- The first-generation S&P Style Indices cover broad market segments, grouped into value and growth categories using style metrics commonly used in the investment community. This makes the indices relevant benchmarks for evaluating the skill of active Director managers, as well as making them suitable for those seeking a traditional “buy-and-hold” index-linked investment implementation with a tilt toward a particular style.
- In contrast, the S&P Pure Style Indices have a stricter definition of value and growth style factors, leading each to have concentrated exposures. Unlike the standard style indices, there are no overlapping securities between pure growth and pure value, potentially presenting them as better candidates for market participants looking to have precise tools in their investment process.
- Driven by methodological differences, the indices have distinct risk/return characteristics and behave differently in different style cycles. Over the long-term investment horizon, the pure style indices have exhibited greater returns and volatility, lower cross correlations, and wider return spreads than the standard style indices.
Launched in 1992, the first-generation S&P U.S. Style Indices brought broad style benchmarks for large-, mid-, and small-cap equities. The indices group the investment universe into value and growth categories, based on relevant fundamental ratios for each style. Certain securities may exhibit both growth and value characteristics; in this scenario, the company’s market capitalization is distributed between growth and value.
As a result, there are overlapping securities that fall into both growth and value indices. Our analysis shows that over the past 10 years, on average, 166 securities in the S&P 500®, 131 securities in the S&P Midcap 400®, and 188 securities in the S&P SmallCap 600® fell into both the growth and value indices (see Exhibit 1).
Hence, roughly one-third of each size segment exhibits neither strong growth nor value characteristics. Therefore, even though traditional style indices serve as investment universes and define the broad opportunity set for style equity managers, the overlapping nature of the indices may not appeal to market participants that desire more precise and focused measurements tools.
In 2005, S&P Dow Jones Indices introduced a second generation of style indices, the S&P Pure Style Indices, which require higher style scores for inclusion, resulting in clearer differentiation between growth and value. The pure style indices include only securities that exhibit either pure growth or pure value characteristics. Due to this, there are no overlapping securities between the pure style indices (see Exhibit 2).