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IN CONVERSATION

MSCI: the data toolmaker

With hundreds of indexes, portfolio and risk analytics, and a growing emerging-markets and environmental, social and governance (ESG) focus, MSCI is a business in constant evolution, but chief executive and chairman, Henry Fernandez, says institutional investors are demanding further development, such as private-equity indexes.

Fernandez has been chief executive of MSCI since 1996, when the company’s revenue was $9 million. Last year it had $900 million in revenue and employed 2500 staff in 20 countries. The firm has grown organically and through acquisition, and Fernandez says he is on the lookout for suitable companies once more.

The last acquisition saw RiskMetrics assimilated into the MSCI fold within nine months of purchase, and each part of that business is now performing well, he says.

He admits he was perhaps too quick to call Institutional Shareholder Services (ISS), the proxy-voting firm that formed part of RiskMetrics’ stable, a “non-core” business.

“The risk business is why we bought the company. I had been pursuing them for five years and a year into the pursuit they bought ISS, and Morgan Stanley owned MSCI,” he says. “When two years ago I bought RiskMetrics, maybe I was too quick to say ISS is non-core and implying it would be sold.”

Now he says the proxy-voting business and a product that checks companies on non-financial factors could be huge successes.

Proof of that is MSCI’s ESG business, an offshoot of the ISS business, which has doubled in the past two years.

“It is a business with a lot of potential,” he says.

Last summer MSCI also launched an executive-compensation data-analytics offshoot of ISS.

“We looked at data in-house but didn’t make it available. It’s been a home run, especially from the issuers, the companies themselves. We’ve done that in the US, and will extend to all countries in Europe and eventually Asia,” he says.

The next cab off the rank in the ESG business will be the rating of sovereign debt on those criteria.

“We’re very brave,” he says.

While typically MSCI has had an equities focus, the recent relationship formed with Barclays to form an ESG fixed-income index is an example of the company looking to expand into other asset classes as investors and other clients demand.

“I have a sense that fixed income will grow a little bit organically or some by sort of acquisition,” he says.

“Institutional investors, asset owners, are extremely interested in creating transparency so their decisions are clear about what they’re buying – the purpose, benefit and measurement of that. We’re in the business of providing that transparency. We provide clarity. They want us to advance the state of the art in what we do. They want us to go in areas we’re not in yet, like private-equity indexes, risk models and fixed-income portfolio management.”

 

Tooling up
Fernandez says MSCI is very focused on creating the tools that help people make investment decisions.

“The broader investment industry attracts a lot of very smart people. We’ve found it attracts talent but the tools to help them navigate are not efficient. We are very focused on creating and maintaining and enhancing and investing in those decision-making tools,” he says.

“We are not in the business of indices per se, or data per se; they are a means to an end.

For example, an index is a performance tool for us, not just an index. The way we build our tools is we look at investment problems then at how to build the tools to fix the problem. It comes of out research.”

An example of that, he says, is the evolution of small caps as a global asset class.

“In the world of high correlations, people want ways to diversify. We make it more transparent,” he says.

The company continues to focus on equity investments as one of its core competencies, with an emphasis on providing equity-portfolio managers the tools they need including performance tools, by way of indexes, performance attribution, in Barra, portfolio construction, market-impact models and the ability to invest according to Sharia compliance or ESG.

But it also continues to evolve into other areas, such as multi-asset-class portfolio analytics, strategy indexes such as volatility or risk premium.

“For a long time indices were about slicing and dicing with market beta, what’s now happening is an evolution in the index world; it’s strategy beta.”

This evolution includes equities long/short, merger arbitrage, momentum (such as fundamental weighted indexes) and will change according to market cycles, for example, inflation-protected equities indexes are on the horizon.

 

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