SOURCE: Russell Investments

Russell Investments

June 06, 2013 10:52 ET

What's in Your Global Index?

Russell Investments Believes Multi-Asset Investors Increasingly Look Globally, Not Locally, to Identify and Measure Investment Opportunities; Russell Global Indexes Follow Suit

SEATTLE, WA--(Marketwired - Jun 6, 2013) -  In response to challenging market conditions and an increasingly global market, Russell sees investors turning to multi-asset strategies across a greater number of regions and asset classes. When investing globally, global market indexes can be helpful tools for asset allocation, passive investment and performance benchmarking. Indexes are intended to reflect the size and performance of companies and markets, but global indexes often disagree about which markets and companies to include and where they fit in the puzzle. This means the choice of index can have a significant impact on the exposures and performance criteria for a global investment strategy.

Russell Indexes use consistent, objective global standards to evaluate where markets and companies reside, resulting in a global index membership that truly reflects the global investment opportunity set. To this end, at this year's reconstitution three distinct features of the Russell Indexes methodology will be deployed:

  • Country Eligibility. Each year at reconstitution, all countries within the Russell Global Indexes are evaluated according to Russell Indexes' Market Risk Review process. The process combines macroeconomic and practical market criteria to determine whether a country qualifies as a developed, emerging or frontier country along the market risk spectrum. This year, Greece failed to meet classification standards as a developed market country for the third year in a row, leading to its reclassification to an emerging market at the conclusion of reconstitution in late June. And this is the second year Egypt has failed to meet all criteria to be classified as an emerging market.

  • Market Capitalization. Russell research has shown companies of similar capitalization tend to have similar performance regardless of location and that investors are increasingly taking a global, not local, orientation when measuring and investing internationally. Russell Indexes applies a global standard to market capitalization breaks at reconstitution, using a consistent cap break for all countries when determining whether companies qualify as large cap or small cap. Other "country-relative" approaches may force fit a certain percentage of companies within a market into large-cap and small-cap, impacting the composition of global equity funds and the exposures for multi-asset investors. In the case of China, 184 Chinese companies classified as large-cap at Russell Indexes 2012 reconstitution. If Russell had used a country-relative methodology, only 98 Chinese companies would have qualified as large-cap, under-representing China's universe of large-cap stocks relative to its global peers.

  • Country Assignment. Country assignment within indexes is important because many investment strategies involve underweighting or overweighting particular countries, or passively investing within these countries. In many cases, country assignment is straightforward, but in today's interconnected global equity market it is not always obvious where a company resides. Coca-Cola Hellenic, one of the largest players in the Greek economy, is now headquartered in Switzerland and trades on the London Stock Exchange. Prada, a well-recognized global luxury brand, is headquartered in Italy and lists on the Hong Kong exchange. Russell Indexes' home country indicators methodology is a rules-based process which determines where securities are domiciled, using several indicators including primary location of trading, assets, revenues and headquarters location. A global index methodology must be flexible to classify out-of-region trading companies. Not doing so may lead to lost opportunity as some index providers simply choose not to include companies with uncertain domicile. For example, as of year-end 2012 there were 188 securities in total within the Russell Global Index trading outside their home region, representing $365 billion in float-adjusted market capitalization. For perspective, $365 billion in float-adjusted market capitalization is roughly equivalent in size to Korea, India or Sweden.

"Our experience has shown that investors should use global standards when evaluating country of risk and market capitalization. In addition, companies are increasingly global and no longer driven by factors solely related to their home market," said Rolf Agather, managing director of global research and innovation at Russell Indexes. "This makes for a much more complex and interconnected global investment puzzle. At Russell, we have applied our insight on the global markets and how investors invest to construct benchmarks which more closely reflect the evolution of the global investment opportunity set." 

Correct classification by index providers is critically important to global investors, whether using indexes as a benchmark or for market exposure. Watch the upcoming Russell Indexes Reconstitution to see where your favorite companies and countries sit along the spectrum.

About Russell Investments
Russell Investments (Russell) is a global asset manager and one of only a few firms that offers actively managed multi-asset portfolios and services that include advice, investments and implementation. Working with institutional investors, financial advisors and individuals, Russell's core capabilities extend across capital market insights, manager research, portfolio construction, portfolio implementation and indexes.

Russell has approximately $173 billion in assets under management (as of 3/31/2013) and works with over 2,500 institutional clients, independent distribution partners and individual investors globally. As a consultant to some of the largest pools of capital in the world, Russell has $2.4 trillion in assets under advisement (as of 6/30/2012). It has four decades of experience researching and selecting investment managers and meets annually with more than 2,200 managers around the world. Russell traded more than $1.4 trillion in 2012 through its implementation services business. Russell also calculates approximately 700,000 benchmarks daily covering 98% of the investable market globally, which includes more than 80 countries and more than 10,000 securities. Approximately $4.1 trillion in assets are benchmarked to the Russell Indexes.

Headquartered in Seattle, Washington, Russell operates globally, including through its offices in Seattle, New York, London, Paris, Amsterdam, Sydney, Melbourne, Auckland, Singapore, Seoul, Tokyo, Toronto, Chicago, San Diego, Milwaukee and Edinburgh. For more information about how Russell helps to improve financial security for people, visit or follow us @Russell_News.

Russell Investment Group is a Washington, USA corporation, which operates through subsidiaries worldwide, including Russell Investments, and is a subsidiary of The Northwestern Mutual Life Insurance Company.

Russell's indexes are unmanaged and cannot be invested in directly.

Any stock level commentary is for illustrative purposes only and is not a recommendation to purchase or sell any security.