The Korea Exchange (KRX) launched the "Korea Value-up Index”, designed to highlight Korean companies demonstrating strong performance in shareholder value enhancement.
Constituent stocks and selection criteria for the new index were unveiled last week, with the index disseminated to investors in real-time starting today.
1. Background & Development Process
1.1 Background
- The index was developed in response to the Korean government’s "Corporate Value Enhancement Plan (February 26)," aiming to promote market recognition and investment in companies exhibiting high corporate value.
- It incorporates various qualitative factors beyond market capitalization and trading volume, encompassing profitability, shareholder return, market valuation, and capital efficiency, providing a comprehensive assessment of listed companies.
- The index encourages companies to enhance their corporate value by offering a clear pathway for inclusion and attracting investments.
1.2 Development Process
- KRX conducted thorough research, including concept design, selection criteria refinement, performance back-testing and analysis.
- Valuable insights from market participants, including pension funds and asset management companies, along with expert opinions, were actively incorporated throughout the development process.
2. Key Features
- Adoption of Qualitative Factors: The index incorporates various objectively applicable and recognized qualitative factors beyond conventional metrics such as market capitalization.
- Sector Neutrality: The "relative evaluation method" ensures that no specific sector is over- or under-represented, promoting a balanced representation of the Korean economy.
- Inclusion of Growth Stocks: By granting early inclusion to companies with early disclosures and incorporating relative PBR evaluation within each sector, the index includes companies with high future growth potential alongside existing value leaders.
- Differentiation: The index is differentiated from existing benchmarks like the KOSPI 200, aiming to attract new investment flows and facilitate the development of new investment products.
3. Index Overview
- Index Name: Korea Value-up Index
- Base Date/Base Value: January 2, 2024 = 1,000p
- Number of Constituents: 100 stocks
- Review Frequency: Annually (following the Futures Expiration Day in June)
- Weighting Method: Free-float adjusted market capitalization weighting (excluding non-floating shares)
- Weighting Cap: 15% (limits the weight of any single stock to 15% of the index)
4. Constituent Selection Process
The index employs a five-stage screening process based on a variety of quantitative and qualitative factors:
- Market representation: Must be within the top 400 in market capitalization (90% of total cumulative market capitalization
- Profitability: Must not have had a 'deficit for two consecutive years' or a 'combined profit and loss deficit for two years' in the past
- Shareholder return: Must have carried out 'dividends' or 'treasury stock burn' in the past 2 consecutive years
- Market evaluation: PBR ranking must be within 50% of 'overall' or 'industry group'
- Capital efficiency: Among the companies that met the above requirements, the final 100 stocks were selected based on the companies with the highest ROE ranking
5. Index Composition & Performance
5.1 Sector Allocation
The index comprises companies from all major sectors, reflecting the overall structure of the Korean economy and stock market.
- Information Technology: 24%
- Industrial Goods: 20%
- Healthcare: 12%
- Discretionary Consumer Goods: 11%
- Real Estate: 10%
- Material: 9%
- Non-Discretionary Consumer Goods: 8%
- Communication: 5%
- Energy: 1%
5.2 Market Representation
The index maintains a balanced representation of companies listed on both the KOSPI and KOSDAQ markets, with an approximate ratio of 7:3 in terms of the number of constituents.
While the number of stocks is 67% KOSPI and 33% KOSDAQ, the market capitalization is 95.3% KOSPI and 4.7% KOSDAQ.
5.3 Historical Performance
Back-testing indicates that the Value-up Index has outperformed existing market benchmarks such as the KOSPI 200 and KRX 300. However, past performance is not indicative of future results.
Performance over the last 5/3/1 year(s):
- Value-up Index: 43.5%/-7%/12.5%
- KOSPI 200: 33.7%/-16.5%/4.3%
- KRX 300: 34.3%/-14.4%/4.9%
5.4 Index Stability
The index exhibits a moderate annual turnover rate of 21.2% and turnover ratio of 14.5%, indicating a balance between constituent change and stability for ETF management.
5.5 Investment Metrics
The index demonstrates favorable investment metrics compared to existing benchmarks, reflecting its focus on companies with strong corporate governance and shareholder value creation.
6. Future Plans
6.1 Index Dissemination
Real-time index calculation (every second) will commence on September 30, 2024.
6.2 Product Launch
Index futures and ETFs based on the Value-up Index are expected to be launched in November 2024.
6.3 Future Index Development
KRX plans to develop a series of indices based on market demand, drawing on insights gained from the development of the Value-up Index. Potential themes for future indices include under-valued stocks and small-cap stocks.
7. Expected Impact
- Re-rating of the Korean Stock Market: The launch of the Value-up Index and related investment products is expected to attract new investments and contribute to a positive re-rating of the Korean stock market.
- Promoting a Culture of Shareholder Value Enhancement: The index will encourage listed companies to focus on shareholder returns and improve their capital efficiency, ultimately contributing to a more robust and sustainable financial market in Korea.
