Russell to add 300 names
NEW YORK — The Frank Russell Co. is reconstituting its well-known series of equity indexes, an annual process that will add more than 300 names to its market-weighted list of the 3,000 largest U.S. stocks.
The event, which concludes at the end of June, shows on a massive scale that big market players have to rebalance their portfolios regularly, just as small investors do.
Because Russell’s products are used as benchmarks by many mutual funds, including passively managed index funds and exchange-traded funds that aim to mirror their performance, the annual reconstitution causes a great deal of market churn. The bottom portion of the overall list — the small-cap Russell 2000, the most popular of the company’s 21 indexes — usually sees the most turnover, and the most volatility.
“What all our indexes are trying to do is show what the markets look like,” said Lori Richards, senior product manager with Tacoma-based Russell. “We rebuild the index every year to make sure what we’ve classified as large cap is still large cap, that there are no small companies festering in the large cap index or large-cap companies in the small-cap index.”
Some companies, such as Winn-Dixie Stores and 99 Cent Stores, have seen a drop in market cap sufficient to move them from the Russell 1000 to the Russell 2000. Others, such as Ask Jeeves Inc. and Ann Taylor Stores Corp., have vaulted from the Russell 2000 to the Russell 1000.
According to a preliminary list, there are 323 new names being added, including 95 companies that had initial public offerings during the past 12 months. Ten of these shot straight into the Russell 1000 index of the nation’s largest companies. Last year, 289 companies were added, and only 28 were IPOs.
Stocks added to the Russell 2000 — where the largest company has a market cap of about $1.2 billion — include some of the past year’s biggest success stories. Internet travel expert Orbitz Inc. and kidswear retailer Carter’s Inc. both went public in the second half of 2003, and automotive component supplier Hayes Lemmerz International Inc. is getting a fresh start after emerging from bankruptcy.
Nearly 200 companies dropped off the list because of corporate activity, such as mergers and acquisitions or bankruptcies, during the 12 months preceding May 31. A number of others, such as troubled health club operator Bally Total Fitness Holding Corp., will be eliminated because their market capitalization has fallen too low.
Losing a spot on an index can be a serious blow for a company, said Chris Hodges, president of Ashton Partners, a Chicago-based strategic advisory firm.
“When you fall off this thing, you start to slowly lose your index representation,” Hodges said. “And index players are the ones that support a lot of the daily volume for many stocks. After that, it’s up to the company’s management team to get out there … and meet with prospective investors.”
More than $360 billion in passively managed assets are pegged to Russell indexes, and the company estimates another $900 billion in actively managed assets are benchmarked to its products. That means there are an awful lot of managers keeping a close watch on the process.