Introduction
Since the 2008 Global Financial Crisis, the U.S. equity market has undergone a prolonged period of large-cap growth, characterized by remarkable performance. Between February 2009 and July 2024, the S&P 500® Growth posted an impressive return of 1,083.34%, significantly outperforming the S&P 500's return of 913.77% and the S&P 500 Value, which returned 712.37%. Over this more than 15-year horizon—a substantial timeframe for performance evaluation—value investing has faced considerable challenges, often raising questions about its effectiveness in a rapidly evolving market landscape.
Against this backdrop, market participants have increasingly turned to innovative strategies for growth investing, with one approach gaining notable traction: growth at a reasonable price (GARP).
In this paper, we introduce the S&P World Ex-Australia GARP Index, a pioneering index that applies the GARP framework to the S&P World Ex-Australia Index universe. This index offers Australian market participants a unique opportunity to assess the performance of companies that exhibit strong growth characteristics while emphasizing reasonable valuation, high profitability and low leverage ratios. The index provides valuable insights into the intersection of growth and value investing. Through our exploration, we aim to illuminate the historical performance and characteristics of this index, presenting a compelling case for its integration into investment strategies focused on growth opportunities beyond the Australian market.
Index Construction
On Aug. 9, 2024, S&P Dow Jones Indices (S&P DJI) launched the S&P World Ex-Australia GARP Index. This index begins by selecting the top 500 stocks with the highest Growth Scores from the S&P World Ex-Australia Index. The S&P World Ex-Australia Index measures the large- and mid-cap universe of developed stocks outside Australia, which collectively represent approximately 85% of each relevant market's total available capital. The Growth Score is a composite metric that combines three-year sales-per-share (SPS) growth with three-year earnings-per-share (EPS) growth.
From this pool of 500 stocks, the S&P World Ex-Australia GARP Index subsequently selects the top 250 stocks based on the highest Quality and Value (QV) composite score. The QV composite score is derived from three metrics that assess both quality and valuation: the financial leverage ratio, return on equity and earnings-to-price ratio. The first two metrics evaluate the quality of the company, while the earnings-to-price ratio serves as a valuation metric. The selected 250 stocks are then weighted according to the product of their float market capitalization (FMC) and Growth Score, subject to a 0.1% single-stock floor, a 5% single stock cap and a 40% single GICS® sector cap. The index is rebalanced on a semiannual basis in June and December.
The S&P World Ex-Australia GARP Index closely mirrors the construction of the S&P 500 GARP Index, with two notable exceptions.
- The weighting of constituents is based on the FMC * Growth Score, rather than solely on the Growth Score used in the S&P 500 GARP Index. This adjustment is essential because the S&P World Ex-Australia GARP Index allocates across more than 20 developed markets, making it important to incorporate FMC in the weighting scheme to ensure that market weight does not deviate significantly from the underlying S&P World Ex-Australia Index.
- The single-stock floor has been increased from 0.05% in the S&P 500 GARP Index to 0.1%. This change is due to the target stock count of the S&P 500 GARP Index being 75, compared to 250 in the S&P World Ex-Australia GARP Index. Raising the stock floor helps mitigate situations where smaller stocks hold a negligible share of the index, thereby improving implementation.
