The International Guide to Securities Market Indices

Henry Shilling

• Publisher: Routledge
• Year: 2017
• Topic: Business
• eBook ISBN:
  9781351343947
• Subtopic: Business General
• Index: Business

Originally published in 1996, The International Guide to Securities Market Indices provides a comprehensive overview of the securities market indices and offers assistance to professionals as well as individual investors in the selection of an appropriate securities market index, on a worldwide basis. The Guide's identifies and catalogues available performance indicators along with their publishers and describes their relevant characteristics and a perspective on their historical price and total return performance. It also contains descriptive profiles along with historical performance data on 400 of the world's leading global, regional and local securities market indices and sub-indices covering 10 asset classes.

1

INTRODUCTION

OVERVIEW

A securities market index is a statistical indicator, benchmark or measure of movements in the general level and direction of prices of financial instruments or securities such as stocks, bonds, money market instruments, commodities, convertible securities, currencies, Guaranteed Investment Contracts (GICs), mutual funds and real estate.

Securities market indices are alike in that they are ordinarily calculated based on standard forms of simple and composite index formulas expressed in relation to a “base” value that is established at the time of their inception and thereafter, on movements that are derived from a series of observations. Otherwise, just about every index, whether calculated continuously throughout the trading day, once daily, monthly or on a quarterly frequency, is constructed diferently in terms of its constituent universe and selection procedures, maintenance practices and computational methodologies.

An index may be based on the prices of all, or only a sample, of the securities whose value it represents. Approaches to sample selections are numerous and range from strictly objective methodologies to subjective guidelines that take into account common factors such as markets, market coverage, security type, economic sector/industry representation, size, trading volume, liquidity, company performance and the availability and quality of prices.

Indices are generally subject to periodic reconstitution, at which time securities may be added to the index or dropped from the index due to mergers, liquidations, declining capitalization and in the event a particular security is no longer thought to represent the type of security covered by the index. In any case, applicable guidelines, frequency and timing of additions and deletions vary from one index to the next.

To maintain continuity of an index and ensure that changes in the index level are attributed entirely to price movements during the trading day, indices must be adjusted from time to time to reflect various corporate actions, such as share issuances, share repurchases, special cash dividends, rights offerings and spin-offs. Here too, differences in methods and variations as to frequency and timing of implementation are in evidence. In addition, varying pricing sources and currency exchange rates, where applicable, and the treatment of dividends and interest in connection with total rate of return calculations, also contribute to variations among indices.

Securities market indices also differ from each other in the way constituents are weighted. Often, prices of constituent securities in the index are market value-weighted. That is, in calculating the index value, the market price of each security is multiplied by the number of shares outstanding or, in the case of bond indices, the amount of bonds outstanding. Pursuant to this method of calculation, changes in the prices of larger companies or companies with more shares or bonds outstanding will generally have a greater influence on the level of a market value-weighted index than price changes affecting smaller corporations. Examples of leading stock indices that weight members on a market value basis include the Standard & Poor’s 500 Composite Stock Price Index (S&P 500), the FT-SE Actuaries All-Share Index in the United Kingdom (UK), and the Nikkei Stock Index in Japan. A few leading bond indices that weight members on the basis of market value include the Lehman Brothers Aggregate Bond Index, Merrill Lynch Global Bond Index and Salomon Brothers Broad Investment Grade Bond Index.

Index components may also be equally-weighted so that each index member has an equal influence on the results, or they may be unweighted, such that securities are combined strictly on the basis of quoted prices. This latter method of weighting characterizes the Dow Jones Industrial Average (DJIA), the oldest surviving and most widely recognized securities market benchmark in the world, as well as the Nikkei 225 Stock Average that was fashioned after the Dow. It is worth noting that indices, though typically based on averages, are not quite the same as averages. The difference consists of the fact that an index is constructed by setting its initial value equal to some arbitrary but generally rounded number at some point in time in order to facilitate comparison of the value of the index in subsequent periods. An average, on the other hand, does not involve the selection of an arbitrary value for some base period. It is simply an average. The Dow Jones Industrial Average and its companions are not indices technically. They are simply the arithmetic mean of the prices of the stocks included at each point in time adjusted for stock splits and other capital changes. Nevertheless, the two tend to be used interchangeably.

Finally, regardless of weighting methodology, index components are combined in one of two ways to arrive at an index value. The most common approach relies on arithmetic averaging, but geometric averaging is still in use both in the United States as well as overseas.

THE UNIVERSE OF INDICIES

Worldwide, it is estimated that upwards of 600 securities market indices are compiled and published by not less than 250 stock exchanges and publishing enterprises, including newspapers, investment banking concerns and investment management organizations. There may be nearly 10,000 in number when subindices, or strictly constructed narrower segments of indices, are taken into consideration.

New indices and subindices are frequently being introduced due to increased usage. For example, between January 1, 1994 and June 30, 1996, at least 118 new indices were launched throughout the world. Of these, 48 were launched in 1995, up from 38 that were introduced in 1994.¹ The pace of new index introductions continues, with at least 32 new indices (excluding subindices) making their debut by mid–1996.

While usage varies, whether for the purpose of performance evaluation, creation of derivative instruments, passive management, or the establishment of incentive fee arrangements, differences in construction, maintenance and calculation methodologies will affect how an index measures the relevant market. They can produce differences in the level and movements of indices over time and, in turn, the portrayal of the marketplace.

For example, the cumulative 10-year price only return to December 31, 1995 for broad equity indices such as the New York Stock Exchange (NYSE) Composite Index, the S&P 500 Index, Wilshire 5000 Equity Index and the Russell 3000 Index, which gained 171.02%, 191.52%, 179.82% and 183.38% respectively, varies by as much as 20.5%. During the same time period, annual price only returns have diverged by a maximum of 3% in a given year.

The Guide to Securities Market Indices is designed to assist professionals as well as individual investors in the selection of an appropriate securities market index, on a worldwide basis. The Guide’s purposes are to:

1.Identify and catalogue available performance indicators along with their publishers;

2.Describe their relevant characteristics; and

3.Provide a perspective on their historical price and total return performance.

The Guide to Securities Market Indices contains descriptive profiles along with historical performance data on 400 of the world’s leading global, regional and local securities market indices and subindices covering 10 asset classes. In addition, over 200 indices are referenced in abbreviated form.

SELECTION CRITERIA

In addition to usage, indices for which descriptive profiles are provided were selected on the basis of the following considerations:

1.Asset class coverage.

2.Market coverage, including individual countries and regions and the world.

3.Coverage by market capitalization and style of management.

4.Availability of exchange-traded derivative instruments.

5.Perceived areas of interest.

6.Availability of adequate and reliable information.

Index descriptions, computation methodologies and historical performance data were, for the most part, obtained directly from their publishers in the form of written specifications and accompanying explanatory materials. Supplemental research was also conducted along with follow-up discussions, as appropriate, with index publishers. In some instances, historical performance data was obtained and/or verified using Bloomberg Financial and Interactive Data Services data bases.

The quality of descriptive materials in general and specifications relating to index calculation methodologies and maintenance procedures in particular, both in the U.S. and overseas, vary considerably. Except for documentation associated with indices of leading publishers and, in particular, index purveyors whose express goal is to ensure transparency in terms of component securities and construction methodologies, publishers in general offer limited disclosure and related documentation lacks precision. Often, index documentation may refer to the use of a standard formula, such as the Paasche index formula, without expanding upon factors such as the frequency and timing of constituent additions and deletions, adjustments for shares outstanding as well as corporate actions or pricing sources that could have meaningful price and total return implications over time. The profiles of indices that fall into this category have been prepared on a best effort basis using all available information. Future editions of The Guide will attempt to expand upon these considerations in a more methodical fashion.

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¹ Excluding subindices. Also, indices designed to track market capitalization segments, such as large, medium and small companies, or stock characteristics, such as growth or value stocks, are each treated as one index.

2

USES AND APPLICATIONS

MARKET PERFORMANCE

In their most basic form, securities market indices are designed to answer the fundamental question: “how did the market do today, yesterday or over any other chosen period of time?” This was the intent behind the creation of the Dow Jones Industrial Average (DJIA) in 1884, an early proxy for the performance of the stock market in the United States, as well as the predecessor to the S&P 500 that was introduced 39 years later. While relying on an entirely different and more complex computational methodology, the Standard & Poor’s Index nevertheless expanded upon the popular and easy to understand DJIA by providing a broader market indicator that measured the changes in the value of a market portfolio.

PERFORMANCE BENCHMARK/STANDARD

Equally important, securities market indices are used to gauge or measure how well individual securities, an investment manager or a portfolio of securities, including separate accounts, pooled accounts as well as mutual funds, have performed. In this context, securities market indices facilitate performance comparison in that they provide a systematic basis for evaluating, monitoring and comparing the performance of individual securities as well as managed portfolios.

According to a quarterly survey of corporate and public pension fund sponsors conducted by Institutional Investor in 1995, 90.3% of respondents use a securities index, market index or style index to measure the performance of pension funds.² Also, securities market indices are now more frequently used by individual investors to measure the relative performance of their portfolios, Individual Retirement Accounts, 401(k) plan accounts as well as their mutual funds and their use of a benchmark is increasing over time.

PORTFOLIO STRUCTURE, RISK AND STYLE ANALYSIS

Beyond their application as a performance benchmark, securities market indices are used to describe the relationship between the return on a security or a portfolio of securities and the overall market, as represented by a broad based index, for purposes of establishing the trade-off between risk and expected returns.

They also serve as a diagnostic tool to assess a portfolio’s overall posture relative to the market and analyze its risk/reward profile. This is accomplished by comparing and contrasting such factors as security holdings, levels of exposure, and industry diversification, maturity and credit quality of an actively managed portfolio with the characteristics of an appropriate securities market index.

Lastly, indices are used to conduct return-based style analysis where manager styles are analyzed without evaluating portfolio holdings. Proposed by William Sharpe in 1988, style analysis evaluates whether an investment manager’s marketed investment sty...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• About the Author
• Acknowledgments
• 1 Introduction
• 2 Uses and Applications
• 3 Reasons for Growth of Indices
• 4 Index Construction and Maintenance
• 5 Characteristics of Preferred Indices
• 6 Historial Highlights
• 7 Guide to Index Profiles
• 8 Index Profiles—Stocks North America
• 8-1
• 8-2
• 8-3
• 8-4
• 8-5
• 8-6
• 8-7
• 8-8
• 8-9
• 8-10
• 8-11
• 8-12
• 8-13
• 8-14
• 8-15
• 8-16
• 8-17
• 8-17a
• 8-17b
• 8-17c
• 18-17d
• 18-17e
• 8-18
• 8-19
• 9 INDEX PROFILES—BONDS NORTH AMERICA
• 10 INDEX PROFILES—MONEY MARKET INSTRUMENTS NORTH AMERICA
• 11 Index Profiles—Commodities North America
• 12 Index Profiles—Convertible Securities North America
• 13 Index Profiles—Guaranteed Investment Contracts North America
• 14 Index Profiles—Mutual Funds North America
• 15 INDEX PROFILES—CLOSED-END FUNDS
• 16 INDEX PROFILES—REAL ESTATE
• 17 INDEX PROFILES—MISCELLANEOUS
• APPENDIX 1 ILLUSTRATIONS OF INDEX CALCULATIONS
• APPENDIX 2 SUPPLEMENTAL SECURITIES MARKET INDICES
• APPENDIX 3 ADDITIONAL PERFORMANCE DATA
• Appendix 4 Glossary
• Appendix 5 Comprehensive Directory of Indices
• APPENDIX 6 INDICES BY ASSET CLASS/COUNTRY
• APPENDIX 7 DIRECTORY OF INDEX PUBLISHERS
• APPENDIX 8 GLOBAL MARKET CAPITALIZATIONS
• APPENDIX 9 YEAR-END 1995 CURRENCY EXCHANGE RATES PER THE U.S. DOLLAR
• APPENDIX 10 INDEX-BASED DERIVATIVE INSTRUMENTS
• APPENDIX 11 1994–1995 PERFORMANCE TABLES