What changed
S&P Dow Jones is updating how its style indexes classify companies. To gauge valuation against the stock price, the firm will now include free cash flow, forward earnings, and intangible assets in its value screens. Concurrently, 12-month price momentum will be dropped from the growth ranking.
The index manager said Friday that the overhaul comes after a recent consultation and is scheduled to take effect at the yearly reconstitution before trading starts on Dec. 21.
Why S&P made the move
This is the latest turn in a long debate over whether classic value yardsticks still capture what is cheap. Researchers and portfolio managers have argued that value's long slump stems partly from weak signals, with price to book often singled out.
The tweak aims to reflect outlays on R&D and other internally built know-how that, under accounting conventions, are booked as expenses instead of being carried as balance sheet assets. Critics say that treatment makes intellectual property heavy firms look pricey and can exclude them from value indexes.
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What it means for your portfolio
Expect turnover. The reshuffle is poised to make funds that track these style indexes realign positions to match the new memberships. Bloomberg Intelligence analyst James Seyffart put the figure at no less than $375 billion in passive funds linked to the gauges affected.
Rival FTSE Russell is also weighing tweaks, reconsidering the 50 or 50 split between growth and value in its benchmarks due to the market dominance of large technology names. That consultation ends Dec. 11.
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