Style indices are relatively prevalent in the US, with Dow Jones, Russell, S&P/Barra and MSCI all offering style indices based on their standard index products. The European markets have been less well served in this respect. Until recently, MSCI was the only major provider to offer a pan-European product within the world value and growth indices. STOXX attempted to redress this with the launch of the Dow Jones STOXX style indexes in July 2001.
The MSCI value and growth Indices use price/book value (P/BV) ratios to divide the standard MSCI country indices into two sub-indices: value and growth. All securities are classified as either ‘value’ securities (low P/BV) or ‘growth’ securities (high P/BV), relative to each MSCI country index. The definition of value and growth is relative to each individual market as represented by the MSCI index. Country value/growth indices are aggregated into regional value/growth indices.
The MSCI methodology is similar to that for the S&P500/BARRA growth and value indices which were launched in 1992 to cover the US equity market. Futures and options on these indices are listed on the Chicago Mercantile Exchange. Currently there are 514 companies in the MSCI Europe index, of which 333 are classified as value and 181 classified as growth. MSCI has index levels on its value and growth indices back to 1975.
STOXX’s style indices are based on the Total Market Index (TMI) series, which comprises large, mid and
small-cap sub-indices. The STOXX TMI aims to capture 95% of the free float market capitalisation of Europe. The new style indices are calculated at all four of these levels (large, mid, small, total), for Europe and the Euro-zone, but not for Europe ex-UK.
STOXX has opted for a more
academic-looking approach to value/ growth segregation, based on a concept from Russell, which uses a combination of six valuation and growth factors. Of these six factors, two are forward-looking, and four are historical:
o Projected price/earnings (P/E) ratio: Based on the closing price at the semi-annual review and on mean annual expected earnings per share (EPS) for the next fiscal period, as reported by IBES
o Projected earnings growth: Based on expected three to five year annual increase in operating EPS, as defined by the IBES long-term growth forecast
o Trailing P/E ratio: Based on the closing price at the semi-annual review and on the previous quarter’s EPS from continuing operations, as reported by IBES
o Trailing earnings growth: Based on average annualised EPS growth for the previous 21 quarters, as reported by IBES
o Price/book (P/B) ratio: Based on the closing price at the semi-annual review and book value per share, as reported by Worldscope
o Dividend yield: based on the closing price at the semi-annual review and on total dividends declared by the company during the previous 12 months.
A multivariate statistical cluster analysis is conducted to produce five stock clusters: strong growth and weak growth, strong value and weak value and neutral. Three categories are identified: growth (comprising strong and weak growth), value (comprising strong and weak value) and neutral. Large neutral stocks (those with a market capitalisation of at least 0.5% of their size segment total market capitalisation) are selected as either growth or value stocks, based on the nearest cluster mean.
There are currently 1,086 companies in the STOXX TMI benchmark. 503 of these are classified and value, 387 as growth, 156 as neutral and 40 are unclassified due to a lack of data.
History of the STOXX value and growth indices has been calculated back to the end of June 1997.
MSCI’s approach to classifying stocks as either growth or value has the benefit of being easy to understand, however it is over-simplistic. While price/book value appears to be a fairly good value/growth indicator for the US market it is less useful for markets outside of the US. The methodology assumes that expensive stocks are automatically growth stocks and cheap stocks are value. It also forces all stocks to be either value or growth, without allowing for the fact that some will be neither growth nor value, or will be a mixture of the two.
The STOXX model applies cluster analysis across the European universe without reference to country or sector. The problem with this is that it assumes that factors such as EPS are comparable across country borders. In reality, different accounting standards make this comparison difficult. There is the additional problem that the model requires long-term growth forecasts – something that is not widely available for European companies. Of the 1,086 companies in the STOXX universe, 337 have no IBES long term growth forecasts, and 270 of the forecasts which are available are based on only one broker’s estimate.
Comparison of the STOXX and MSCI indices throws us some interesting differences. Of the 20 largest companies in Europe, nine have different style classifications depending on whether one uses the STOXX or the MSCI methodology (table).
The structures of the indices also differs significantly. MSCI’s methodology ensures that the country weights within the value and growth indices are very similar to those within the MSCI Europe benchmark. With the STOXX indices however, there are significant differences. The value index is heavily biased towards UK and German companies, while the growth index is dominated by stocks from France and The Netherlands.
In both the MSCI and the STOXX series, the growth indices are dominated by healthcare companies. However, while the banks sector makes up more than 31% of the STOXX value index, it makes up less than 20% of the MSCI value index. The telecoms sector has an 11% weighting in the MSCI value index, but only 4% in the STOXX value index. MSCI classifies 99% of the European Energy sector as value, while for STOXX it is just over 60%.
With the significant differences between the STOXX and MSCI methodologies leading to differing country and sector exposures, it is no surprise that performances differ also. While the performance of value versus growth follows a similar pattern for both the MSCI and STOXX series, the scale of outperformance and underperformance is very different.
It would seem that the two methodologies capture the same effect, but it could be argued that STOXX does so more successfully than MSCI. Examination of stock correlations seems to back this up. As the table shows, companies are more highly correlated to their allocated style index rather than the alternative style index using the STOXX methodology than they are using the MSCI methodology.
Guy Fisher and Nick Aldred are analysts with ABN AMRO in London; this article is based on research ‘European Style Indices’ issued by ABN Amro Index Analysis

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