performance, making this year's reconstitution somewhat uneventful compared to years when we see dramatic shifts in values or prices."

One possible exception involves the financial services sector. A total of 56 banks, regional banks and savings and loans are on the "deletions" list this year. By contrast, only 15 such financial institutions can be found on the "additions" list.

"A lot of banks hovering near the bottom of the Russell 2000 at this point last year were leapfrogged by a diverse group of companies that performed well this year," Jensen said. "Most of the newly deleted banks ranked among the bottom 1,000 stocks in the Russell 2000, meaning they had little impact on the sector weights of the index."

By contrast, 34 biotechnology firms and 20 medical specialties companies likely will be added to the Russell 3000. In addition, the research shows nine oil and gas production companies will flow into the index.

The preliminary lists of additions and deletions represent the first step in Russell's annual "reconstitution" process. Any updates to these lists will be posted June 18 and June 25. Updates are made primarily due to recent corporate actions that affect the stock and availability of it shares. Otherwise the preliminary list remains largely unchanged. The final membership lists for the Russell 3000, Russell 2000 and Russell 1000 will be posted July 6.

Annual reconstitution of the Russell indexes captures the 3,000 largest U.S. stocks as of the end of May, ranking them by total market capitalization to create the Russell 3000. As a broad market index, the Russell 3000 represents approximately 98 percent of the U.S. stock market and the vast majority of traded securities. The largest 1,000 companies in the ranking comprise the Russell 1000 while the remaining 2,000 companies become the Russell 2000.

Membership in Russell's 21 U.S. equity indexes — widely used as benchmarks for both passive and active investment strategies — is determined primarily by market capitalization rankings and style attributes. Recent studies by some large brokerage and investment firms that preview Russell's annual reconstitution process and attempt to predict subsequent changes to the indexes have proven once again to be generally accurate.

"Russell uses a transparent reconstitution process to develop its indexes," Jensen said. "Anyone with financial market data can calculate its likely impact on membership and weights, which allows investors to adjust their portfolios over time and thus reduces the possibility of dramatic price swings caused by a lack of liquidity."

About Russell
Russell Investment Group, a global leader in multi-manager investment services, provides investment products and services in more than 35 countries. Russell manages more than $107 billion in assets and advises clients worldwide representing more than $1.8 trillion. Founded in 1936, Russell is a subsidiary of Northwestern Mutual and is headquartered in Tacoma, Wash., with additional offices in New York, Toronto, London, Paris, Singapore, Sydney, Auckland and Tokyo.

Contact: Steve Claiborne 253.594.1858

Russell Investment Group is a registered trade name of Frank Russell Company, a Washington, USA corporation, which operates through subsidiaries worldwide. Frank Russell Company is a subsidiary of The Northwestern Mutual Life Insurance Company.

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