A government-backed index that ranks companies on profit measures such as return on equity as well as market value is changing corporate behavior in Japan, Bloomberg News reported.
Launched in January, JPX-Nikkei Index 400 (JPNK400) caught the attention of funds and other investors when it kicked out Sony Corp. from its ranks earlier this month.
The index, first broached by planners from Prime Minister Shinzo Abe’s Liberal Democratic Party, seeks to showcase the country’s most shareholder-friendly companies and shame executives of those it excludes into altering their strategies in a bid to get back on, the news agency said.
The gauge aims to pick the most capital-efficient companies, its lead developer, Daisuke Tanaka of Japan Exchange Group Inc., was quoted as saying. While ROE was important, selecting businesses solely for the profit they generate from shareholders’ funds wasn’t an option, he said.
“If we chose based just on ROE, many things wouldn’t work on a practical level,” Tanaka told Bloomberg. “ROE is a percentage, and the numbers jump around a lot each year. It’s not stable. Many companies would be replaced each year, which would increase costs for investors, making the index useless.”
The index added operating income as it would favor companies making profit from their chosen business, and market value to reflect stock appreciation, he said. Three-year average ROE and cumulative operating profit each received a 40 percent weighting, with the rest representing market capitalization.
Specialized indices are becoming popular among investors seeking to cut down on asset-management costs, the report said. Smart beta funds, to which JPNK400 belongs, accounted for about 18 percent of US exchange-traded assets at the end of 2013, including exchange-traded notes, and grabbed 31 percent of exchange-traded fund net deposits in the year, it said, citing data from Morningstar Inc.
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