SEATTLE, WA -- (Marketwired) -- 05/23/13 -- Russell rebalances its entire family of global indexes each year in June to reflect the changing markets and maintain true representation of global equity markets, capitalization and style. A critical element of the Russell Indexes reconstitution methodology is the Market Risk Review, which determines whether a market meets Russell's criteria for developed, emerging or frontier classification. This is the second year Egypt has failed to meet all the criteria for an emerging market and the Review also shows the importance of continuing restrictions on market access in China, India and Argentina. Countries that do not meet classification criteria for three years in a row may be reclassified.
The reconstitution of the global equity markets as defined by Russell Indexes encompasses $4.1 trillion in benchmarked assets globally and 72% of institutional asset benchmarked in the U.S. In order to be reclassified during reconstitution, a country must meet Russell's criteria as having become either more or less risky for investors for three straight years. The Market Risk Review is governed by our transparent, rules-based index construction methodology. It analyzes country level risk and market accessibility as well as operational factors such as currency controls and trade execution mechanisms. Countries are ranked along a relative risk spectrum, with developed markets in general the least risky and most efficient in which to trade. The results of the Market Risk Review are published yearly in the Russell Index Country Guidebook.
"Russell Indexes market risk review process provides a clear road map to ensure our global indexes stay relevant and their composition reflects the true nature of today's global equity opportunity set," said Russell Indexes senior research analyst Mat Lystra. "It is an important part of our methodology, enabling us to keep up with changing markets and provide true market representation for global investors."
This year's Market Risk Review led Russell Indexes to announce in March the reclassification of Greece from a developed to an emerging market, to be implemented at this year's reconstitution in June. This conclusion by Russell Indexes resulted from a three-year market risk review process, as prescribed by Russell's methodology, in which Greece did not meet macro- and operational risk criteria for developed market status, but did meet classification criteria for emerging markets.
While no country reclassifications are imminent for Russell Indexes this year beyond Greece, other markets pose concern for investors. "In response to a challenging investment environment, many investors are increasing their allocations to multi-asset strategies that incorporate a wider array of geographies and asset types. The risks for investors in Egypt and Argentina have been widely publicized, but less attention has been paid to market accessibility and operational concerns in countries such as China and India. In these markets, visibility varies significantly between issuers, which underscores the importance of security selection," said Russell Investments emerging markets portfolio manager Gustavo Galindo. "This highlights the important insight that transparent, rules-based Index methodologies can deliver to help inform investment decisions about global markets."
Egypt: On the Edge
Russell Indexes Market Risk Review notes that Egypt has become increasingly more risky, primarily as a result of political instability contributing to declines in currency reserves, foreign direct investment and tourism. Mohamed Morsi was elected president in June and efforts to strengthen the country's domestic economy amid rising prices and budget deficits have thus far been mixed. These factors have led to the country's inability to meet Russell Indexes' macro risk standards for emerging markets. It is in year two (of three) on the path to be reclassified from emerging to frontier market as part of Russell Indexes market risk review process.
Argentina: Questions about Viability
Argentina is the sixth largest economy within the Russell Frontier Index and a top 10 country in terms of exposure within the Index, but growing political intervention, decreased foreign ownership of equities and increasing instability has fed inflation and unrest, leading many frontier markets asset managers to routinely avoid this market. In addition, tight and entrenched currency controls have introduced a level of operational risk that has called into question Argentina's viability as a frontier market. Argentina is in year one (of three) of the Russell Indexes market risk review process.
India: Continuing Barriers to Entry
India is currently part of the Russell Emerging Markets Index and, while it is not currently under review, the country's investment account setup requirements are among some of the most onerous of any market Russell Indexes monitors. In India, slow growth has weighed on the rupee and high import fuel costs have driven inflation. In addition, burdensome registration and tax requirements have frustrated global investors, raising concerns that it may be difficult for global investors to replicate index exposures through the local market.
China: The Devil is in the Details (of A-Shares)
China is also part of the Russell Emerging Markets Index. While China is a growing economic player on the global stage, the transparency of financial information and corporate governance remain concerns for investors trying to track risk exposures. Domestic investors also have access to a different and much larger class of shares (A shares) than foreign investors. Russell Indexes welcomes the Chinese government's recent moves to expand the allocation of A share quotas for global institutional investors, but the A share market is still too restricted to be included in the Russell Global Index and for China to be considered anything but an emerging market from a global investment standpoint.
Transparent, rules-based and objective market risk classification by index providers is critically important to global investors, whether using indexes as a benchmark or for market exposure. Watch the upcoming Russell Indexes Reconstitution to see where your favorite country sits along the spectrum.
About Russell Investments
Russell Investments (Russell) is a global asset manager and one of only a few firms that offers actively managed multi-asset portfolios and services that include advice, investments and implementation. Working with institutional investors, financial advisors and individuals, Russell's core capabilities extend across capital market insights, manager research, portfolio construction, portfolio implementation and indexes.
Russell has approximately $173 billion in assets under management (as of 3/31/2013) and works with over 2,500 institutional clients, independent distribution partners and individual investors globally. As a consultant to some of the largest pools of capital in the world, Russell has $2.4 trillion in assets under advisement (as of 6/30/2012). It has four decades of experience researching and selecting investment managers and meets annually with more than 2,200 managers around the world. Russell traded more than $1.4 trillion in 2012 through its implementation services business. Russell also calculates approximately 700,000 benchmarks daily covering 98% of the investable market globally, which includes more than 80 countries and more than 10,000 securities. Approximately $4.1 trillion in assets (as of 12/31/12) are benchmarked to the Russell Indexes.
Headquartered in Seattle, Washington, Russell operates globally, including through its offices in Seattle, New York, London, Paris, Amsterdam, Sydney, Melbourne, Auckland, Singapore, Seoul, Tokyo, Toronto, Chicago, San Diego, Milwaukee and Edinburgh. For more information about how Russell helps to improve financial security for people, visit www.russell.com or follow us @Russell_News.
Russell Investment Group is a Washington, USA corporation, which operates through subsidiaries worldwide, including Russell Investments, and is a subsidiary of The Northwestern Mutual Life Insurance Company.
Russell's indexes are unmanaged and cannot be invested in directly.
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