S&P Dow Jones Indices is changing the rules it uses to sort shares into growth and value indexes, a shift that will force funds tracking them to reshuffle their holdings, Bloomberg reported, in a story carried by The Economic Times.
Value indexes aim to hold companies that look cheap; growth indexes hold those ranked highest for growth potential. Index funds copy them, so when the rules move, money moves too.
What is changing
- Intangible assets, forward earnings and free cash flow will be added to the factors that decide whether a company counts as value.
- 12-month price momentum, how much a share has risen over the past year, will no longer be used to rank growth potential.
The changes follow a consultation and take effect at the annual reshuffle of the indexes, before the market opens on December 21.
Why it matters
Bloomberg Intelligence analyst James Seyffart estimates that at least $375 billion of passive funds are tied to the affected indexes, all of which will need to adjust to the new line-up.
The decision ends part of a long debate over whether traditional value measures still work. Researchers and fund managers have argued that value investing's long slump partly reflected flaws in the measures themselves, especially price-to-book.
The problem, critics say, is that accounting rules usually treat spending on research and other internally developed assets as an expense rather than an asset. That makes companies built on intellectual property look expensive and can keep them out of value indexes, which the new approach is meant to correct.
Others may follow
S&P is not alone. FTSE Russell is reconsidering the 50/50 split between growth and value stocks in its indexes because of how dominant technology giants have become. Its consultation closes on December 11.