Russell Style Index Methodology

Russell uses a proprietary, "non-linear probability" method to assign stocks to the growth and value style indexes. The term "probability" is used to indicate the degree of certainty that a stock is value- or growth-based on its relative price-to-book ratio and the Institutional Brokers Estimate System (I/B/E/S) forecast long-term growth mean. This method allows stocks to be represented as having both growth and value characteristics, while preserving the additive nature of the indexes.

The process for assigning growth and value weights is applied separately to the Russell 1000 and Russell 2000 indexes. Research indicates that valuations of small stocks on average differ from those of large stocks. Treating the Russell 1000 and Russell 2000 separately prevents distortion to relative valuations that may occur if the Russell 3000 was used as the base index.

For each base index (the Russell 1000 and Russell 2000), stocks are ranked by their adjusted book-to-price ratio (B/P) and their I/B/E/S forecast long-term growth mean (IBESLT). These rankings are converted to standardized units and combined to produce a composite value score (CVS). Stocks are then ranked by their CVS, and a probability algorithm is applied to the CVS distribution to assign growth and value weights to each stock. In general, stocks with lower CVS are considered growth, stocks with higher CVS are considered value, and stocks with a CVS in the middle are considered to have both growth and value characteristics and are weighted proportionately in the growth and value index. Stocks are always fully represented by the combination of their growth and value weights. For example, a stock that is given a 20% weight in the value index will have an 80% weight in the growth index.

Growth/Value Algorithm Example

Stock A, in Figure 1 below, is a security with 20% of its available shares assigned to the value index and the remaining 80% assigned to the growth index. The growth and value probabilities will always sum to 100%. Hence, the sum of a stock's market capitalization in the growth and value index will always equal its market capitalization in the Russell 1000 Index or Russell 2000 Index.

For over 1,000 additional terms and definitions please see our Investment Glossary Guide.

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