Reconstitution: A New Year’s party in June

In some corners of the investment community, it’s time for New Year’s. But these investors are not attempting to adjust our calendars – they are adjusting our understanding of the global equity markets.

For more than 30 years, the Russell Indexes — including an ecosystem that includes more than $5.7 trillion in assets benchmarked to Russell’s indexes1 — have observed a different sort of new year’s ritual. Each year on the last Friday in June, Russell Indexes completes a “reconstitution” process that includes a top-to-bottom recalibration of how U.S. and global equity markets are represented within the entire Russell series of indexes.

This event and the related adjustments essentially redefine, refresh and recast the entire Russell family of indexes for the next 12 months.  For asset managers, it’s a natural time to update their understanding of how today’s equity market are structured. Many investors and investment managers will re-evaluate the equity landscape with fresh perspective.

The methodology behind this reconstitution process is designed to ensure that Russell’s indexes will accurately reflect the current investable opportunity set within the market. Governance of this process includes close client consultations and regular interaction with a client advisory board. In the event that changes to methodology are deemed necessary, Russell Indexes announces such changes publicly and in advance of the annual reconstitution process.

And change is always part of the process. If the index protocols were not periodically updated, Russell’s indexes could start to exhibit unintended sector, capitalization and style tilts, presenting a challenge for index accuracy, and complicating asset allocation for index users.

To learn more about this “New Year’s” milestone and the workings of index reconstitution, visit “Recon Central”, an information hub that includes videos, an infographic describing the process, a precise schedule for reconstitution execution, videos and more.

1Compiled by Russell Indexes using data from the Morningstar Direct database as of December 31, 2014.