Global index provider FTSE Russell has proposed an overhaul of the Russell style indexes, its benchmark indexes that have divided the U.S. stock market into two investment styles—growth and value—for 40 years.

The move comes amid criticism that mechanically applying a 50-50 ratio between growth and value stocks no longer accurately reflects the market, as big tech companies come to dominate the U.S. stock market.

Under the proposed changes, if a handful of stocks undermine the representativeness of the index, the Russell 1000 or Russell 2000 indexes would allow the weighting of growth or value stocks to reach up to 60%.

FTSE Russell plans to collect feedback until December 11, finalize the revision plan, and apply it starting from the annual index reconstitution in June next year.

Based on last year's figures, assets tracking Russell's growth and value style indexes amount to approximately $8 trillion (about 11,000 trillion won), leading to expectations that a restructuring would prompt major portfolio adjustments by funds tracking these indexes.

The push for the overhaul stems from the fact that as big tech companies account for a growing share of the U.S. stock market capitalization, forcibly keeping the growth stock weighting at half has significantly reduced room for other growth companies.

In fact, the number of growth companies in the Russell 1000 index reached 626 twenty years ago, but has now decreased to 368.

Consequently, FTSE Russell's proposal includes a measure allowing the allocation ratio for growth or value stocks to be reduced or increased by up to 10 percentage points from the baseline 50%.

FTSE Russell explained that a 10-percentage-point fluctuation band does not imply a target.

The proposal also includes introducing the price-to-sales ratio (PSR) to broaden the scope of value stocks.

This was chosen because it has a relatively minor impact on the turnover rate of index constituents and active funds.

Asset managers have pointed out that the traditional valuation method centered on the price-to-book ratio (PBR) failed to properly reflect tech companies centered on intangible assets such as technology and patents, leading to a long-term slump in value stock investing.

Some point out that once this proposal is implemented, the boundaries between growth and value stocks could become blurred.

Indera Dees of MarketGrader evaluated it as a "back door to incorporate some growth stocks into the value category."

Bloomberg News reported on the 20th (local time) that another index provider, S&P Dow Jones Indices, has also finished collecting feedback on a plan to include intangible assets and free cash flow in its value stock classification criteria and is considering an index overhaul.

(Photo: AP, Yonhap News)