TACOMA, Wash. - Turnover in The Frank Russell Co.'s famed stock indexes is expected to be the lowest in a decade when they are reconstituted next month.
Lack of strong initial public offerings and a disappointing economy are the reasons, index fund managers say.
Managers interviewed expect only 12 to 16 new names on the Russell 1000, compared with 178 last year and a 10-year average of 147. They also predict between 277 and 335 additions to the Russell 2000 index, vs. 609 last year and a 10-year average of 540.
Financial services stocks are expected to dominate the list of additions to the large-capitalization Russell 1000, replacing once high-flying technology stocks.
Russell will begin ranking companies based on their market capitalization following the close of the market May 31. Preliminary lists will be announced June 7, with updates on the following two Fridays. The new lineup will take effect June 28, although it won't be announced until 10 days later.
Only 56 to 70 companies that did IPOs during the past year are expected to be added to the indexes, down from 130 last year and 320 the year before.
"There were very few IPOs and very few companies that were bought out," said Steven DeSanctis, director of small-cap research at Prudential Securities Inc., New York.
Brad Pope, head of U.S. equity index product strategy for Barclays Global Investors, San Francisco, also mentioned the IPO dropoff, noting an IPO stock needs very good performance in order to be added to a Russell index.
The market capitalization needed to become a part of the indexes is expected to drop as well. Managers estimate a market cap of as little as $1.2 billion will be needed for the Russell 1000, vs. $1.4 billion last year. To get a spot on the Russell 2000, a market cap of between $130 million and $133 million will be needed, managers predict, vs. $147 million last year.
Weightings to shift
In its annual report on the impending changes in the indexes, Goldman Sachs & Co. predicted the technology sector's weighting in the Russell 1000 to drop 0.3 percentage points, to 15.1%, while the weighting of financials is expected to rise by the same amount, to 21.6%.
Kelly Haughton, chief Internet strategist at Russell, said Russell is projecting that approximately one-half of the companies being added to the Russell 1000 index will be financial or consumer discretionary.
Mr. Haughton said Russell is projecting approximately one-half of the companies being added to the Russell 1000 index will be financial or consumer discretionary stocks. Russell also predicts one-third of the names being moved from the Russell 1000 to the Russell 2000 would be in the technology sector.
Many of the financial companies being added to the index are the same ones dropped in 1999 and 2000 to make room for hot technology stocks. New York Community Bancorp and Colonial Bancgroup would be among them, predicts Michael Feehily, principal portfolio manager with State Street Global Advisors, Boston.
Meanwhile, Prudential's Mr. DeSanctis thinks Ariba Inc., Foundry Networks Inc., CNET Networks Inc. and CMGI Inc. will move off the Russell 1000 and onto the 2000.
The major growth and value indexes also will see some notable changes, with managers predicting turnover of between 34% and 36%.
Despite many technology stocks being labeled as value, the Russell 2000 Growth index's exposure to technology is expected to rise slightly - to 29% of the index from 27%, forecasts. BGI's Mr. Pope.
He expects consumer goods weightings to be up in both the Russell 1000 Growth and Russell 1000 Value indexes.
With all the talk about what's in and what's out, "access to information is making it harder to benefit from reconstitution," Mr. Pope said. "The best way to navigate (the rebalance) is to buy the ETF (exchange traded fund) and ride that through."
"We're purposely making it hard to game," Mr. Haughton acknowledged.
Those interviewed for this story also made the following predictions:
* AOL Time Warner Inc. is expected to be moved to the Russell 1000 Value from the Russell 1000 Growth index.
* IPOs expected to be added to the Russell 1000 are JetBlue Airways Corp., Kraft Foods Inc., Prudential Financial Inc., Anthem Inc., and Travelers Property Casualty Corp.
* Household names Kmart Corp. and U.S. Airways Group Inc. were named by Mr. Haughton as companies that are expected to be shifted into the Russell 2000 from the Russell 1000. Troubled steelmaker Bethlehem Steel Corp. is expected to be deleted from the Russell 2000 and 3000 indexes.