SSE Large&Mid&Small Cap Style Indices Methodology

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Paul Johnson
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1 all Cap Style Indices Methodology. Index Name and Code Index Name all Cap growth all Cap value all Cap relative growth Large&Mid&S mall Cap relative value Index Code Base Day and Base Point The base day of all Cap style indices is Dec 3, The base point is Index Univers The universe of all Cap style Indices is the constituents of all Cap. 4. Selection Method 4. Calculating the style factor value The growth investment style characteristics for construction are defined using the following three variables: internal growth rate, income growth rate and net growth rate. The value investment style characteristics for construction are defined using the following four variables: D/P B/P CF/P E/P.

2 Calculating growth factors: For the calculation of income growth rate and growth rate, first a regression (ordinary least square method) is applied to the last 3 yearly income and respectively: Sales t t = a t + b = a t + b Where a, the slope coefficient, b, the intercept. Then, an average absolute sales or sales is estimated: a a sales salesg =, G = sales The Internal Growth Rate is calculated as follows: G = ROE*(-PO) Payout ratio (PO) is calculated using the current annualized dividend divided by the trailing 2-month. Calculating value factors: D/P=Current Annualized Dividend/daily average market cap E/P= Current Annualized / daily average market cap B/P= Equity / daily average market cap CF/P= Current Annualized cash flow / daily average market cap 4.2. Missing variables For a stock, if one or several style factors are not available, use industry average instead Winsorizing the Variables As part of the standardization process, outlier variable values are winsorized to ensure that the market average values used to standardize the variables are less affected by extreme values. To do this, for a given variable, the values for all securities are first ranked by ascending order. Then, for values that lie in the bottom 5th percentile rank or in the top 95th percentile rank, the value of the 5th and the 95 th percentile rank stock is allocated respectively Computing a z-score Z-score is a widely used method of standardizing a variable in order to combine it with other variables that may have a different unit of measurement or a different scale. The z-score is defined as follows: μ Ζ = x σ Where: x is the winsorized variable value for a given security 2

3 μ is the mean using winsorized variables σ is the standard deviation using winsorized variables Calculate the style Z score The Value z-scores are computed by averaging the four value variable z-scores while growth z-scores are calculated by averaging the three growth variable z-scores. The growth z-score is calculated as follows: GrowthZ Score = ( Z salesg + Z G + Z g ) 3 The value z-score is calculated as follows:: = Selection method ( Z + Z + Z + Z ) ValueZ Score B / P CF / P E / P D / P 4.3. all Cap Growth Index and all Cap Value Index Step : Select stocks with top 50 growth Z scores as growth constituents; Step 2: Select stocks with top 50 value Z score as value constituents all Cap all Cap relative growth and relative value all Cap relative growth and all Cap relative value include all of all Cap constitutes, the market value of each constitute is assigned to all Cap relative growth and all Cap relative value according to their style weighting. Step : For stocks that only belong to all Cap Growth Index, the growth style weighting is and value style weighting is 0. Step 2: For stocks that only belong to all Cap Value Index, the value style weighting is and the growth style weighting is 0; Step3: Assigning the style weightings of the rest stocks according to the ratio of growth rank / value rank: growth rank/value rank Style weight top/3 75%growth\25%value mid/3 50%growth\50%value bottome/3 25%growth\75%value 3

4 5. INDEX CACULATION LARGE&MID&SMALL CAP style indices are calculated using a Paasche weighted composite price formula. LARGE&MID&SMALL CAP Growth Index and all Cap Value Index Calculation Formula is: Current adjusted market cap of constituents Current = 000 Base Period Adjusted market cap = (Price Adjusted No. of shares). 6. Constituents Review Constituents of all Cap style indices are reviewed every 6 months, together with all Cap periodical review. Constituents are adjusted according to the periodical review. 6. Review Time Meetings of Index Advisory Committee are usually held early in June and December every year and constituents adjustment are implemented on the first trading day of July and January each year. 6.2 Ongoing Adjustments 6.2. All the adjustments to the constituents of the all Cap relative style indices arise from, and should synchronize with the adjustments to the constituents of the all Cap Index. This is to make sure that the all Cap relative style indices and the all Cap Index share the same constituents and have the same market capitalization Non-replacement rule. If a stock is deleted from the all Cap and by chance it also belongs to all Cap Growth Index or all Cap Value Index, it should be deleted from that style as well and no stock should be added to the style to fill the vacancy. The number of the constituents of all Cap Growth Index or 4

5 all Cap Value Index can remain less than 50 (or more than 50 in case of stock split) until the next semiannual adjustment, after which it will be restored to 50. 5

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