Growth, value stocks set for reshuffle as S&P adopts new rules

The index provider will add intangible assets, forward earnings and free cash flow to the list of factors to define whether a company is cheap relative to its share price, according to a statement Friday. At the same time, 12-month price momentum will be dropped as a criteria to rank a company’s growth potential.

The new rules came after a recent consultation and will take effect at the annual reconstitution before the market open on Dec. 21.

S&P’s decision follows a long debate over whether conventional value measures still work. Researchers and money managers have argued that part of value’s long slump reflected flaws in the metrics, especially price-to-book. The adjustment is meant to account for spending on research and other internally developed assets that accounting rules usually treat as expenses rather than balance-sheet assets. Critics say this makes intellectual-property-heavy companies look expensive and can keep them out of value indexes.

S&P isn’t the only index provider that has been mulling changes. FTSE Russell is reconsidering the 50/50 split between growth companies and value stocks in its benchmarks due to the dominance of technology giants in the market. That consultation ends Dec. 11.