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To: Mkilloran who wrote (10740)	7/8/1998 8:49:00 AM
From: EyeDrMike	Read Replies (1) \| Respond to of 23519

Russell 2000 impact: Hang on: The Russell rebalance is underway Expect companies getting booted from the more popular indexes - like the Russell 2000 -- to suffer, while new additions may get a nice (albeit temporary) bump First in a two-part report By Michael Brush moneydaily.com If you own small-cap stocks and they start bouncing around over the next three weeks, don't be too alarmed. It may have nothing to do with the management behind your stock, and everything to do with a small company in Washington that helps pension funds pick money managers. Each year around this time, the Frank Russell Company rebalances its well-known indexes, the most famous of which go by names like Russell 2000 and Russell 1000. Although the indexes were originally designed as performance yardsticks for Frank Russell, over time they have also become the list of stocks that many passively managed index funds try to match. So when stocks are moved in and out of the Russell groupings, index fund managers have to follow -- generally pushing up or down the prices of the stocks involved. The effect can be dramatic; in each of the past three years, stocks going into the index have outperformed those going out by at least 12%. It is easy to see why the indexes have to be modified each year. Frank Russell picks the stocks in them on the basis of market capitalization. So as companies grow or shrink, they have to be added to and removed from the indexes. The biggest 3,000 U.S. stocks (foreign stocks are excluded) go into the Russell 3000 index. That group is then divided into the Russell 1000, the largest thousand stocks in that pool; the remaining names are the Russell 2000. Lots of money flows in and out of stocks when they are added to or removed from the indexes, which explains the wild price moves. Merrill Lynch analyst Satya Pradhuman estimates that $90 billion in assets are indexed to the Russell benchmarks, primarily the Russell 3000 and its two main subcomponents. (Russell further splices and dices those indexes to form growth and value versions.) A sizeable chunk of that money is invested in the small, less-liquid names -- which can be the ones that move the most when added to or taken off a Russell list. Pradhuman says about $14 billion is indexed to the smaller-cap Russell 2000, either directly or indirectly through the Russell 3000. Generally, Russell 2000 stocks have a market cap of between $1.2 billion and $250 million. All that money sloshing around on the basis of what stocks Frank Russell decides to include in its indexes can have a big effect on the price of stocks. Last year, stocks being added to the Russell 2000 outperformed those being taken off by 18% between May 1 and the end of June, when the changes are finalized, notes David Cushing, of ITG Research. The year before the difference was 14% and in 1995 it was 12%. The difference in performance between adds and deletes starts growing well before the list is finalized at the end of June, because firms like ITG predict which companies are coming and going ahead of time. In addition, Frank Russell itself releases a preliminary list in the middle of June. That list is usually about 95% accurate. After the end of June, most of the impact on stock prices then reverses -- but not always. In 1996 the entire 14% differential between adds and deletes was reversed in just 12 trading days after the list was finalized, according to ITG. But last year, only about seven percentage points of the 18% difference that developed was reversed by the end of July. "For the first time last year we did not see the reversal," says Cushing. That may have been for technical reasons that may not repeat this year, he says. Last year, too many brokers had promised clients they would buy the stocks being deleted at the closing price on June 30, the day the changes were finalized. When those brokers later sold the shares, they put too much pressure on the market for the stocks. Typically, stocks being added to the indexes are ones whose share prices have come up a lot, increasing the market cap for the stock. They also tend to be initial public offerings or firms spun off from others. Stocks being deleted are often -- but not always -- fallen angels, whose stock price decline shrunk their market caps so much that they no longer rank among the 3,000 largest companies. Just because a stock is on the remove list, however, does not mean you should sell it. This year, estimates Pradhuman, a little under 500 stocks will be added to the Russell 2000 and a few more than 300 will be taken off. (The list of additions is bigger, because the index declines during the year as stocks drop off.) Pretty soon, in other words, over a limited number of trading days several billions dollars will be taken out of stocks leaving Russell indexes, and reinvested in new candidates -- moving stock prices all over the place. To find out the best way to play the Russell index reconfiguration -- it is not as easy as you may think -- see tomorrow's Money Daily.