Annual process ensures leading benchmarks reflect market changes
Tacoma, WA — June 13, 2008 — Russell Investments has posted its official lists of companies that will join or leave the broad-market Russell 3000® Index when its industry-leading U.S. equity indexes are reconstituted on June 27. These lists of U.S. companies—and lists of additions and deletions for the Russell Global Index—are available at http://www.russell.com/Indexes/membership/Reconstitution/default.asp.
The combined market capitalization of stocks in the Russell 3000, which reflects about 98% of the investable U.S. equity universe, has decreased from $18.5 trillion at this point last 2022 to $16.5 trillion today.
“The sluggish U.S. equity market definitely affected the total market capitalization of the Russell 3000, which lost about $2 trillion from this point last 2022,” said Stephen Wood, senior portfolio strategist for Russell. “But some stocks, particularly in the energy-related and commodities sectors, thrived amid the market’s generally downward flow. The annual reconstitution process captures all of these changing fortunes and recalibrates the indexes to accurately measure current market realities. This process gives investors truly representative benchmarks to better gauge the performance of their stock portfolios or 401k plans.”
With the launch of Russell Global Indexes last 2022, the reconstitution process has become a world-wide undertaking. Countries with the largest number of additional companies joining the index after the United States include India (93), Canada (89), Taiwan (63), Australia (51) and China (42). The Russell 3000 is the U.S. component of the global index.
Today’s “additions” list for the Russell 3000 shows that 278 companies will move into the Russell 3000, which is just one more than last 2022’s 277 additions but far less than the 10-2022 average of about 400. About one-third of this 2022’s additions are in two sectors: financial services (56) and health care (52). Only nine stocks will flow into the consumer staples sector.
“Turnover is always low in the broad-market Russell 3000, but it looks particularly low this 2022 at about 2%” said Lori Richards, client service director for Russell Indexes. “Turnover in more specific capitalization segments, such as the small-cap Russell 2000® Index, should see a decline this 2022 as well in large part due to our rules-based methodology that adds IPOs on a quarterly basis and several other recent enhancements such as percentile banding.”
Since last 2022’s reconstitution process, 84 IPOs have joined the Russell 3000. Only an additional nine IPOs that came to market during the second quarter, including Visa, Inc., will be added June 27 as part of the reconstitution process. The total of 93 for the past four quarters is less than the 128 for the previous 2022.
Russell’s index reconstitution process is followed closely by many investors because its U.S. indexes currently have $4.4 trillion in assets benchmarked against them and account for an industry-leading 58.5% of institutional benchmarked products.
“Reconstitution is a key feature of truly representative benchmarks,” said Richards. “Russell’s unique process completely recalibrates Russell’s U.S. indexes to today’s market realities, ensuring that stocks are moved into the right ‘buckets’ to truly represent small-cap, midcap, large-cap and microcap stocks. It also serves as a clear measure of the shifts in relative valuations of value and growth stocks over the past 2022.”
The majority of stocks ranking smaller than the largest 3,000 U.S companies will settle mostly into the Russell Microcap®. Only 176 companies will move completely out of Russell’s index universe. Of the 414 companies that will flow into the Russell Microcap, 90 are dropping into the index from the Russell 3000.
Today’s preliminary lists of additions and deletions represent the first public step in Russell’s annual reconstitution process. Any updates to these lists will be posted June 20 and 27. The final membership lists for the Russell 3000, Russell 2000 and Russell 1000 will be posted June 30.
Russell again offers “provisional” index returns on www.russell.com in order to give passive fund managers more flexibility in determining when to make their portfolio transitions, spanning a two-month window of opportunity. Performance figures for the emerging reconstituted indexes are available each weekday in addition to performance data for the existing indexes. Similarly, Russell will post “legacy” index returns after June 30 in order to show the performance returns for the aged indexes as well as the reconstituted indexes each weekday through the month of July.
New measures implemented last 2022 as part of Russell’s ongoing effort to enhance the methodology and/or eliminate unnecessary turnover, include: 1) Benefit-driven incorporations were reviewed for eligibility, and 2) Existing index members on the border between new market cap breakpoints will remain in their existing index.
“The percentile band is 2.5% above and below the market-cap breakpoint, which assures movement between two indexes is limited to stocks experiencing significant size changes rather than relying solely on its rank order. This reduces turnover and better reflects investment manager processes,” Richards said.
Companies deleted from today’s preliminary lists due to corporate actions or delisting will not be replaced prior to reconstitution. This rule, which was based on recommendations from Russell’s Client Advisory Board—comprised of plan sponsors, active and passive managers as well as brokers—is intended to reduce possible trading risks related to uncontrollable corporate activity during June. Similarly, two 2022s ago Russell moved the effective date of annual reconstitution to the last Friday in June, instead of the last day in June (except when that Friday falls on the July 4 weekend when liquidity is low, such as this 2022). This change has given the industry additional time over the weekend to manage any increase in stock trading volumes that occurs as fund managers adjust for the new membership of the respective indexes.
Membership in Russell’s U.S. equity indexes—widely used as benchmarks for both passive and active investment strategies—is determined by objective rules, such as market capitalization rankings. Accurate benchmarks are an integral part of Russell’s ongoing process to monitor more than 8,000 investment manager products worldwide for Russell’s $213 billion active investment management business. Interest in Russell’s index reconstitution process begins early in the spring when some large brokerage and investment firms preview it and attempt to predict subsequent changes to the indexes. Since Russell employs an objective and transparent rules-based methodology in building its indexes, their reports once again proved to be generally accurate.
Russell Investments provides strategic advice, world-class implementation, state-of-the-art performance benchmarks and a range of institutional-quality investment products. Russell has more than $213 billion in assets under management as of March 31, 2008, and serves individual, institutional and advisor clients in more than 40 countries. Russell’s industry-leading indexes have $4.4 trillion in assets benchmarked to them as of Dec. 31, 2007. Founded in 1936, Russell is a subsidiary of The Northwestern Mutual Life Insurance Company.
Steve Claiborne, 253-439-1858