S&P Outlines Index Changes
Standard & Poor’s will revamp its style indexes later this year by, among other things, dropping one of seven factors traditionally used to determine stock level style scores.
An S&P news release said the changes will also refresh the factors used to calculate growth and value. The company said its next generation of growth/value style and pure style indexes will be based on a review of recent academic literature, and a time-series and cross-section analysis.
“In order to effectively capture changes in financial theory, accounting standards and investment sentiment, a relevant and efficient style benchmark should refresh its factors every five to 10 years,” said Aniket Ullal, senior director at S&P Index Services. “The introduction of new factors such as momentum to calculate the S&P Style and S&P Pure Style Indices will reflect the new way that investors think about style.”
According to S&P, the old factors used to judge growth issues were sales growth, earnings growth, and internal growth rate, while the new growth factors will be sales growth, earnings change to price, and momentum. The old factors for value stocks were sales to price, book to price, cash flow to price, and dividend yield, while the new factors will be sales to price, book to price, and earnings to price.
The remainder of Standard & Poor’s style framework, such as the creation of style baskets and construction of indexes from those baskets, will remain unchanged.
More information about the changes is available here.