INDEXING DEVELOPMENTS
By Journal of Indexes Staff

MSCI Preps Major Expansion

MSCI has unveiled plans for a major expansion of its popular All Country World Index (ACWI). When complete, the new ACWI will include all investable large- and mid-cap stocks worldwide; previously, the index only sampled a majority of stocks. The new index will cover approximately 98 percent of the market cap of large- and mid-cap companies worldwide. As part of the expansion, MSCI also will introduce large- and mid-cap ACWI subindexes.

The indexing giant says it also will significantly expand its global small-cap index to include emerging markets; previously, it only focused on the developed world. The indexer also will develop growth and value versions of the small-cap index.

To round things out, MSCI will combine the ACWI with the improved small-cap index to create a new, comprehensive global benchmark.

The final methodology and details of the index transition process will be announced by March 31, 2007.

SSgA Goes Fundamental

State Street Global Advisors (SSgA) has teamed up with Global Wealth Allocation (GWA) to launch a new, fundamentally weighted index strategy for clients in Australia. The new SSgA Wealth Weighted Global Equities Index Strategy is the first broad-based, fundamentally weighted index strategy embraced by SSgA. The specific strategy covers the developed international markets, and weights stocks based on earnings, cash flow and book value.

Firing On All Cylinders

The S&P 500 Index posted its eighteenth consecutive quarter of double-digit earnings growth in the third quarter. Total index earnings soared 19.9 percent over year-ago levels, thanks to a broad swath of positive earnings surprises.

S&P expects the streak of double-digit growth to come to an end in the fourth quarter, with earnings growth slowing to 8.9 percent, thanks mainly to falling profits in the energy patch.

The indexer is similarly downbeat about 2007, with expected earnings growth of just 9.97 percent. S&P expects results to be led in 2007 by Information Technology (up 20.92 percent) and Telecommunication Services (up 21.26 percent).

Record Highs

The Dow Jones Industrial Average finally broke above its January 2000 peak of 11,722.98 in October. The move marked a recovery from the index's nadir of 7,528, set on October 4, 2002.

SPVIA Global

The S&P/Citigroup PMI World Index beat 74 percent of active global funds over the first three quarters of 2006, while S&P's emerging markets S&P/IFCI Composite beat 77.9 percent of actively managed emerging markets funds. That performance puts the lie to claims that active managers outperform in "inefficient" foreign markets.

Passive Hedge Funds

There are now more than 7,000 hedge funds managing over $1 trillion in assets, and analysts predict continued growth as far as the eye can see. According to a new report from Merrill Lynch, some of this growth will come from the introduction of "passively managed hedge funds."

"The argument for passive management is based on the idea that as the level of competition among active fund managers grows, it becomes more difficult for the average active manager to outperform their benchmark after fees," the group said in a report. "Hence investors who have little skill in selecting outperforming active managers are much better off with a strategy that mechanically replicates the benchmark at a much lower cost." Indeed.

The Merrill Lynch paper argues that hedge fund returns can be replicated in three ways: through fund of funds, through balancing risk factors between different instruments (currencies, commodities, stocks, etc.) or through "mechanical replication," i.e., using a systematic, rules-based methodology to achieve results.

Social Dividends

Socially responsible investing (SRI) leader KLD Research & Analytics teamed up with Mergent to launch a new dividend-focused index called the KLD Dividend Achievers Social Index, or "DASI." The methodology is simple: KLD lays Mergent's Dividend Achievers screen (which selects companies that have paid increasing dividends for the past 10 years) on top of the SRI screens it uses for its two U.S. large-cap indexes, the Large Cap Social and Domini 400 Social indexes. The companies that pass both screens are equally weighted in the index. As of September 30, the index paid a yield of 2.37 percent, significantly lower than most competing (non-SRI) dividend indexes.

NYSE IPO Indexes

The New York Stock Exchange (NYSE) debuted two new indexes (the IPOX Composite (IPO.ID) and IPOX US (IPY.ID)) that track the performance of NYSE-listed initial public offerings (IPO). The modified-capweighted indexes use a methodology designed by IPOX Schuster LLC.