S&P Dow Jones Indices has adopted new rules for sorting equities into growth and value investment styles, a change that could reshape major index holdings. The index provider will add intangible assets, forward earnings and free cash flow to the factors used to determine whether a company is cheap relative to its share price. At the same time, 12-month price momentum will be dropped as a criterion for ranking a company's growth potential.
The new rules followed a recent consultation and will take effect at the annual reconstitution before the market open on Dec. 21. The changes are expected to force index-tracking funds to adjust holdings to match the new constituents. Bloomberg Intelligence analyst James Seyffart estimated that at least $375 billion of passive funds are tied to the affected gauges.
The decision follows a long debate over whether conventional value measures still work. Researchers and money managers have argued that part of value's long slump reflected flaws in the metrics, especially price-to-book. The adjustment is meant to account for spending on research and other internally developed assets that accounting rules usually treat as expenses rather than balance-sheet assets. Critics say this makes intellectual-property-heavy companies look expensive and can keep them out of value indexes.
S&P is not the only index provider considering changes. FTSE Russell is reconsidering the 50/50 split between growth companies and value stocks in its benchmarks due to the dominance of technology giants in the market. That consultation ends Dec. 11.
Source: Bloomberg Markets · Summarized by HeadlinesBriefing