September 15 saw RIMES host its annual client conference. The event provides RIMES’ clients and partners an opportunity to hear from financial sector experts and discuss some of the most important issues facing the buy-side.
This year, our keynote speaker was David Blitzer, Managing Director and Chairman of the Index Committee for the S&P and Dow Jones Indices, one of RIMES’ partners. Blitzer provided an insider’s view of how two of the world’s most important indices are maintained.
For David, the role of the index provider is to generate useful data for the finance sector. All such indices are overseen by a committee, which decides an index’s objective and how best to identify and qualify relevant securities. In this task, the committee typically looks at a range of important elements including liquidity, the size and domicile of a company, where they trade, which country they are identified with and which sector they fall into.
So how does the committee work with the Dow Jones Industrial Average? David explained the committee must follow a set of rules when selecting which companies comprise the index.
Started in 1896, the Dow Jones constitutes 30 blue chip stocks, incorporated in the US, demonstrating sustainable growth and well known to investors. To help identify such companies, S&P Dow Jones Indices have made a rule whereby all Dow Jones candidates must be selected from the S&P 500.
These rules ensure there are few changes to the 30 companies that make up the index. Importantly, all Dow Jones stocks are weighted to ensure the index is a fair representation of the industrial average. It is for this reason that Apple was only admitted after it split its stock; bringing its share price down from a huge $700 to $100 (the highest share price on the Dow Jones is around $180 and the lowest $20).
Our speaker then explained how S&P Dow Jones Indices manages the S&P 500. The S&P 500 functions as an analytical tool for understanding the market. Comprising around 80 percent of all US companies, it is an excellent measure of the US market and the basis for numerous exchange rate funds, mutual funds, futures, options and various other financial instruments. The total cash tracking through the S&P 500 amounts to $2 trillion. As a result, S&P Dow Jones Indices manages it very closely, focusing on stock liquidity, regular stock turnovers and ensuring there is a wide range of sectors represented.
David explained that most of the changes that take place to the S&P 500 generally occur due to M&A activity. S&P Dow Jones Indices manages such changes carefully, making the announcement after the US market has closed and two hours before the New Zealand market launches; ensuring minimal disruption to the traders that use the index.
Finally, David provided some insight into GICS, the Global Industry Classification Standard. GICS is widely used by financial analysts to understand which industry a stock belongs to. Blitzer announced some of the changes to GICS, which were completed just 24 hours after the RIMES Conference. The change has seen an 11th industry category added to GICS – real estate – a reflection of the fact that real estate investment funds are increasingly common. Previously, the industry and been included within the financial sector classification.
For David Blitzer, S&P Dow Jones Indices plays an important role in generating data for the financial markets, but they are one part of a wider value chain. In this chain, companies such as RIMES are vital at they help get the index data to where it’s needed: buy-side firms.