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Frequently asked questions
Russell Global Style Indexes
Product Information
Q: What are the key features of the Russell style indexes?
- Research driven — Comprehensive, objective construction based on empirical research of investment manager behavior.
- Representative — Russell's multi-variable model, incorporating capitalization-weighted probability, reflects opportunity sets of style managers.
- Tested — This methodology has been tested successfully in the U.S. and has proven to be the best measure globally.
- Comprehensive -Russell's style indexes are float-adjusted, additive, and cover 98% of the globe.
- Modular — There are style indexes for each regional and country index, and for each capitalization tier.
Q: What initially led to the development of Russell's U.S. style indexes?
A: In 1987, Russell innovatively developed the Russell U.S. style indexes in order to evaluate manager performance according to style segments. Russell launched the large cap Russell 1000® Value and Growth indexes which became the first style indexes.
Q: Russell global indexes follow the same methodology as Russell U.S. style indexes. Why did you determine to extend this methodology to the globe?
A: When Russell analyzed global portfolios against multiple variables and various combinations of those variables, it became apparent that the current combination of book-to-price and I/B/E/S long term growth estimates was most effective at capturing the manager investment styles across a range of markets (U.S., Japan, global, global ex-U.S. and others). In fact, the two variables were the best options when balancing both representation of the style investment opportunity set, data availability and turnover costs.
Q: Were there any adjustments in the U.S. methodology to account for the addition of the global indexes?
A: There were very few adjustments made in order to maintain an efficient and transparent process. The adjustments relate to the treatment of companies with missing variables and improve the quality of style probabilities for such stocks. These adjustments were slight and should not greatly impact the U.S. style indexes.
Q: Will the global style indexes rebalance at the same time as global index reconstitution?
A: Yes. Global style indexes will be rebalanced along with global indexes each June, with the exception of the Japan component. Due to the timing of when most Japanese companies report their financials, the Japan portion of the global series is rebalanced in November to ensure the most up-to-date representation of Japanese companies.
Methodology
Q: Why does Russell choose to use two variables, book-to-price and long-term growth estimates, to determine style?
A: Russell research shows that these are the two primary characteristics that best define portfolios of managers who define their style to be Growth or Value. Additional factors have proven to have nonmaterial effects on style weights given the degree of correlation between "extra" variables and the two dominant characteristics — book-to-price representing a strong value variable and long-term growth forecast, representing a strong growth variable. With these two variables, Russell is able to offer consistent and transparent approach while addressing capitalization bias, style manager behavior and turnover costs..
Q: Did Russell do variable analysis globally to determine the effectiveness of book-to-price and long term growth estimates for the global index style series?
A: Yes. When developing the global style indexes we expected to find that more variables would be needed globally to effectively determine value or growth. However, after testing 16 different characteristics in hundreds of different combinations and scenarios and by also testing results against actual manager holdings, the analysis plainly showed that little would be gained in terms of representation, accuracy or insight into style investing by adding additional characteristics to the global style methodology.
Q: Why does Russell use book-to-price if it is not standard for value managers to use price/book as a variable to pick stocks?
A: Relative book-to-price best represents the pool of securities value managers typically select from. The style indexes are not designed to replicate the complex processes every style manager goes through to pick stocks. Rather, they are designed to identify the pool of stocks style managers chooses from before they use their own proprietary methods to pick individual stocks. Moreover, research also demonstrated that adding complexity via additional variables consistently increased turnover.
While there are differences in accounting practices between countries, these differences affect all potential characteristics and are not isolated to book-to-price. Russell's goal is to represent the broad opportunity set of managers and based on our research, an unadjusted book-to-price accomplishes this goal.
Q: Brokers do not tend to make long term growth estimates for smaller companies or those in emerging countries. Is there enough coverage of securities to use this variable?
A: Surprisingly, I/B/E/S coverage of long term growth estimates is relatively good in emerging countries and in the small cap space. There is a broad representation across countries and total market capitalization. For example, I/B/E/S coverage by total market cap of the Russell Global Index was over 91%.
For those companies without coverage, Russell style algorithm ensures quality analysis by substituting the I/B/E/S value score of like companies. It assigns a value probability based on the average of the companies in the same country and same industry. This substitution logic ensures that even those companies without estimates are classified correctly.
Q: Why are countries in the global index, except for the U.S. and Japan, allowed to hold a disproportionate growth/value split (i.e. not 50/50)?
A: As with the global index family, we use a global-relative approach to style indexes. Our research has shown that investors are increasingly making decisions based more on the company and/or sector and less on the geographic orientation of a particular company. In the styles arena that means that there is not an even 50/50 split between value and growth at the individual country level. Rather, some countries, as with sectors, may display more of a growth or value bias.
Q: Why are the U.S. and Japan handled separately?
A: Given the size and impact of the existing Russell and Russell/Nomura style indexes in the U.S. and Japan, and based on feedback from both market participants and Russell Index Client Advisory Board, these countries' style weights are currently being retained as the U.S. and Japan component of the global style index series.
Russell Investment s is the owner of the trademarks, service marks, and copyrights related to its respective indexes.
Indexes are unmanaged and cannot be invested in directly. Investments in products based on the Russell indexes may not provide the exact performance of the index due to implementation strategies, expenses and fees applicable to the investment product.
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Russell Global Style Indexes |
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Indexes are unmanaged and cannot by invested in directly. Returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment.
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