Russell Roundup
By Journal of Indexes Staff

Russell Changes Reflect Market's Growth

Russell's newly reconstituted family of 21 unmanaged U.S. stock indexes reflects widespread growth in market capitalization for U.S. equities after a positive year on Wall Street. On July 6, Russell posted official membership lists for the Russell 3000 as well as the small-cap Russell 2000 and large-cap Russell 1000 indexes.

The smallest company in the broad-market Russell 3000 Index, for example, surged 51% over a 12-month period, while the largest increased by 11%. Additionally, 100 of the newly added companies were initial public offerings during the year. Stocks in the Russell 3000 have an updated capitalization range that stretches from $317.8 billion for the largest stock (General Electric) to $175.8 million for the smallest.

The market capitalization of the median company in the Russell 3000 now stands at $822.4 million, up 32% from $622.3 million in 2003. Of the 100 IPOs that entered the Russell 3000, ten gained enough value to jump directly into the Russell 1000, representing 0.24% of the large-cap index's weight. The 90 newly added IPOs in the Russell 2000 represent 0.35% of its total market capitalization.

The Russell 2000 now ranges from a ceiling of $1.6 billion to a bottom end of $175.8 billion. The capitalization of the median company in the small-cap benchmark is $496.4 million, up 41% from last year.

Total market capitalization for the Russell 3000 stands at $13.3 trillion, also up 32% increase over last year. The market capitalization for the Russell 2000 is $1.2 trillion, representing 9.2% of Russell 3000. About 34 biotechnology and 20 medical specialty companies joined the broad-market Russell 3000 Index, along with 12 real estate investment trusts, replacing a wide range of firms-including 56 regional and savings banks- from sectors that didn't fare as well during a year of positive returns.

"Russell's index reconstitution process each year objectively captures the changing fortunes of companies and industries in the U.S. equity market," says Dennis Jensen, senior Russell research analyst. "We didn't see as much change this year as we did a few years ago during the Internet bubble."

Final index membership went into effect June 25. Russell reconstructsits indexes each year, ranking the 3,000 largest U.S. stocks by capitalization at the end of May. Although companies and securities may leave the indexes during the year due to mergers or bankruptcies, replacements occur only when the indexes are reconstituted. More than $1.4 trillion in assets are benchmarked to Russell indexes, and more than $364 billion is invested in passive index funds tracking those indexes

Sustainability Indexes Find A Home In The U.S.

KLD Research & Analytics Inc., which runs one of the largest socially responsible investment (SRI) indexes in the U.S. , the Domini 400, has announced the launch of the new KLD Select Social Index to its family of social indexes .

Already a staple for European SRI indexes with the Dow Jones Sustainability indexes . The sustainability concept maintains that environmentally and economically sustainable companies do not only make investors feel like they are doing right, but tend to outperform companies focused on more destructive practices.

KLD says its new index addresses one of the principal barriers facing socially responsible investment: the reluctance of institutional investors to adopt SRI strategies because of their desire for diversification across the market. Many institutions believe that traditional SRI screening, by excluding industries such as nuclear power, gaming and defense, introduces additional risk into their portfolios. For some institutions, the scale of their assets forces them to be 'universal' investors.

The KLD Select Social Index responds to these concerns by including companies representing every industry (except tobacco), weighting them based on their relative social and environmental performance, and explicitly limiting risk exposure. The Index enables investors to incorporate social and environmental factors into their investments, and enables them to influence corporate behavior in a broad spectrum of large-cap companies through shareholder engagement.

'We have constrained our index through optimization to deviate from the Russell 1000 ® by 2% or less,' says Peter D. Kinder, president of KLD. 'We want to address the concerns of investors who want to integrate social and environmental factors into their investments, but for whom risk is a critical issue.'

The interesting factor with the new indexes is a methodology that weights not based on market cap, but based on a company's sustainability score, which judges company based on a variety of socially responsible and environmentally sustainable factors. The following companies score at the top and bottom, respectively, of the weighting scheme:

Table 1

The KLD Select Social Index selects constituents from across the entire market. KLD applies no industry exclusions except tobacco, whereas most social indexes have industry screens for such issues as alcohol, tobacco, gaming, military contracting and nuclear power.

In addition, the overall impact of industry weight variations from the Russell 1000 is limited in the construction of the Select Social Index.

Foods Packaged and Soaps & Toiletries are the two most overweighted industries in the KLD Select Social Index compared to their size in the Russell 1000.

Electric Utilities and Oil Integrated Majors are the two most underweighted industries in the Index compared to their size in the Russell 1000. (See Table 2.)

Table 2

Nikkei 1000 Free-Float To Debut 2005

Nihon Keizai Shimbun Inc. will launch a new stock index, the Nikkei 1000, in early 2005. The cap-weighted index will track Japan 's 1000 largest-based on free-float-listed companies; futures and ETFs are also planned.

The weightings in this index are likely to be far different from those in Japan 's other cap-weighted indexes, given that stock held by a parent firm or cross-shareholding partners on a long-term basis will be excluded from the calculations.

Despite moves to break down the long-standing tradition of cross-shareholdings among companies, many such relationships still remain. Designed for institutional investors, the Nikkei 1000 will include issues trading on all the country's stock exchanges, including the Jasdaq market. Nihon Keizai Shimbun, which manages Japan 's benchmark Nikkei 225 index, plans to release rules governing the Nikkei 1000 prior to launch.