Rebalancing the Russell Indices: Beta and Volatility Every day, global investors used market indices to measure...

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Rebalancing the Russell Indices: Beta and Volatility Every day, global investors used market indices to measure the status of stock, bond, and commodity markets around the world. The level and change of indices such as the S&P 500, Nikkei, Shanghai Composite, and others conveyed to investors in a simple way the day-to-day ups and downs of markets. Because the returns on an index represented the average returns of a comprehensive set of stocks, bonds, or other securities in a given market, average returns and the volatility of those returns helped investors develop expectations about the risk and return of a given investment. While many investors used indices, they didn't always stop to consider how exactly an index was constructed. Index providers such as Standard & Poors (S&P 500 Index), Nasdaq (Nasdaq Composite Index), and Citigroup (Citigroup World Government Bond Index) determined which securities to include in an index. They established rules and procedures by which the constituents of an index were determined over time. These rules were determined ex ante and were typically made publicly available so that market participants could anticipate what changes might be made to an index and so they could be sure the index would appropriately represent the underlying asset class over time. As an example, the S&P 500, a US large-cap equity index, required that firms file an SEC 10-K annual report (a US filing) and that "The U.S. portion of fixed assets and revenues constitutes a plurality of the total, but need not exceed 50%.1 This latter requirement ensured that the index would include only US equities. The S&P 500 also required that included firms have Unadjusted company market capitalization of US$ 5.3 billion or more" to ensure the index contained only large-cap equities. In addition to determining which securities should be included in a given index, index providers had to determine the weights used to aggregate the components of the index. Many equity indices (such as the S&P 500) were market-capitalization weighted, meaning that the percentage of the index invested in a given security was equal to that security's market capitalization (market cap) divided by the aggregate market cap of all other securities in the index. Other indices, such as the Dow Jones Industrial Average (DJIA), were price weighted, meaning that the index components were weighted by a company's stock price. Market-cap-weighted indices were useful because they reflected the aggregate valuation views of investors. Price-weighted indices reflected the prices investors were willing to pay for each security. Other common methodologies included equal weighting (index components were given an equal weight) and fundamental weighting (index components were weighted by a fundamental factor such as size of revenue, book value, or dividends). These other methodologies were useful in that they provided alternative approaches to analyzing markets. Fund Performance and Benchmark Indices To portfolio managers, indices were important because they represented benchmarks for the performance of their fund and an investment universe from which to select securities. The self-declared benchmark for the Fidelity Low-Priced Stock Fund, for example, was the Russell 2000 equity index, one of the most widely used US small-cap equity indices. The Russell 2000 and its complement, the Russell 1000, together covered the 3,000 largest US stocks; the Russell 2000 focused on stocks numbered 1,001 to 3,000 by market cap, a typical equity universe for small-cap fund managers. In its 2015 statement of additional information (SAI, a required regulatory filing and investor communication), the Fidelity Low-Priced Stock Fund made clear that the fund was to be measured relative to its self-stated benchmark in multiple ways. First, the management fee paid by investors to Fidelity was determined, in part, by "a performance adjustment based on a comparison of...Fidelity Low-Priced Stock Fund's performance to that of the Russell 2000 Index." Second, in describing the fund's performance for the year, the lead portfolio manager, Joel Tillinghast, compared it to that of the Russell 2000. He explained in detail the fund's underperformance relative to the benchmark: For the year, the fund's share classes returned roughly -1%, trailing the flat result of the benchmark Russell 2000 index. Much of the underperformance was due to lack of exposure to real estate investment trusts (REITs) and utilities, each of which posted a big gain as the prolonged period of low interest rates led investors to seek more-stable, predictable income. Our non-U.S. holdings also detracted despite a favorable currency impact overall.4 Given the importance of the index in determining both the management fee of the investment adviser and investor expectations for performance, changes in the composition of the index were events of importance for fund managers and investors alike. Index Reconstitution Because indices targeted a specific asset class or type of security, they needed to be reconstituted as the components of the index changed. For example, if the stock price of a small-cap company increased dramatically, it could become a mid- or large-cap company, since market cap is equal to the stock price times the shares outstanding. On a periodic basis, the constituents of the index were reevaluated to determine whether they still fit the index inclusion criteria. If a security no longer fit, the index provider would examine the universe of relevant securities and identify which security should take its place, then announce which securities it would delete from and add to the index and the date on which the change would be made. As an example, consider the Russell 2000 index, which along with the Russell 1000 covered the 3,000 largest US stocks; inclusion in the Russell 1000 and Russell 2000 was based strictly on total market cap, determined annually on the last trading day of May. Stocks with a market cap ranking 1 through 1,000 entered the Russell 1000, and those ranked 1,001 to 3,000 comprised the Russell 2000, both with weights equal to the percentage of the aggregate market cap of the other 1,000 or 2,000, stocks respectively (Exhibit 1). On the last Friday of every June, the index was reconstituted, and stocks that had slipped from the bottom of the Russell 1000, meaning their weight in the index was less than 0.001%, could appear at the top of the Russell 2000 index, where their weight could jump by a factor of 400 to 500. The Russell 1000 and 2000 covered a wide range of market caps. Each year, the indices were reconstituted to include companies that had moved from one index to another (for example, when a larger-cap company experienced a decrease in its market cap, it could be moved from the Russell 1000 to the Russell 2000). Toward the end of May each year, all eligible securities were ranked by market cap. These indices were then reconstituted on the last Friday in June.5 Index fund managers followed this reconstitution process closely to ensure their index funds tracked the newly reconstituted indices. The June 2014 Russell 2000 Index Reconstitution On June 13, 2014, the new constituents of the Russell 1000 and 2000 indices were announced. Two of the companies that were going to be removed from the Russell 1000 and added to the Russell 2000 were First Citizens Bancshares, Incorporated (FCB), and Innoviva, Inc. (Innoviva), because the market cap of both of these companies (Exhibit 2) was well below the lowest market-cap stock of the Russell 1000 (around $160 million) after the change. FCB, based in Raleigh, North Carolina, was a bank holding company with two subsidiaries: First Citizens Bank and IronStone Bank. The bank operated over 550 branches in 20 states, scattered primarily across the southeastern and western United States. The company provided standard consumer, business, and commercial banking services such as deposits, loans, and mortgages. However, the bulk of its revenue came from interest paid on loans, in particular real estate, construction, and land development loans. As a result of the economic downturn in the late 2000s, FCB was able to expand by acquiring smaller failed financial institutions. The bank's expanded branch network allowed it to reach new markets and fund additional revenue-raising loans. One of the challenges to bank and credit unions such as FCB was that demand for their services was highly dependent on business transactions, and could fluctuate with rises and declines in the economy. Periods of economic growth were often marked by expansion, development, and increased borrowing, which would increase bank revenue. However, the contrary was true during periods of recession. Banks were also exposed to frequent changes in interest rate, which affected the demand for loans and the amount lenders were willing to save. Innoviva was a biopharmaceutical company that focused primarily on research and development. It was headquartered in Brisbane, California, but its products were sold all over the world, including in the United States, Japan, Canada, and Western Europe. It targeted health areas including respiratory disease, bacterial infections, and central nervous system pain. One unique aspect of Innoviva's platform was that it partnered with other pharmaceutical companies during the late stages of drug development. This enabled companies to expedite the development and commercialization process, allowing new drugs to reach a wider market more quickly. In 2012, the company collaborated with Astellas Pharma Inc. to develop VIBATIV, a highly successful infection treatment. This medical breakthrough raised the company's revenue by 454%. Similarly, Innoviva's participation in the development of Relvar/Breo Ellipta and Anoro Ellipta asthma treatments, launched in 2014, earned the company millions of dollars in royalties. Being near the bottom of the Russell 1000, Innoviva and FCB comprised only a very small percentage of the index. Because of their small weight, active managers who were benchmarked relative to the Russell 1000 could safely ignore the two stocks. However, dropping out of the Russell 1000 put them among the largest market-cap stocks in the Russell 2000, simply because the Russell 2000 was comprised of small-market-cap companies. As a result, Innoviva and FCB comprised a large portion of the Russell 2000. Page 4 UV8352 As the index was reconstituted, active managers who tracked the Russell 2000 were aware of the changes. In choosing whether to add Innoviva and FCB to their investment portfolios, managers had to assess both the future return and the risk of the positions. In looking at the price or return variation of the stocks (Exhibits 3 and 4), Innoviva appeared to have greater variation than the FCB. At the same time, the Capital Asset Pricing Model (CAPM), applied to monthly return data for each stock (Exhibit 5) could be used to estimate the beta relative to the Russell 2000. Page 5 Exhibit 1 Rebalancing the Russell Indices: Beta and Volatility Russell 1000 and 2000 Top 10 and Bottom 10 Holding by Market Capitalization UV8352 Top 10 Russell 1000 (1/14) Market Cap (in billions of Top 10 Russell 2000 (1/14) Market Cap (in billions of US dollars) US dollars) Apple Inc. $ 500.7 CoStar Group, Inc. $ 5.3 Exxon Mobil Corporation $ 438.7 athenahealth, Inc. $ 5.0 Microsoft Corporation $ 310.5 Middleby Corporation $ 4.6 Google Inc. Cl A $ 376.4 Acuity Brands, Inc. $ 6.0 General Electric Company $ 282.0 Ionis Pharmaceuticals, Inc. $ 4.6 Johnson & Johnson $ 258.3 Ultimate Software Group, Inc. $ 4.3 Chevron Corporation $ 239.0 Align Technology, Inc. $ 4.6 Procter & Gamble Company $ 220.7 PTC Inc. $ 4.2 JPMorgan Chase & Co. $ 219.7 Brunswick Corporation $ 4.3 Wells Fargo & Company $ 238.7 NorthStar Realty Finance Corp. $ 4.2 Bottom 10 Russell 1000 (1/14) Market Cap Bottom 10 Russell 2000 (1/14) Market Cap (in billions of (in millions of US dollars) US dollars) CDW Corp. $ 4.0 ZaZa Energy Corp. $ 103 AVX Corporation $ 2.3 Cascade Bancorp $ 249 Tableau Soft., Inc. Cls A $ 4.3 Harvard App. Regenerative Tech Ins 67 Booz Allen Hamilton Hold. 2.8 Bear State Financial, Inc. $ 174 zulily, inc. Class A 5.1 USMD Holdings, Inc. $ 204 United States Cell. Corp. 3.5 Exco Res. Inc Rights $ 141 Veeva Sys. Inc Class A $ 4.0 GSE Holding, Inc. $ 42 Intelsat S.A. $ 2.4 CompX International Inc. Class $ 175 Clear Ch. Out., Inc. Cls A $ 3.6 Tejon Ranch Co $ 60 Kronos Worldwide, Inc. $ 2.2 Net Element, Inc. $ 141 Source: All exhibits were created by the authors. Data for this are from FTSE Russell, Compustat, and company filings. Page 6 Exhibit 2 Rebalancing the Russell Indices: Beta and Volatility Russell Index Characteristics for First Citizens and Innoviva Market Value (in millions of Holding FIRST CITIZENS Ticker Date 5/30/2014 US dollars) Weight (percentage) Index 2096.72 0.0083 Russell 1000 FCNCA BANCSHARES INC 6/30/2014 2344.75 0.1054 Russell 2000 INNOVIVA INC. 5/30/2014 3226.96 0.0114 Russell 1000 INVA (Formerly (THRX) THERAVANCE INC.) 6/30/2014 3373.63 0.1394 Russell 2000 Data source: FTSE Russell, Compustat, and company filings. Exhibit 3 Rebalancing the Russell Indices: Beta and Volatility Monthly Returns: First Citizens BancShares versus Russell 2000 Index 15% 10% 5% 0% -5% -10% -15% Jun-11 Oct-11 Feb-12 Jun-12 Oct-12 Feb-13 Jun-13 Oct-13 Feb-14 Jun-14 -First Citizens BancShares -Russell 2000 Data source: Center for Research in Security Prices, http://www.crsp.org/ (accessed Jul. 16, 2021). UV8352 Page 7 50% 40% 30% 20% 10% 0% -10% -20% -30% Exhibit 4 Rebalancing the Russell Indices: Beta and Volatility Monthly Returns: Innoviva versus Russell 2000 Index W Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Innoviva Russell 2000 Data source: Center for Research in Security Prices, http://www.crsp.org/ (accessed July 16, 2021). Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 UV8352 Page 8 Exhibit 5 Rebalancing the Russell Indices: Beta and Volatility Monthly Return Data UV8352 First Citizens BancShares Innoviva Date 6/30/2011 Russell 2000 (FCNCA) (INVA) Three Month T bill -4.13% -15.00% -2.46% 0.01% 7/31/2011 -3.79% -3.74% -3.67% -0.02% 8/31/2011 -11.73% -11.13% -8.81% 0.02% 9/30/2011 -9.53% 6.00% -6.32% 0.00% 10/31/2011 13.59% 10.38% 8.84% 0.01% 11/30/2011 5.28% 4.99% -0.49% 0.00% 12/31/2011 2.11% -5.31% 0.47% 0.00% 1/31/2012 1.04% -19.73% 7.01% -0.01% 2/29/2012 -0.37% 5.41% 2.29% 0.00% 3/31/2012 3.88% 4.28% 2.39% 0.01% 4/30/2012 -5.14% 10.97% -1.62% 0.00% 5/31/2012 -2.77% -4.39% -6.74% 0.02% 6/30/2012 -0.92% 7.39% 4.81% 0.00% 7/31/2012 -1.42% 31.10% -1.45% 0.00% 8/31/2012 0.52% -8.44% 3.20% 0.01% 9/30/2012 -1.17% -2.85% 3.12% 0.01% 10/31/2012 3.59% -13.12% -2.23% 0.00% 11/30/2012 -2.22% -0.13% 0.39% 0.02% 12/31/2012 -0.73% -1.07% 3.34% 0.01% 1/31/2013 6.64% 0.05% 6.21% 0.00% 2/28/2013 2.98% -8.81% 1.00% 0.00% 3/31/2013 1.92% 16.41% 4.40% 0.02% 4/30/2013 2.04% 42.89% -0.40% 0.01% 5/31/2013 5.82% 3.82% 3.90% 0.01% 6/30/2013 -2.49% 9.96% -0.70% 0.00% 7/31/2013 9.09% 0.08% 6.90% 0.00% 8/31/2013 -3.47% -7.03% -3.30% 0.01% 9/30/2013 1.81% 14.00% 6.20% 0.00% 10/31/2013 2.98% -10.35% 2.50% 0.01% 11/30/2013 6.10% 3.06% 3.90% 0.00% 12/31/2013 -0.77% -5.59% 1.80% 0.00% 1/31/2014 -0.62% 3.28% -2.80% 0.02% 2/28/2014 1.42% 0.49% 4.60% 0.00% 3/31/2014 7.42% -16.38% -0.80% 0.00% 4/30/2014 -6.59% -12.99% -3.90% 0.01% 5/31/2014 -2.27% 6.43% 0.70% 0.00% 6/30/2014 11.61% 23.50% 5.20% 0.00% Data source: Center for Research in Security Prices, http://www.crsp.org/ (accessed Jul. 16, 2021). Rebalancing the Russell Indices: Beta and Volatility Every day, global investors used market indices to measure the status of stock, bond, and commodity markets around the world. The level and change of indices such as the S&P 500, Nikkei, Shanghai Composite, and others conveyed to investors in a simple way the day-to-day ups and downs of markets. Because the returns on an index represented the average returns of a comprehensive set of stocks, bonds, or other securities in a given market, average returns and the volatility of those returns helped investors develop expectations about the risk and return of a given investment. While many investors used indices, they didn't always stop to consider how exactly an index was constructed. Index providers such as Standard & Poors (S&P 500 Index), Nasdaq (Nasdaq Composite Index), and Citigroup (Citigroup World Government Bond Index) determined which securities to include in an index. They established rules and procedures by which the constituents of an index were determined over time. These rules were determined ex ante and were typically made publicly available so that market participants could anticipate what changes might be made to an index and so they could be sure the index would appropriately represent the underlying asset class over time. As an example, the S&P 500, a US large-cap equity index, required that firms file an SEC 10-K annual report (a US filing) and that "The U.S. portion of fixed assets and revenues constitutes a plurality of the total, but need not exceed 50%.1 This latter requirement ensured that the index would include only US equities. The S&P 500 also required that included firms have Unadjusted company market capitalization of US$ 5.3 billion or more" to ensure the index contained only large-cap equities. In addition to determining which securities should be included in a given index, index providers had to determine the weights used to aggregate the components of the index. Many equity indices (such as the S&P 500) were market-capitalization weighted, meaning that the percentage of the index invested in a given security was equal to that security's market capitalization (market cap) divided by the aggregate market cap of all other securities in the index. Other indices, such as the Dow Jones Industrial Average (DJIA), were price weighted, meaning that the index components were weighted by a company's stock price. Market-cap-weighted indices were useful because they reflected the aggregate valuation views of investors. Price-weighted indices reflected the prices investors were willing to pay for each security. Other common methodologies included equal weighting (index components were given an equal weight) and fundamental weighting (index components were weighted by a fundamental factor such as size of revenue, book value, or dividends). These other methodologies were useful in that they provided alternative approaches to analyzing markets. Fund Performance and Benchmark Indices To portfolio managers, indices were important because they represented benchmarks for the performance of their fund and an investment universe from which to select securities. The self-declared benchmark for the Fidelity Low-Priced Stock Fund, for example, was the Russell 2000 equity index, one of the most widely used US small-cap equity indices. The Russell 2000 and its complement, the Russell 1000, together covered the 3,000 largest US stocks; the Russell 2000 focused on stocks numbered 1,001 to 3,000 by market cap, a typical equity universe for small-cap fund managers. In its 2015 statement of additional information (SAI, a required regulatory filing and investor communication), the Fidelity Low-Priced Stock Fund made clear that the fund was to be measured relative to its self-stated benchmark in multiple ways. First, the management fee paid by investors to Fidelity was determined, in part, by "a performance adjustment based on a comparison of...Fidelity Low-Priced Stock Fund's performance to that of the Russell 2000 Index." Second, in describing the fund's performance for the year, the lead portfolio manager, Joel Tillinghast, compared it to that of the Russell 2000. He explained in detail the fund's underperformance relative to the benchmark: For the year, the fund's share classes returned roughly -1%, trailing the flat result of the benchmark Russell 2000 index. Much of the underperformance was due to lack of exposure to real estate investment trusts (REITs) and utilities, each of which posted a big gain as the prolonged period of low interest rates led investors to seek more-stable, predictable income. Our non-U.S. holdings also detracted despite a favorable currency impact overall.4 Given the importance of the index in determining both the management fee of the investment adviser and investor expectations for performance, changes in the composition of the index were events of importance for fund managers and investors alike. Index Reconstitution Because indices targeted a specific asset class or type of security, they needed to be reconstituted as the components of the index changed. For example, if the stock price of a small-cap company increased dramatically, it could become a mid- or large-cap company, since market cap is equal to the stock price times the shares outstanding. On a periodic basis, the constituents of the index were reevaluated to determine whether they still fit the index inclusion criteria. If a security no longer fit, the index provider would examine the universe of relevant securities and identify which security should take its place, then announce which securities it would delete from and add to the index and the date on which the change would be made. As an example, consider the Russell 2000 index, which along with the Russell 1000 covered the 3,000 largest US stocks; inclusion in the Russell 1000 and Russell 2000 was based strictly on total market cap, determined annually on the last trading day of May. Stocks with a market cap ranking 1 through 1,000 entered the Russell 1000, and those ranked 1,001 to 3,000 comprised the Russell 2000, both with weights equal to the percentage of the aggregate market cap of the other 1,000 or 2,000, stocks respectively (Exhibit 1). On the last Friday of every June, the index was reconstituted, and stocks that had slipped from the bottom of the Russell 1000, meaning their weight in the index was less than 0.001%, could appear at the top of the Russell 2000 index, where their weight could jump by a factor of 400 to 500. The Russell 1000 and 2000 covered a wide range of market caps. Each year, the indices were reconstituted to include companies that had moved from one index to another (for example, when a larger-cap company experienced a decrease in its market cap, it could be moved from the Russell 1000 to the Russell 2000). Toward the end of May each year, all eligible securities were ranked by market cap. These indices were then reconstituted on the last Friday in June.5 Index fund managers followed this reconstitution process closely to ensure their index funds tracked the newly reconstituted indices. The June 2014 Russell 2000 Index Reconstitution On June 13, 2014, the new constituents of the Russell 1000 and 2000 indices were announced. Two of the companies that were going to be removed from the Russell 1000 and added to the Russell 2000 were First Citizens Bancshares, Incorporated (FCB), and Innoviva, Inc. (Innoviva), because the market cap of both of these companies (Exhibit 2) was well below the lowest market-cap stock of the Russell 1000 (around $160 million) after the change. FCB, based in Raleigh, North Carolina, was a bank holding company with two subsidiaries: First Citizens Bank and IronStone Bank. The bank operated over 550 branches in 20 states, scattered primarily across the southeastern and western United States. The company provided standard consumer, business, and commercial banking services such as deposits, loans, and mortgages. However, the bulk of its revenue came from interest paid on loans, in particular real estate, construction, and land development loans. As a result of the economic downturn in the late 2000s, FCB was able to expand by acquiring smaller failed financial institutions. The bank's expanded branch network allowed it to reach new markets and fund additional revenue-raising loans. One of the challenges to bank and credit unions such as FCB was that demand for their services was highly dependent on business transactions, and could fluctuate with rises and declines in the economy. Periods of economic growth were often marked by expansion, development, and increased borrowing, which would increase bank revenue. However, the contrary was true during periods of recession. Banks were also exposed to frequent changes in interest rate, which affected the demand for loans and the amount lenders were willing to save. Innoviva was a biopharmaceutical company that focused primarily on research and development. It was headquartered in Brisbane, California, but its products were sold all over the world, including in the United States, Japan, Canada, and Western Europe. It targeted health areas including respiratory disease, bacterial infections, and central nervous system pain. One unique aspect of Innoviva's platform was that it partnered with other pharmaceutical companies during the late stages of drug development. This enabled companies to expedite the development and commercialization process, allowing new drugs to reach a wider market more quickly. In 2012, the company collaborated with Astellas Pharma Inc. to develop VIBATIV, a highly successful infection treatment. This medical breakthrough raised the company's revenue by 454%. Similarly, Innoviva's participation in the development of Relvar/Breo Ellipta and Anoro Ellipta asthma treatments, launched in 2014, earned the company millions of dollars in royalties. Being near the bottom of the Russell 1000, Innoviva and FCB comprised only a very small percentage of the index. Because of their small weight, active managers who were benchmarked relative to the Russell 1000 could safely ignore the two stocks. However, dropping out of the Russell 1000 put them among the largest market-cap stocks in the Russell 2000, simply because the Russell 2000 was comprised of small-market-cap companies. As a result, Innoviva and FCB comprised a large portion of the Russell 2000. Page 4 UV8352 As the index was reconstituted, active managers who tracked the Russell 2000 were aware of the changes. In choosing whether to add Innoviva and FCB to their investment portfolios, managers had to assess both the future return and the risk of the positions. In looking at the price or return variation of the stocks (Exhibits 3 and 4), Innoviva appeared to have greater variation than the FCB. At the same time, the Capital Asset Pricing Model (CAPM), applied to monthly return data for each stock (Exhibit 5) could be used to estimate the beta relative to the Russell 2000. Page 5 Exhibit 1 Rebalancing the Russell Indices: Beta and Volatility Russell 1000 and 2000 Top 10 and Bottom 10 Holding by Market Capitalization UV8352 Top 10 Russell 1000 (1/14) Market Cap (in billions of Top 10 Russell 2000 (1/14) Market Cap (in billions of US dollars) US dollars) Apple Inc. $ 500.7 CoStar Group, Inc. $ 5.3 Exxon Mobil Corporation $ 438.7 athenahealth, Inc. $ 5.0 Microsoft Corporation $ 310.5 Middleby Corporation $ 4.6 Google Inc. Cl A $ 376.4 Acuity Brands, Inc. $ 6.0 General Electric Company $ 282.0 Ionis Pharmaceuticals, Inc. $ 4.6 Johnson & Johnson $ 258.3 Ultimate Software Group, Inc. $ 4.3 Chevron Corporation $ 239.0 Align Technology, Inc. $ 4.6 Procter & Gamble Company $ 220.7 PTC Inc. $ 4.2 JPMorgan Chase & Co. $ 219.7 Brunswick Corporation $ 4.3 Wells Fargo & Company $ 238.7 NorthStar Realty Finance Corp. $ 4.2 Bottom 10 Russell 1000 (1/14) Market Cap Bottom 10 Russell 2000 (1/14) Market Cap (in billions of (in millions of US dollars) US dollars) CDW Corp. $ 4.0 ZaZa Energy Corp. $ 103 AVX Corporation $ 2.3 Cascade Bancorp $ 249 Tableau Soft., Inc. Cls A $ 4.3 Harvard App. Regenerative Tech Ins 67 Booz Allen Hamilton Hold. 2.8 Bear State Financial, Inc. $ 174 zulily, inc. Class A 5.1 USMD Holdings, Inc. $ 204 United States Cell. Corp. 3.5 Exco Res. Inc Rights $ 141 Veeva Sys. Inc Class A $ 4.0 GSE Holding, Inc. $ 42 Intelsat S.A. $ 2.4 CompX International Inc. Class $ 175 Clear Ch. Out., Inc. Cls A $ 3.6 Tejon Ranch Co $ 60 Kronos Worldwide, Inc. $ 2.2 Net Element, Inc. $ 141 Source: All exhibits were created by the authors. Data for this are from FTSE Russell, Compustat, and company filings. Page 6 Exhibit 2 Rebalancing the Russell Indices: Beta and Volatility Russell Index Characteristics for First Citizens and Innoviva Market Value (in millions of Holding FIRST CITIZENS Ticker Date 5/30/2014 US dollars) Weight (percentage) Index 2096.72 0.0083 Russell 1000 FCNCA BANCSHARES INC 6/30/2014 2344.75 0.1054 Russell 2000 INNOVIVA INC. 5/30/2014 3226.96 0.0114 Russell 1000 INVA (Formerly (THRX) THERAVANCE INC.) 6/30/2014 3373.63 0.1394 Russell 2000 Data source: FTSE Russell, Compustat, and company filings. Exhibit 3 Rebalancing the Russell Indices: Beta and Volatility Monthly Returns: First Citizens BancShares versus Russell 2000 Index 15% 10% 5% 0% -5% -10% -15% Jun-11 Oct-11 Feb-12 Jun-12 Oct-12 Feb-13 Jun-13 Oct-13 Feb-14 Jun-14 -First Citizens BancShares -Russell 2000 Data source: Center for Research in Security Prices, http://www.crsp.org/ (accessed Jul. 16, 2021). UV8352 Page 7 50% 40% 30% 20% 10% 0% -10% -20% -30% Exhibit 4 Rebalancing the Russell Indices: Beta and Volatility Monthly Returns: Innoviva versus Russell 2000 Index W Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Innoviva Russell 2000 Data source: Center for Research in Security Prices, http://www.crsp.org/ (accessed July 16, 2021). Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 UV8352 Page 8 Exhibit 5 Rebalancing the Russell Indices: Beta and Volatility Monthly Return Data UV8352 First Citizens BancShares Innoviva Date 6/30/2011 Russell 2000 (FCNCA) (INVA) Three Month T bill -4.13% -15.00% -2.46% 0.01% 7/31/2011 -3.79% -3.74% -3.67% -0.02% 8/31/2011 -11.73% -11.13% -8.81% 0.02% 9/30/2011 -9.53% 6.00% -6.32% 0.00% 10/31/2011 13.59% 10.38% 8.84% 0.01% 11/30/2011 5.28% 4.99% -0.49% 0.00% 12/31/2011 2.11% -5.31% 0.47% 0.00% 1/31/2012 1.04% -19.73% 7.01% -0.01% 2/29/2012 -0.37% 5.41% 2.29% 0.00% 3/31/2012 3.88% 4.28% 2.39% 0.01% 4/30/2012 -5.14% 10.97% -1.62% 0.00% 5/31/2012 -2.77% -4.39% -6.74% 0.02% 6/30/2012 -0.92% 7.39% 4.81% 0.00% 7/31/2012 -1.42% 31.10% -1.45% 0.00% 8/31/2012 0.52% -8.44% 3.20% 0.01% 9/30/2012 -1.17% -2.85% 3.12% 0.01% 10/31/2012 3.59% -13.12% -2.23% 0.00% 11/30/2012 -2.22% -0.13% 0.39% 0.02% 12/31/2012 -0.73% -1.07% 3.34% 0.01% 1/31/2013 6.64% 0.05% 6.21% 0.00% 2/28/2013 2.98% -8.81% 1.00% 0.00% 3/31/2013 1.92% 16.41% 4.40% 0.02% 4/30/2013 2.04% 42.89% -0.40% 0.01% 5/31/2013 5.82% 3.82% 3.90% 0.01% 6/30/2013 -2.49% 9.96% -0.70% 0.00% 7/31/2013 9.09% 0.08% 6.90% 0.00% 8/31/2013 -3.47% -7.03% -3.30% 0.01% 9/30/2013 1.81% 14.00% 6.20% 0.00% 10/31/2013 2.98% -10.35% 2.50% 0.01% 11/30/2013 6.10% 3.06% 3.90% 0.00% 12/31/2013 -0.77% -5.59% 1.80% 0.00% 1/31/2014 -0.62% 3.28% -2.80% 0.02% 2/28/2014 1.42% 0.49% 4.60% 0.00% 3/31/2014 7.42% -16.38% -0.80% 0.00% 4/30/2014 -6.59% -12.99% -3.90% 0.01% 5/31/2014 -2.27% 6.43% 0.70% 0.00% 6/30/2014 11.61% 23.50% 5.20% 0.00% Data source: Center for Research in Security Prices, http://www.crsp.org/ (accessed Jul. 16, 2021).