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1 Introduction
1.1 Standard & Poor's
Standard & Poor's long history of calculating equity indexes dates back to 1923. The S&P 500 Index the standard for measuring largecap U.S. stock market performance was first calculated in 1957. In 1999, Standard & Poor's launched the S&P Global 1200 Index, the first real-time global index.
The S&P Global 1200 is comprised of six country/regional indexes, some of which have significant followings in their home markets, such as: the S&P 500 (U.S.); the S&P Latin America 40; S&P/TSE 60
(Canada); S&P TOPIX 150 (Japan); S&P Asia Pacific 100; and S&P Europe 350. All of the indexes are constructed similarly to the S&P 500. Non-U.S. stocks in the S&P Global 1200 have actual free-float adjustments for government ownership, corporate cross-holdings strategic holdings, and foreign-ownership
restrictions. Liquidity require-ments are ensured by periodic analysis of dollar-value traded and float-adjusted turnover of stocks.
1.2 Morgan Stanley
Capital International Morgan Stanley Capital International (MSCI) has been the market leader for international equity indexes for more than 30 years. The MSCI World Index includes stocks from 23 developed markets. The MSCI Kokusai Index is a subset of the World Index that excludes Japanese
stocks. Since inception, MSCI's index-con-struction methodology has been to identify all the stocks in a country, apply full mar-ket- capitalization weights to all the stocks, select 60% coverage for each industry group within the country and avoid companies with substantial cross-ownership.
Since 1996, MSCI has tried to adjust for low-float availability of certain constituents by applying market-capitalization factors. On December 10, 2000, MSCI announced its intention to adjust the free-float method-ology and market coverage of its key indexes. In summary, MSCI decided to do the following:
- Index constituents with a free float greater than 15% are to be included at their actual float level rounded up to the nearest 5%.
- Target market coverage is to be increased to 85% of the float-adjusted market capitalization from the current 60% of total market capitalization.
- The changes were to be implemented in two stages: as of the close on November 30, 2001, and as of close on
May 31, 2002.
1.3 FTSE And Dow Jones
FTSE, which is the pre-eminent index provider for the United Kingdom, and Dow Jones, which manages the famous Dow Jones Industrial Averages in the United States, also have float-adjusted global indexes that can be used as ex Japan portfolios. The FTSE World Index aims to cap-ture between 82% and 90% of the investable market capitalization available in any one country. The large-cap segment of the Dow Jones World Index aims to cover 70% of a country's investable market capitalization. Both FTSE and Dow Jones have their own sector-classification systems.
1.4 MSCI's Float Adjustments Lead To
Turnover In Kokusai-Linked Assets On May 19, 2001, MSCI released its list of stocks to be included in its free-float-adjust-ed indexes. The provisional index series released in May was intended to help the phasing in of the new float-adjusted indexes. Flows of index-linked assets were estimated to be US$125 billion for all passive assets linked to MSCI indexes and US$14 billion for Kokusai-linked assets alone. With an esti-mated US$60 billion in passive assets linked to MSCI Kokusai, 1 it is decision time for Japanese asset managers as they transition from one index to another. The MSCI transi-tion process has thus far not esulted in any major market disruption, thanks in part to MSCI phasing the process over a year. However, many international asset man-agers are using this opportunity to review their existing benchmarks. This paper examines some important decision parameters that need to be considered: index methodology, liquidity and impact of index transition. 2 This paper compares the S&P Global 1200 ex Japan and MSCI Kokusai across these parameters. Though FTSE and Dow Jones have credible alternatives, we restrict our comparison to S&P, the index provider to whose indexes (principally the S&P 500) most assets are benchmarked, and MSCI, the index provider to whose indexes the most international assets are benchmarked.
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