The small cap premium has long been a staple of equity investing, but recently some practitioners have called its very existence into question.
New research suggests that the mix of quality, volatility and size factors is important. This is confirmed with an analysis of the Russell 2000® Defensive Index, which combines these three factors and exhibits a strong small cap premium.
The performance of the Russell 2000® Defensive Index points the way to exploring further multifactor combinations in the small cap asset class.
On May 26, 2015, FTSE Russell introduced the FTSE Global China A Inclusion Indexes as a transitional tool in preparation for the potential inclusion of China A-shares in its widely followed global benchmarks. These indexes were designed in response to the gradual liberalization of the Chinese capital markets, as evidenced by the growth of the QFII and RQFII schemes and the introduction of the Shanghai-Hong Kong Stock Connect program.
It wasn’t too long ago that the concept of factors in investing was the exclusive province of professors of finance and a few active “quant” managers. Mainstream portfolio construction was focused primarily on asset allocation. Within equities, that meant achieving the right balance in allocation to various segments such as large cap and small cap, country and sector, and perhaps value and growth style.
Traditional style indexes – such as growth and value, large and small cap – are designed to represent broad market segments based on investment styles and sets of characteristics that are focused on by professional investment managers, making them excellent benchmarks for evaluating the skill of active managers.
In 1995, Nomura Research Institute and Frank Russell Company’s index group partnered to create the Russell/Nomura Japan Equity Indexes (RNJEI) as benchmarks for the Japanese equity market. The year 2015 marks the 20th anniversary of the creation of the RNJEI series and provides a good opportunity to evaluate the effectiveness of the indexes.
The RNJEI series was created to accomplish several objectives:1
In finance and investment theory, factors are variables that drive equity returns. In recent decades there has been great interest in identifying factors that help explain equities’ behavior, and factor research has been actively pursued across other asset classes, such as fixed income and currencies.
Recent volatility in the value of the euro, Swiss franc and Japanese yen suggest that risk in global currency markets may be on the rise. The currency market is the world’s largest financial market and, with the ongoing globalization of portfolio exposures, is becoming an increasingly important component of investors’ returns. However, if investors share their currency exposures with those implicit in their equity, fixed income or other benchmarks, they may be setting their currency policy unconsciously, rather than consciously.
An equity factor index is intended to offer controlled exposure to a factor or factors. But how does it achieve this goal in practice? There are a number of conceptual and design steps involved in the creation of an equity factor index and in this paper we explore these decisions.
FTSE Russell and Bursa Malaysia have launched two new indexes, which will track mid and small-cap companies. The FTSE Bursa Malaysia MidS Cap Index comprises constituents from the FTSE Bursa Malaysia EMAS Index with a full market capitalisation range of MYR 200 million to MYR 2 billion, subject to buffers applied to provide stability in the selection of constituents at the semi-annual reviews. The FTSE Bursa Malaysia MidS Cap Shariah Index consists of all constituents of the FTSE Bursa Malaysia MidS Cap Index that are Shariah compliant according to the Shariah Advisory Council screening methodology.
The first quarter of 2017 saw a reversal of a year long run for value stocks which, at the end of 2016, held a 16 percentage point lead over growth stocks. A shift in style towards growth stocks—companies whose prices tend to be based on potential vs. actual earnings—in both the large cap and small cap segments of the market is often an indication of an optimistic market sentiment. The Russell 2000 style indexes help to understand the latest market movements.
Large cap China A-shares have turned the performance tables relative to mid and small cap China A-shares as measured by China A-share indexes from global index provider FTSE Russell. After declining 4.3% in the 10 year period ended June 1, 2017, the FTSE China A Large Cap Index value has risen 5.4% in 2017. The FTSE China A Mid Cap Index and FTSE China A Small Cap Index values, on the other hand, have both declined in 2017 after rising 30.3% and 61.7%, respectively, over the last decade.
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