MSCI Inc. (MSCI) was formed as a division of Morgan Stanley (MS) in the late 1960s and introduced its first equity index products in 1969. The company went public in 2007, and Morgan Stanley sold the last of its MSCI holdings in 2009. MSCI is a leading provider of investment decision support tools, including indices, portfolio risk and performance analytics, and corporate governance services. It has about 6,200 clients in 82 countries that it serves through 20 offices worldwide. The company has two segments: performance and risk management, and governance.
Performance and risk management offerings (about 87% of revenues) include proprietary index data, portfolio risk analytics and environmental, social, and governance ratings, and research delivered by data feeds and proprietary software. MSCI-branded indices are designed to measure returns in a broad variety of markets, both developed and emerging, worldwide. Performance indices are for regions or countries, size of company (small cap to large), investment style (growth to value), and industry. All told, the company calculates about 150,000 indices daily. The performance of about $240 billion of assets is currently evaluated against an MSCI index.
The MSCI Global Equity Indices are the company’s flagship products, measuring returns available to global investors across a broad range of markets. Besides the regional, style, and industry indices, the company has recently introduced the MSCI ACWI IMI, or All Country World Investable Market Index, which is being used as a benchmark by some pension plans. Other recent offerings include the EM (emerging market) 50, overseas China, and Andes region products. Customized indices comprise around 5,500 performance-related products and environmental, social and governance (ESG) products that allow clients to measure and report on their performance is such areas as sustainability, ethics, and alternative or clean technology.
Risk management analytics permit customers to identify and manage potential risks of stocks, fixed-income holdings or derivatives, produce daily risk reports, evaluate and monitor asset managers, and observe correlations across groups of assets or portfolios. Products offer value-at-risk simulation, stress testing, and performance attribution, among other features, to help clients manage multi-asset portfolios. Other risk offerings include hedge-fund monitoring and evaluation, customized data processing, and investment planning for high net worth individuals. Portfolio management analytics products allow clients to identify global sources of risk and return in global, asset class, regional, and single-country models. Risk products are mostly offered under the Barra brand name.
The governance segment (13% of revenues) provides corporate governance and analysis to institutional investors and corporations worldwide in three categories: global proxy research and distribution and securities class action services; executive compensation, governance ratings, and voting trends; and financial research and analysis, including forensic accounting research that helps clients identify aggressive accounting practices and signs of financial distress.
Approximately 85% of MSCI’s revenues derive from subscription fees, and the balance comes from fees paid as a percentage of assets under management that are evaluated against MSCI indices. By customer category, 56% of revenues are from asset managers, 24% from banks and broker-dealers, 11% from alternative asset managers, and 9% from asset owners. By region, 53% of assets are controlled by clients based in the Americas, 36% in Asia, and 22% in Europe, the Middle East, and Africa.
MSCI is the second-largest provider of indices, behind a joint venture of Standard & Poors, a division of The McGraw Hill Companies (MHP), and Dow Jones, a segment of News Corp. (NWS); MSCI has a 19% market share; the joint venture has 31%. Other major index providers include CME Group (CME) and sections of private companies. In portfolio and risk analytics, competitors include SunGard, Standard & Poors, International Business Machines (IBM – Free IBM Stock Report), Barclay’s, BlackRock (BLK), FactSet Research Systems (FDS), and Moody’s (MCO).
MSCI stock plunged 28% in a day after Vanguard decided to shift about $130 billion of assets from MSCI indices to another provider; the stock has since recovered around a third of the drop. The damage to MSCI’s earnings should be fairly small, since asset-based fees constitute only about 15% of the total and Vanguard was paying below-average rates. Nonetheless, revenues and earnings rose just modestly in 2012, held back by a small decline in asset-based fees. We think that earnings will be little changed in early 2013 as the loss of the Vanguard business is offset by slow growth from other clients, some new business, and a recent acquisition in real estate data services. Costs ought to remain under control as the company raises the percentage of its staff employed in emerging markets.
MSCI ought to prosper with growing interest In international and passive investing. The company generates plenty of free cash flow for acquisitions. We think the stock is reasonably valued and offers investors good international exposure.
At the time of this article’s writing, the author had a position in IBM.