BOSTON -- State Street Global Advisors is converting almost $1 billion in a commingled fund managed for tax-exempt institutional clients to new Dow Jones-based style indexes, said Christopher M. Pope, SSgA principal and director-client services for defined benefit plans.
Also, SSgA has filed to register up to eight exchange-traded mutual funds based on the Dow Jones style indexes for retail and other investors. As of July 1, SSgA will convert the fund to style indexes built from the Dow Jones U.S. Total Market index of 2,100 stocks. It will scrap its so-called multiple domestic equity indexes, known as Muldex, which SSgA created based on the Russell 3000 universe.
The move will affect $900 million from institutional clients now invested in the Muldex styles. Mr. Pope said the clients have agreed to stay in the commingled fund.
Michael A. Petronella, managing director at Dow Jones Indexes, Princeton, N.J., said his firm plans to market licenses for using its U.S. style indexes to other index fund managers. SSgA is the first to license the Dow Jones style indexes and begin investing with them.
The Dow Jones style indexes are divided into large-cap, midcap and small-cap segments of growth and value styles. Its style indexes categorize stocks as growth, value or neutral, meaning they don't fit either style. In all, the style indexes have about 1,550 stocks, mutually exclusive divided between growth or value.
The Muldex style indexes had 2,400 stocks. Despite the big difference in the number of stocks between the Dow Jones and Muldex Russell style indexes, Mr. Petronella said, the difference amounts to only about 4% of the market capitalizations.
The Dow Jones style indexes eliminate many illiquid stocks found in the Russell indexes, Mr. Petronella said, making the indexes more investible and tradable than Muldex or some other style indexes. The Dow Jones methodology also is more transparent andunderstandable, making the indexes easier for investors to use for indexing or as benchmarks, he said.
The style indexes have a low turnover, he said. In the large-cap style, it is only 6% of market cap and 12% of stocks a year. The turnover increases as market cap decreases, he added.
The Dow Jones style indexes have purer growth and value segments than do some other style indexes, some of which may include the same stock in both growth and value categories, Mr. Petronella said. The purer style shows up in the higher returns in recent years in the growth segments for the backtested Dow Jones style indexes, compared with the Standard & Poor's/BARRA or the Russell style indexes, he said. At the same time, the Dow Jones value style performed worse than the other two indexes, indicating a stronger value bias and a weeding out of so-called relative value stocks that some analysts regard as growth stocks.
For the 12 months ended March 31, for example, in the small-cap growth style, the Dow Jones index returned 105.85%, compared with 41.46% for the S&P/BARRA and 58.52% for the Russell, according to Dow Jones statistics. In the small-cap value style, for the same period, the Dow Jones index returned only 2.58%, compared with 15.31% for the S&P/BARRA and 11.32% for the Russell.
Dow Jones uses six factors for sorting stocks into growth, value or neutral categories for the indexes. Two factors are forward-looking numbers: projected earnings and projected earnings growth rate. Four factors are backward looking: trailing price/earnings ratio; price-to-book value ratio; dividend yield; and trailing earnings growth rate.