PHILADELPHIA — The two biggest names in indexing don’t agree on the relative performance of value and growth stocks during the first half of the year.
The Standard & Poor’s 500/
Citigroup Value Index rose 7.73% though the end of June, beating the Standard & Poor’s 500/
Citigroup Growth Index, which gained 6.53%.
For the same period, the Russell 1000 Growth Index climbed 8.13%, beating the Russell 1000 Value Index, which was up 6.33%.
The divergence is unusual and can pose problems, industry consultant Ronald J. Surz, president of PPCA Inc. in San Clemente, Calif., wrote in an e-mail.
“In addition to the performance evaluation dilemma this creates for investors and consultants, investment managers will find that they have been rewarded or penalized for tracking one of these benchmarks,” he wrote.
One solution would be for the two index giants to publish a “core” index in addition to their value and growth indexes, Mr. Surz wrote. Core stocks are those such as General Electric Co. (GE) and Johnson & Johnson (JNJ) that fall in the gray area between value and growth, he wrote. That’s the way he goes about constructing his indexes, Mr. Surz wrote.
For the first half of 2007, his large-cap-value and large-cap-growth indexes both climbed by about 7.3%, while his large-cap-core index fell 5.2%.
Those results seem to indicate that Standard & Poor’s of New York has more core in its growth index, and Russell Investment Group of Tacoma, Wash., has more core in its value index, Mr. Surz wrote.
That may be true.
The S&P and Russell indexes use different methodologies in the construction of their indexes.
Russell allocates stocks that have both value and growth characteristics to its indexes on a percentage basis, depending on how strong those characteristics are. As a result, some stocks, such as semiconductor manufacturer Cree Inc. (CREE) and rental-car giant Hertz Global Holdings Inc. (HTZ), can appear in both value and growth indexes.
S&P of New York draws a much harder line that divides stocks into value and growth camps.
Of course, Russell thinks it does a better job. For Russell, the ultimate test of an index is how well it correlates over time with the performance of investment managers who invest in each market segment, Steve Claiborne, a company spokesman, wrote in an e-mail.
So far this year, those correlations have been strong, he wrote.
“Growth managers are outperforming value managers in both the large-cap and small-cap arenas, much the same way as each growth index in Russell’s comprehensive family of U.S. indexes is outperforming its value counterpart at each capitalization tier,” Mr. Claiborne wrote.
Russell, however, “is trying to do too many things at one time,” said David Blitzer, New York-based managing director and chairman of S&P’s index committee.
S&P takes a simpler approach to index construction that lends itself to greater stability, he said.
The two rivals, however, are in agreement that neither believes they need to come out with a core index.
“Things are confusing enough as it is,” said Denis Jensen, a senior research analyst with Russell.
It isn’t as if directional discrepancies between the Russell and S&P style indexes are common, Mr. Blitzer said. They occur as blips when the markets are in transition, he said.
While such blips may seem unnerving, they do not affect the ability of at least S&P’s indexes to measure the market accurately over the long term, Mr. Blitzer said.
