Standard & Poor`s Corp. unveiled its brand index of 400 medium-size companies Wednesday to general plaudits on and off Wall Street.
The powerhouse of indices in the investing world is the supremely successful S&P 500-stock index, which has been around in one form or another since 1928.
With investor interest turning increasingly to stocks below the top tier, S&P is hoping its new MidCap-so named because of the companies` midlevel market capitalizations, or market value of their outstanding stock-will prove just as big a hit.
”Midcap stocks have been the orphans of the market, with no widely recognized index measuring their stock-price performance,” said Elliott Shurgin, vice president of index products and services at S&P. ”We anticipate that our MidCap will become the investment benchmark for this important market sector.”
None of the 400 companies to be included in the MidCap, which will be computed beginning June 19, is in the S&P 500. The companies have market capitalization of $202 million to $5.2 billion and total market value, as of Wednesday, of $380 billion, compared with $2.5 trillion for the companies that make up the S&P 500.
The MidCap will be a market-weighted index, as is the S&P 500, with each stock affecting the index in proportion to its market value. Of the 400 companies, 66 percent are industrials, almost 18 percent are utilities, 15 percent are financial, and just more than 1 percent are transportation companies.
Twenty-two of the companies are based in Illinois, including 20 in the Chicago area. Another 13 are in Wisconsin, and 6 are in Indiana.
The concept of investing in an index boomed in the late 1970s and 1980s because it allows institutional investors to generally duplicate overall moves in the stock market at a lower cost than if they tried to pick individual stocks.
The S&P 500 increasingly has become the index benchmark for the stock market among professionals because it is so much broader than the older 30-stock Dow Jones industrial average. Some 75 percent of the estimated $250 billion or more that is invested in index funds in the U.S. is in funds tied to the S&P 500.
A portfolio of the S&P 500 allows an investor to replicate 75 percent of the market value of the stocks traded in the United States. An investor who owned both the S&P 500 and the new MidCap 400 index would be able to replicate 90 percent of the value of U.S. stocks, fund managers said.
”It`s a natural extension of investing,” said Tony Ryan, manager of equity investments for PanAgora Asset Management in Boston. ”It allows us to get 15 percent more exposure to the market.”
”I think it`s a very sound index. I think it`s a real niche,” said Steve Bodurtha, a specialist in indexing and derivative products at Merrill Lynch. ”They didn`t have a lot of room between the S&P 500 and the Russell 2000,” he added, referring to the most popular big-stock and small-stock indexes, ”but I think they hit their mark.”
Although the timing seems good for an index for this universe of companies, there`s no guarantee the MidCap will take off. To be successful, Bodurtha said, an index needs to serve a genuine need, be manageable-not too many stocks, enough liquidity and not too much turnover-and have followers.
”It`s kind of a chicken-and-egg thing,” he said, ”but I think this one has a shot.”
A big unknown is whether the MidCap leads to development of derivative products, futures and options contracts based on the new stock index. Most observers agree the existence of such derivatives isn`t essential to a successful index, but it helps.
”It isn`t necessary,” said Ryan, ”but it`s helpful because it increases liquidity and adds credibility to an index.”
The Chicago Mercantile Exchange, the world`s second-largest futures exchange, has the right of first refusal to develop derivatives based on S&P`s products; it has tremendously successful futures and options based on the S&P 500. Merc President William Brodsky said Wednesday there is ”serious interest” in developing contracts based on the MidCap.
The Merc and the Chicago Board of Trade introduced futures contracts based on an over-the-counter stock index in 1985, but neither made it. They
”failed miserably,” said one observer.
But Brodsky noted that, in the last six years, indexing and futures trading have gained far greater acceptance among institutional investors. And, he said, in recent months, as smaller capitalization stocks have come to the fore, ”there`s been a recognition that the S&P 500 isn`t always going to be the leading group of stocks.”
Almost 62 percent of the MidCap index is composed of New York Stock Exchange-listed companies, and another 3 percent is made up of companies listed on the American Stock Exchange. Brodksy said he believes the high percentage of exchange-listed companies would give derivative products based on the MidCap a big advantage over the failed OTC-index products.
Companies in the Chicago area included in the index generally were pleased to be there.
”I think it`s probably a plus,” said Robert Racic, treasurer of Federal Signal Corp., an Oak Brook-based manufacturer. ”Typically companies included in an index get a little more visibility. We`re happy to be there.”
William D. Fischer, president and chief operating officer of Dean Foods Co. in Franklin Park, said, ”We`re flattered. I think it`s a good thing for Dean Foods. When you`re in an index, you generally see an increase in your trading.”
A spokesman for GATX Corp. in Chicago echoed that view. ”We`re very pleased to be included,” he said. ”We believe it will give us wider coverage by securities analysts.”
”We`re delighted to have the recognition and the increased institutional interest,” said a spokeswoman for Continental Bank. ”This is really good news,” said a spokeswoman for Kemper Corp. in Long Grove. ”We feel it will have a good effect on our stock price.”
