TACOMA, Wash. â Russell Investment Group will launch the Russell Microcapâ¢ Index, a new benchmark for microcap stocks, when it reconstitutes its family of U.S. stock indexes on June 24. The new investment tool will track the performance of 2,000 of the smallest companies in the U.S. equity market.
"Our research confirms there is a real need for a truly representative benchmark for microcap managers," said Lori Richards, senior product manager for Russell Indexes. "This new index offers managers and other investors a comprehensive, unbiased barometer to compare their performance against the genuine microcap marketplace of stocks."
The Russell Microcap Index, which will be comprised of the smallest 1,000 securities in the small-cap Russell 2000Ã Index plus the next 1,000 companies below the index, will represent approximately 3% of the U.S. equity market. The index will not include less-regulated OTC bulletin board securities or pink-sheet stocks priced under $1.
"Microcaps have outperformed small caps in three of the past four years, and the cumulative four-year gap is impressive," said Steve Swartley, senior manager research analyst at Russell. "This performance gap shows the importance of using a distinct benchmark that accurately captures this dynamic segment of the market."
The Russell Microcapâs available performance history reflects an annualized return of 9.03%, from June 30, 2000 through the end of the first quarter in 2005, versus 5.08% for the Russell 2000. Swartley noted that the median microcap manager that Russell follows has outperformed the Russell 2000 in nine of the past 10 years. Furthermore, the median microcap manager has outperformed the median manager in the small-cap universe in eight of the past 10 years, and by more than 1,000 basis points in two of the past four years.
Fundamental characteristics of the two indexes also reflect distinct differences between them: The Russell Microcap Index, which encompasses companies with market capitalization ranging from approximately $55 million to $500 million, had a weighted average market cap of $290 million last June, compared to $900 million for the Russell 2000. Similarly, the P/E for the Russell Microcap was 42.8 last June, while the P/E for the Russell 2000 was 30.5.
Companies slated for the Russell Microcap will be ranked as of May 31 by total market capitalization and will be weighted based on free-float adjustment, an integral aspect of Russell index methodology that is of particular importance in the small-cap and microcap segments. Free-float adjustment means stocks are weighted by their available market capitalization which is calculated by multiplying the primary closing price by the available shares. Russell uses a transparent, objective process in the development of its indexes and all Russell indexes have been free-float adjusted since inception.
A preliminary list of Russell Microcap members will be available after the U.S. markets close on June 10 and the index will go into effect after the markets close on June 24.
"We welcome the addition of the Russell Microcap Index because it certainly fills an important need in the market. Microcap managers have not had a true institutional benchmark and they need to be held accountable to an index that accurately reflects their portfolio," said Scott Johnston, chairman of Sterling Johnston Capital Management, a firm that manages more than $600 million in institutional microcap equity. "The index should prove to be a useful tool that will ultimately help asset managers and investors more accurately gauge the performance of their microcap funds and we believe it will also create interest in this very important asset class."
With the addition of the Russell Microcap Index, Russell will provide daily index performance data for 23 segments of the U.S. market, including the large-cap Russell 1000Ã Index, broad-market Russell 3000Ã Index and the recently launched Russell Top 50â¢ Index. Russell employs its indexes to objectively evaluate investment managers for multi-manager funds and other investment services. More than $2.5 trillion in assets are benchmarked to Russell indexes, including more than $450 billion invested in passive index funds that use them as a model.