S&P is arming investors with 2 powerful new tools

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October 16, 2005|By CHARLES JAFFE

Just because something is "new and improved" doesn't mean you should rush out to get it.

Sure, some people want a new car every model year or two or upgrade to the very latest version of hot appliances or computer technology.

But when something is new and improved in the investment world, adopting it with a sense of caution makes sense.

That's true with the investment world's latest "new improvement," which was unveiled this month when Standard & Poor's Corp. launched its new, hotly anticipated Style and Pure Style indices.

The two different series of indexes will soon be available in the form of index funds or exchange-traded funds, but they will also become very powerful benchmarking tools for ordinary investors.

The question is how quickly investors should gravitate toward what some are calling the next generation of indexing.

It's safe to say that existing indexes and index products are not going the way of the eight-track tape, but the new developments put an interesting twist on what's available.

The Style index series amounts to a fine-tuning of S&P's current methodologies; unless you are a true technician - or a chartered financial analyst - you're unlikely to see that much difference.

But Pure Style is different, because it distills "growth" and "value" to their most essential elements.

By most definitions, a stock qualifies for the "growth" label when its revenues and/or profits are rising faster than its industry or the overall market; a growth stock should amount to a great stock at a good price, where a value issue is priced low relative to sound and solid fundamentals, making it a good stock at a great price.

Up to now, any time you looked at a specialized version of an index, you were getting a bit of a mess. Technically, for example, all 500 stocks in the Standard & Poor's 500 had to be categorized as "growth" or "value," even though many of those issues truly fell somewhere in the middle.

To frame it simply: You could split the S&P 500 into S&P 500 Growth and S&P 500 Value. The two specialized indexes equaled the whole.

The result has been that growth and value index measures were a bit too similar; they tended to move together and the picture they gave was a bit murky because there was an element of growth in the value picture (and vice versa).

In the Pure Style system, stocks that don't measure up as growth or value are left out. There are no ambiguities; a Pure Style growth index includes only stocks that truly earn their designated label, based on a number of measures.

"Someone who really wants to focus on growth is not concerned about stocks that are left out in the middle," says David Blitzer, managing director and chairman of the index committee at Standard & Poor's.

"This also allows the pension fund manager - or the individual investor - to see if that growth fund they bought really is delivering the essence- of-growth kind of performance they expect from, say, a large-cap growth fund."

The data supporting the new products is "back-tested," a sketchy process of trying to apply the model to history as if it existed back then, but institutional managers seem to trust what they have seen thus far.

As for individual investors, even Blitzer is quick to say that it would be foolish to rush into the new indexes, no matter the new/improved feel.

"Yes, the Pure Style indices are different and new, but are they the best thing for every investor? No," says Blitzer. "In fact, for the guy who wants to be a buy-and-hold investor and who doesn't want to think about it too often, go out and buy an S&P 500 fund or a 1500 fund and you'll come away feeling fine."

Financial advisers go further, suggesting that the improvements are nothing to ditch old favorites for, as the improvements are still unproven and the upgrades may translate to only marginally improved control of a portfolio. Adding some Pure Style exposure - when funds are available - may improve a portfolio, but a full-blown overhaul is not called for.

"This is an evolutionary change, not a revolutionary one," says Larry Swedroe of Buckingham Asset Management in St. Louis. "You don't drop everything, but as your portfolio evolves and it's time to make changes, you might gravitate toward these things."

Adds Harold Evensky of Evensky & Katz in Coral Gables, Fla.: "If your portfolio isn't where you really want, and Pure Style helps you get there, maybe you make a change. But right now this is just some new interesting technology, worth looking at but not worth abandoning everything you have done up to now."


Charles Jaffe is senior columnist for MarketWatch. He can be reached by mail at Box 70, Cohasset, MA 02025-0070.

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