Portfolio Design: A Modern Approach to Asset Allocation

DESCRIPTION OF THE RUSSELL 1000 INDEXES

Value and growth stocks will be compared using the Russell indexes which were developed in the 1980s with most indexes beginning in 1979. Stocks in the United States range in value from a few million dollars to more than $300 billion. As explained in Chapter 3, the 3000 largest firms in terms of capitalization are represented in the Russell 3000 index. The Russell 3000, in turn, is sub-divided by size into the Russell 1000 index of the largest stocks and Russell 2000 small-cap index of the next largest 2000 stocks. The Russell 1000 represents 92 percent of the market capitalization of the Russell 3000 index even though it includes only 1000 of its 3000 stocks.2

The Russell 1000 index, in turn, is divided into two indexes for value and growth. Russell uses two criteria to assign firms to the value and growth indexes: (a) price-to-book ratio and (b) estimates of the long-run growth of earnings as provided by Institutional Brokers Estimate System (IBES). Every June, the indexes are reconstituted using current market capitalization weights. The firms are arrayed in order according to the two criteria (using an algorithm which is proprietary). Seventy percent of the firms at the two ends of the array are assigned to the value or growth indexes, respectively, depending on the two criteria. The remaining 30 percent of firms in the middle of the array are then divided proportionally into value and growth depending upon the same two criteria. So these ...