Bloomberg News

Banks May Gain Most From Russell Shift Affecting $3.9 Trillion

June 10, 2011

June 10 (Bloomberg) -- Russell Investments’ annual index revisions may help financial companies the most, thanks to Citigroup Inc. and BankUnited Inc., according to JPMorgan Chase & Co., BlackRock Inc. and Credit Suisse Group AG.

The preliminary list of membership adjustments to measures such as the Russell 1000 Index and Russell 2000 Index will be announced following the close of U.S. trading today. The changes will take effect after 4 p.m. New York time on June 24.

Banks, brokerages and insurers have posted the biggest losses in benchmark indexes in 2011, falling 4.4 percent through yesterday in the Russell 1000 Index of U.S. shares with a median market value of about $5.8 billion. JPMorgan’s Min Moon said $1.17 billion of financial shares may be bought to account for the industry’s increase in Russell gauges, with Citigroup representing half the gain in the Russell 1000 after the U.S. Treasury sold stock, boosting shares available for trading.

Financials will “get a natural index tailwind,” said Dave Lutz, head of exchange-traded fund trading and strategy at Stifel Nicolaus & Co. in Baltimore. “Many fund managers will need to react to the rebalancing.”

Russell Investments, a Seattle-based company owned by Northwestern Mutual, says about $3.9 trillion is benchmarked to its global stock-market measures. It uses the market value of each stock on the last trading day in May to determine how to allocate them in indexes.

Busy Session

The annual changes usually spur one of the busiest trading sessions of the year as money managers shift holdings to match Russell’s adjustments. Last year, 13.9 billion shares changed hands on U.S. exchanges on June 25, the fifth-highest total in 2010, according to data compiled by Bloomberg. In four of the previous five years, rebalancing day was in the top 10.

Including migrations from the Russell 2000, whose companies have a median market value of about $530 million, about five financial companies, including BankUnited and American Capital Ltd., may shift into the Russell 1000, JPMorgan’s Moon said.

The group known as consumer staples will see its weighting drop the most in the Russell 1000, according to JPMorgan and Citigroup. BlackRock disagrees, saying it expects the biggest decrease to come from energy because Exxon Mobil Corp., the world’s largest company by market value, spent $5 billion to buy back shares in first three months of the year and plans to spend that amount on repurchases this quarter.

In the Russell 2000, computer and software stocks, as well as raw-materials producers, will get the biggest reductions, JPMorgan and Credit Suisse forecast.

GM, LinkedIn

General Motors Co., the automaker that emerged from a 2009 bankruptcy, will enter the Russell 1000 Index, according to JPMorgan, Investment Technology Group Inc., BlackRock and Macquarie Group Ltd. LinkedIn Corp. is also likely to join the measure after the social-media company completed the hottest initial public offering in the U.S. since at least 2006, JPMorgan and Macquarie said.

Weatherford International Ltd., an oilfield-services provider, Seagate Technology Plc, the world’s largest maker of computer disk drives, and insurer XL Group Plc will likely be deleted from the Russell 1000 after moving their incorporations to Europe, according to JPMorgan and ITG.

LyondellBasell Industries NV, the chemical maker that emerged from bankruptcy last year, will join the Russell 1000, BlackRock forecast.

‘Lower Than Average’

Greg Savage, who manages exchange-traded funds based on Russell indexes in San Francisco for BlackRock, said he expects a lower-than-average number of changes this year, with GM, LyondellBasell and Weatherford dominating. BlackRock, the world’s largest asset manager, runs 16 Russell-based ETFs with combined assets of $70 billion.

Besides adding and subtracting companies from its indexes, Russell also reclassifies companies as growth stocks, value stocks or blends of the two based on changes in their valuation over the past year. In February, Russell said it will stop using analysts’ long-term estimate for per-share-earnings growth to define a company’s style.

Last year, Exxon Mobil had its growth allocation boosted by Russell. The change may have helped the oil producer lag behind Chevron Corp. and ConocoPhillips, which had most of their market capitalization assigned to Russell’s value gauge. Analysts’ estimates for Exxon lacked a consensus as some analysts used 2009 earnings, when the company earned $3.98 a share, as the base year. Others used 2010, when Exxon’s profit was lifted by a rebound in crude-oil prices from their December 2008 low.

Growth vs. Value

Now, in addition to book-to-price ratios, a company’s style will be determined by the growth rate of both its two-year estimated earnings and its five-year historic revenue.

Twenty-nine of the 50 biggest U.S. companies will undergo shifts in their style classification, according to Credit Suisse. Hewlett-Packard Co. and Cisco Systems Inc., currently in growth indexes, will probably be treated as value stocks, while Microsoft Corp. and Coca-Cola Co., now represented in both value and growth indexes, will probably be treated as growth stocks, Credit Suisse said. General Electric Co. and Intel Corp., currently blend stocks, may become purely value.

“The style rule changes have been difficult to enact, and the new process isn’t transparent,” Lori Calvasina, an analyst with Credit Suisse, wrote in a note dated June 6. “We wouldn’t be surprised to see differences between our forecasts and actual changes.”

--Editors: Joanna Ossinger, Nick Baker

To contact the reporter on this story: Lu Wang in New York at; Inyoung Hwang in New York at

To contact the editor responsible for this story: Nick Baker at

Toyota's Hydrogen Man
blog comments powered by Disqus