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Growth, value and the third dimension: Stability Indexes

By: Catherine Yoshimoto, Sr. Index Product Manager

Despite the market’s focus on the Brexit vote on June 23, the annual reconstitution of the Russell US indexes was successfully completed on June 24. As discussed in an earlier post, a notable event during the 2016 reconstitution was Apple’s shift from 100% growth to a blend of 8% value and 92% growth. A shift such as this within the Russell US Style Indexes provides good insight into the underlying changes that have taken place within a company over the past year. However, a closer look at the Russell Stability Index® Series shows that an even more significant shift has taken place in Apple’s defensive/dynamic characteristics, providing even more insight into the company’s current state.

The Russell Stability Indexes provide another level of insight to investors beyond that of just growth and value. The Russell Stability Index Series categorizes the underlying constituents of the indexes as either defensive or dynamic depending on their sensitivity to business, market and economic cycles. Companies that exhibit less sensitivity to such cycles are categorized as defensive and those that are more sensitive are categorized as dynamic.  As with growth and value classifications, a company can also be a blend of the two. 

Apple’s positioning within the Russell Stability Index Series flip-flopped from 27% dynamic and 73% defensive in 2015 to 79% dynamic and only 21% defensive in 2016. This indicates a profound change in the perceived stability of the company based on the Russell Stability Index Series construction methodology.

As seen below, the Russell Stability Indexes are constructed using five variables: return-on-assets, earnings variability, debt-to-equity and two volatility periods.[1] As we found out during the 2016 reconstitution, the primary driver of Apple’s increase in its dynamic characteristic was its relative increase in both debt-to-equity and stock volatility.   

Russell Stability Index Series Construction Methodology

Source: FTSE Russell. Percentages shown are the weights applied when determining whether a security falls into the Defensive or Dynamic Index.

The percentage of a company’s shares that is split among the Russell 1000® Growth-Dynamic, Growth-Defensive, Value-Dynamic and Value-Defensive indexes is determined by multiplying the stability probabilities by the style probabilities.

As illustrated below, Apple is primarily a growth-dynamic company as of 2016, with 73% of its shares belonging to the Russell 1000 Growth-Dynamic index, followed by 18% Growth-Defensive, 7% Value-Dynamic and 2% Value-Defensive. While Apple’s future product lines and revenue direction have come into question,[2] the company has been down this road before and thrived. As seen below, Apple was 100% a growth-dynamic company in 2007 when it released its top-selling product — the iPhone.

Apple’s probabilities within the Russell Stability and Style Indexes over time

Source: FTSE Russell, data as at June 30, 2016. Please see the end for important legal disclosures.

By layering the stability probability of a company on top of its style, market participants may get a more complete picture of the current condition of a company. The Russell Style and Russell Stability Indexes offer market participants a means of accessing the various perspectives of the indexes’ underlying constituents as they change over time.

Visit the Russell Stability Index Series page to see additional detail on the construction methodology.

 

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[1] For additional details on the Russell Style Index Series, refer to the Construction and Methodology

[2] http://www.nytimes.com/2016/04/27/technology/apple-q2-earnings-iphone.html

 

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No member of the LSE Group nor their respective directors, officers, employees, partners or licensors provide investment advice and nothing in this communication  should be taken as constituting financial or investment advice. No member of the LSE Group nor their respective directors, officers, employees, partners or licensors make any representation regarding the advisability of investing in any asset. A decision to invest in any such asset should not be made in reliance on any information herein. Indexes cannot be invested in directly. Inclusion of an asset in an index is not a recommendation to buy, sell or hold that asset. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional.

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