For S&P, There's Style ... And Then There's Real Style
By Journal of Indexes Staff

Standard and Poor's has always been the plain Jane at the U.S. style investing ball. As competing index companies introduced ever more complicated methodologies for dividing the market into growth and value, S&P stuck by its simple "one-rule" system: Stocks with high price/book values are "growth " stocks, while stocks with low price/book values are "value" stocks.

In an abrupt turnabout, however, S&P junked its old U.S. style indexes in May and replaced them with two new sets of indexes, the "Style Index Series" and the "Pure Style Index Series." Both index series use the seven-factor Citigroup style methodology, with three factors to evaluate the "growth" score of a company and four factors for value. When the products launch on September 16, S&P will become unique among index providers in offering two different sets of style indexes.

[I]nvesting and trading situations require a complementary set

of broad style indices and narrower pure style indices," explains David Blitzer, managing director and chairman of the Index Committee at Standard & Poor's.

The "Style Index Series" divides the entire market into two equal-sized groups of growth and value stocks, and is designed to appeal to traditional asset allocation managers, who generally like to have their component style indexes add up to the broader market. Stocks that do not exhibit either strong growth or value characteristics have their market capitalization split between the two indexes.

The "Pure Style" indexes, in contrast, include only those companies that exhibit either strong growth or strong value characteristics. Each Pure Style index (growth and value) will hold approximately one-third of the total market capitalization of the broader index, meaning that the middle one-third of companies won't be included. To further accentuate the style characteristics, these indexes will be "style weighted": Companies with the highest growth or value scores will be given the highest weightings.

The Pure Style indexes put S&P in direct competition with Morningstar, which prior to the announcement was the only company with a set of style indexes that excluded "middle-of-the-road" companies. Investors had often turned to Morningstar's style indexes and related ETFs because they offered the "purest" approach to style.