–    In the Darwinian sense, mid-size firms are truly positioned in an evolutionary sweet spot, having survived beyond their startup phases and offering stability as well as rapid growth opportunities in the future.

–    The S&P Global Challengers List™ identifies 300 mid-size companies that show the highest growth characteristics along dimensions encompassing intrinsic and extrinsic growth. They are expected to emerge as challengers to the world’s leading blue chip companies.

–    This list can be used by service providers such as consultants and marketers analyzing global growth trends or seeking client engagement opportunities; by strategy formulators assessing future partners or competitors; and by product creators structuring investment vehicles offering exposure to fast growing mid size companies.

–    A globally consistent set of intrinsic and extrinsic attributes are used to identify growth using a robust scoring technique. The attributes used are share price appreciation, sales growth, earnings growth and employee growth.

–    S&P will publish this list annually, and track its performance through annual publications. The Class of 2006 has representation from 32 countries and 10 sectors.

–    The S&P Global Challengers 40 index is a highly liquid and investable subset of the broader list.

Mid-size firms positioned in the market’s sweet spot

In the Darwinian sense, mid-size firms are truly positioned in an evolutionary sweet spot, having survived beyond their startup phases and offering stability as well as rapid growth opportunities in the future. Mid-capitalization firms can be thought of as having overcome the “growing pains” of small firms and, as such, are much less risky than small-cap start-ups. Essentially, the mid-cap space represents those firms, which were successful enough to sustain their traction while getting bigger. Looking at it in another way, the class of mid-caps offers the best potential pool of companies, which could indeed be tomorrow’s leaders. It is precisely these leaders we’d like to identify.
Popular financial literature is rife with “fastest growing company” lists as published by The Inc., Business 2.0, Forbes, Fortune, Kiplinger and the like. Each of these lists is limited in its approach – some are focused only on a particular sector such as technology, some include non-listed firms, some cover a specific country such as U.S., and so on. Besides, definitions of growth may not be robust – a narrow set of extrinsic variables may be used, variables may not be standardized and unreliable forecast variables may be used.

A need exists for a truly global list from three distinct quarters:
• Service providers such as consultants and marketers analyzing global growth trends and identifying client engagement opportunities.
• Strategy formulators identifying fast growing companies that may serve as future partners and competitors.
• Investment product creators needing a robust universe for structuring vehicles offering exposure to fast growing mid size companies.

The S&P Global ChallengersTM will fulfill this need.

Introducing the S&P Global ChallengersTM

The S&P Global Challengers List identifies 300 mid-size companies that show the highest growth characteristics along dimensions encompassing intrinsic and extrinsic growth. This annual list is based on a robust methodology that applies consistent standards to multiple countries. We believe that this list could serve as the universe for developing more focused products like the S&P Global Challengers 40 Index.

Eligibility Criteria

Universe
The universe for the S&P Global Challengers List consists of publicly-listed common shares of companies from all countries in the world. The universe does not, however, consider ADRs/ GDRs and, in the case of multiple listings on different exchanges by the same company, considers only the listing in the company’s home country. The universe also considers only the primary share class of a company.

Inclusion Factors
From the universe, the companies to be included must first meet the size criteria. All eligible companies must have at least USD 500 million and at most USD 5 billion in total market capitalization, among all share classes as of Dec 31 of the year prior to the index reconstitution date. Further, the companies must satisfy both extrinsic and intrinsic factors:

Extrinsic Factors
• Price appreciation. All eligible companies must have positive three-year price appreciation as of Dec 31 of the year prior to index reconstitution.
• Sales growth. All eligible companies must have positive three-year sales growth as of the latest fiscal year for each company.

Intrinsic Factors

• Earnings per share growth. All eligible companies must have positive three-year earnings per share growth as of the latest fiscal year for each company.
• Employee count growth. All eligible companies must have positive three-year employee count growth as of the latest fiscal year for each company.

Reconstitution

Data
The list is revised once a year in April. The cut-off date for the data is March 31.

Exclusion Criteria
From the universe, companies are excluded in the case of:

Data Unavailability

• They have not reported their annual fiscal numbers in the 13 months prior to the index reconstitution date (April of each year). The 13-month window allows for different fiscal year ends for the different companies.
• They do not report employee data in their annual reports. The employee data is needed to calculate employee count growth rates.

Incalculable Growth Rates
• Their EPS, Sales and employee count growth rates cannot be calculated. These are companies for which the EPS, Sales and employee counts are less than or equal to zero. This also excludes companies with shrinking losses.

List Construction
The final list is constructed taking the following steps:

1. Foreign Exchange: Local currency is used to represent all currency-related data items. This ensures that foreign exchange fluctuations do not bias the construction of the list.
2. Factor Standardization: Three-year growth rates are calculated for share price, EPS, Sales and employee count, and these represent the factors relevant to list construction. These factors are standardized across the composite by using the following formula:

F=(x – µ)/ s

Where:
F – Standardized growth rate factor
x – Growth rate for that company
µ – Average of the growth rate for the composite
s – Standard Deviation of the growth rate for the composite
3. Data Cleaning: The data is further cleaned by removing the effect of outliers for all growth rates. This ensures that no one growth-rate biases a company to be a part of the list. This is achieved by capping the standardized factors calculated above to 2.5. Effectively, the growth rates are capped up to 2.5 times the standard deviation from mean.
4. Factor Scoring: The standardized growth rate factors are then summed to determine the composite score of each company.
5. Final List Construction: The final list consists of the 300 companies with the highest composite scores as well as all four growth-rates positive.

The S&P Global Challengers List Characteristics
Using the selection criteria stated above, we reconstruct what each ”graduating class” of the S&P Global Challengers would have looked like dating back to 2001, and determine different characteristics of our list.

Performance – Risk and Returns
Using the constituents of each graduating class in our list, we construct a portfolio and compare its performance to appropriate benchmarks. For performance purposes, the portfolio is constructed as an equally-weighted portfolio.

Sector and Geographic Coverage
A sector and geographic analysis of the S&P Global Challengers List™ shows that growth resides in a broad range of sectors and geographies.

 The Class of 2001 – did the mousetrap work?
One way to validate the S&P Global Challengers List would be to revisit our list from 2001 (Class of 2001) and check where the constituents stand today. Out of the 300 in the initial list, 295 survived, with the composite showing significant growth trends in terms of average sales, and number of employees as seen in exhibits 4 and 5. The composite also shows higher growth trends than blue chip companies as seen in exhibit 6. We use the S&P Global 1200, as a proxy for blue-chip firms from around the world. For the S&P Global 1200, these averages are calculated using data of approximately 1000 firms, as is available in databases.

Is the mousetrap perfect?
As we can see from the characteristics of the Class of 2001, this approach has indeed been successful in identifying companies with future leadership potential. That said, given the S&P Global Challengers’ reliance on company-reported data, the integrity of the list depends on the integrity of the underlying company reports. Examples include Livedoor (Japan) and iSoft (United Kingdom), both of which are constituents of the S&P Global Challengers List in the Class of 2006. Both of these companies are under investigation by regulatory authorities for misleading financial reporting.

How does one invest in the S&P Global Challengers?
The S&P Global Challengers List by itself forms a universe that lends itself to analysis of emerging growth companies as well as formation of investment vehicles providing exposure to these companies. For an investable vehicle, desirable characteristics include:
• Accessibility to the underlying stocks
• Liquidity
• Geographic diversification
Along these lines, we developed the S&P Global Challengers 40 Index, a liquid investable equal-weighted portfolio of the 40 fastest growing stocks with representation from around the world, and the S&P Global Challengers List as the universe. The S&P Global Challengers 40 Index is just one manifestation of an investment vehicle – there could potentially be several other investment vehicles that could be developed like the S&P Global Challengers Asia Index, S&P Global Challengers Europe Index and so on.

The S&P Global Challengers 40 Index

Eligibility Criteria

Universe
The universe for the S&P Global Challengers 40 Index is the S&P Global Challengers List.

Inclusion Factors
From the S&P Global Challengers List, the companies to be included in the S&P Global Challengers 40 Index must satisfy the following:

• Liquidity. All eligible companies must have average daily trading volume of at least USD 3 million over the 6 months before the list reconstitution date.
• Price. All eligible companies must have a 3-month average daily price greater than USD 5, as of Dec 31 of the year prior to list reconstitution.
• Exchange Listing. All eligible companies must be listed on exchanges in North America, Europe, Japan, Taiwan, Hong Kong, South Korea or Australia, either directly or through ADRs/ GDRs.

Reconstitution
Data
The list is revised once a year in April. The cut-off date for the data is March 31.

List Construction
The final list is constructed taking the following steps:
1. Composite score: Eligible companies are sorted based on their composite growth scores. We select the companies with the highest composite scores.
2. Geographic representation: From the list sorted by composite scores, we select 40 companies, such that no more than 20 or fewer than 5 companies are from the Americas, Europe and Asia/ Pacific.
S&P Global Challengers 40 Index inherits similar attractive characteristics
Like the S&P Global Challengers List, we construct ”buckets” for the S&P Global Challengers Index going back to 2001. We then use this historical data to determine the composites’ characteristics. In the case of a company, which fulfills the Exchange Listing eligibility criteria because of its ADR/ GDR listing, the ADR/ GDR returns will be used for performance analysis.

Class of 2001 Progress
Like the S&P Global Challengers List, we calculate metrics such as average market cap, average EPS and average sales for the class of 2001, to see where it stands today. The entire graduating class from 2001 survived as of Dec 31, 2005.

The Newly Minted Class of 2006
Our freshest set for the S&P Global Challengers has representation from 32 countries and 10 sectors for the List [APPENDIX A]. The S&P Global Challengers 40 Index has representation from 9 countries and 8 sectors worldwide [APPENDIX B]. Both lists are ordered based on the overall growth scores of the companies.
Concluding thoughts – A leader board for the quintessential quest for growth
The quintessential quest for growth by corporate executives, consultants, marketers and investors needs a robust, globally consistent leader board. The S&P Global Challengers List attempts to fulfill this need. It is not perfect, but it works quite well. Companies that show growth characteristics along the identified dimensions continue to grow and have a high potential of emerging as future leaders. Further, growth resides in a broad range of industries and countries. We believe that the S&P Global Challengers will serve as a robust and globally consistent leader board for this quintessential quest for growth.