If exposure to “style” is important to you when evaluating an investment product and constructing multi-asset investment strategies, then it follows that an understanding of exactly what the term style encompasses also is important. The various publishers of style indices are hardly in full agreement on their specifications of the portfolios that are the bases for their respective indices. Further, they differ on the frequency and the timing of maintenance (reconstitution or rebalancing) of their indices.
To demonstrate these differences, all we have to do is to test the exposure of one set of style indices in terms of another one, or several sets versus the same one as a control. Last month, in the Of note panel on the Practice page of this site, the Russell style indices were depicted within PPCA’s Surz Style Pure℠ framework just prior to the annual reconstitution of the Russell series (as well as the last of four quarterly updates by PPCA.) The disagreement of the two sets of indices was obvious if you’ve seen the visual. Keep in mind that the structure of the Russell style indices was cast a year earlier and that much had happened to the membership of the underlying portfolios since then. We experienced a market in which some very large cap stocks became small caps, and a significant number of value stocks exchanged places with growth stocks on the value/growth spectrum. Yet all remained a part of their original populations as cast by Russell at the end of June of 2008. No doubt this caused problems over the past several months for those portfolio managers who go to considerable lengths to control tracking error versus Russell style indices. A few days ago Ron Surz circulated an excellent visual depicting this dynamic which you may access here.
In addition to the maintenance matter, the publishers of style indices account for security populations of different sizes, divide their populations by cap size somewhat differently, and account for the middle ground, that is, the part of the population represented by securities that are not convincingly fully growth or value in somewhat bizarre ways. Accordingly, with the exception of the Surz and Morningstar series which included core categories within each cap size division, some securities end up being represented in both the value and growth camps.
Here is a link to a one-page visual of the Russell, S&P, MSCI/Barra and Morningstar style indices plotted in the context of the Surz Pure Style℠.
In the margin on the right of this page, under Resources, are links to the web sites of the style index publishers covered in the study (also serving as my credit of sources.) You’ll have to expend some calories on navigation at each site depending on the depth you want to plumb on the technical aspects of index construction.
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