Financial markets indexing is a highly competitive sphere, but client wins and ongoing innovation has powered MSCI to a second consecutive victory in the index provider of the year category.
Few firms can compete with New York-based MSCI’s market position: it counts 97 of the world’s biggest 100 asset managers and nine-tenths of the top 100 pension funds as clients. The size of its footprint is considerable, with assets benchmarked against MSCI indexes passing $11 trillion this year.
However, the firm’s position as a market behemoth is not new and would, alone, be insufficient grounds for winning this award. A series of client acquisitions and MSCI’s innovation in different sectors – a theme highlighted by multiple judges – is what delivered victory to the firm.
“They have been bringing continuous innovation in the benchmarking space,” said one judge. “The themes they developed this year, such as environmental, social and corporate governance (ESG), as well as the success of their factor-based indexes, are two of the reasons explaining my choice.”
Ulrich Stoof, global head of index licensing for structured products at MSCI, says the firm’s strength in the ESG area lies in its “deep” sources of data – more than 150 research analysts dissect the figures – and an ability to deliver optimised indexes. He points to client wins this year as validation of its approach.
“The adoption of MSCI ESG indexes by the Government Pension Investment Fund in Japan, and by Swiss Re as well as AP4 in Europe, underscores the momentum we continue to have in this space,” says Stoof.
MSCI’s work with derivatives exchanges has been a key area of innovation in 2017. It is working with several top venues to build a listed futures and options segment on its international benchmark indexes. “Over $2.77 trillion has been traded in the more than 200 listed derivatives linked to MSCI indexes until end of September 2017,” he says. That represents a growth in volumes of 47% compared to the same period in 2016.
“We are also building closer relationships with providers of structured products and over-the-counter derivatives,” says Stoof, highlighting MSCI’s growing business in custom indexes. Clients can draw on MSCI’s own portfolio, its ESG research team and risk analysis software such as MSCI Barra.
“The integrated index-analytics-ESG approach gives us a unique proposition among index providers,” he argues.
This year, Nasdaq Dubai signed a licensing agreement to use MSCI indexes to create derivatives products, the plan being to develop futures contracts based on the MSCI United Arab Emirates Index. “This development is significant in light of the importance the region has for international investors seeking exposure to emerging markets such as the UAE,” says Stoof.
In today’s capital markets environment, transparency and confidence in your index provider are more important than everUlrich Stoof, MSCI
MSCI continues to innovate in factor-based investment strategies, an area highlighted by judges. This is a fast-developing area: “The conversation on factor investing has moved towards understanding the key investment exposures they provide and best practices for implementation,” he says.
Clients are increasingly using factor indexes and the financial instruments linked to them not only as specialised investment strategies or satellite allocations. “[Clients] increasingly utilise them as precision exposures in portfolio construction, hedges against core allocations, or complements to active mandates,” says Stoof. “MSCI’s factor indexes allow investors to tailor exposures for specific outcomes in an easy-to-replicate and cost-effective way.”
He highlights MSCI’s ability to incorporate ESG into investors’ risk allocation strategy as an example of the firm’s innovation. “We recently launched a new range of 16 MSCI Factor ESG Target Indexes, including 12 indexes based on three different factors and four Multi-Factor ESG Target Indexes,” he says.
The methodology aims to maximise the exposure to a chosen factor or range of factors along with an improvement of the ESG score compared to the market-cap-weighted parent index.
“We have a large equity index and analytics research team of 165 people, in addition to the ESG researchers,” says Stoof, noting that MSCI’s licensing business in this area consists of more than 950 exchange-traded funds. “Major changes for us have been the growth in the size of assets in indexed investments and the broadening range of indexes we are creating as our clients become increasingly sophisticated in their indexed investing.”
MSCI boasts three quarters of the top 100 hedge funds (as measured by data provider Preqin) as clients – a big vote of confidence from one of the most innovative and cutting-edge segments of the asset management industry.
“In today’s capital markets environment, transparency and confidence in your index provider are more important than ever,” says Stoof. “Delivering high-quality solutions across client segments has been the driver for our continued innovation and service evolution.”