Stock story: Morgan Stanley Capital International (MSCI)

Providing benchmarks, data and analytics to global financial market participants. (Reading time: 2 mins)

Stock story: Morgan Stanley Capital International (MSCI)

January 2022

Capital International, now Morgan Stanley Capital International (MSCI), published its first global equity index in 1968. Since then, MSCI has become a global index behemoth. More than US$16 trillion in assets is benchmarked to MSCI products, including the well-known MSCI World Index. Most of the world's leading asset managers use MSCI products to build portfolios and to benchmark investment performance.  

MSCI, as the publisher of more than 250,000 daily indices, plays a core role in global capital markets. The index teams at MSCI set standards for investors by deciding which stocks and markets are worthy of inclusion in the closely followed indices. These decisions move stock prices and send billions of dollars of capital across international borders.

MSCI's index business has expanded extensively on the back of two key drivers, with more room to grow. The first driver, the growing popularity of global investing, expanded MSCI's client base. As asset owners looked to diversify holdings away from single domestic markets, the MSCI World Index, and its counterparts such as the MSCI Emerging Markets Index, served an expanding client need. Investors used the indices to define investable universes, monitor and manage portfolio risk, and benchmark investment performance.

The second driver, growth in passive investing, has widened the reach of MSCI index decisions. Passive investment strategies replicate an underlying index, delegating stock selection to the index publisher such as MSCI. MSCI indices are replicated by passive ETF  assets that hold over US$1.3 trillion in assets. The outlook remains rosy given the relatively low penetration of global passive products. 

But, MSCI is more than an index publisher. Motivated to "help clients build better portfolios for a better world," MSCI leverages its core position in the index industry to build tools for investors to assess and manage portfolio risk. No risk appears more front of mind for investors than ESG and climate change, and here MSCI excels.

MSCI has earned itself a pivotal role in the ESG (environmental, social and corporate governance) investing revolution. Its product set includes one of the broadest sets of ESG ratings (covering more than 14,000 issuers), leading climate risk-assessment tools, and ESG and climate risk-adjusted versions of the popular MSCI global indices. No fewer than 48 of the top 50 asset managers (of almost 2,000 clients) subscribe to MSCI ESG Research ratings, and MSCI is the number one provider of ESG indices used in passive strategies. Just as MSCI World Index decisions influence capital flows, MSCI's ESG ratings are starting to do the same. In a rapidly growing market, MSCI is becoming entrenched in investor flows much like in its index business.

MSCI’s index business (about 80% of earnings) has strong network effects. Asset allocators and asset managers benefit from using the same standards, much like two people speaking the same language. Asset allocators familiar with MSCI indices would likely prefer to benchmark an asset manager's investment performance against an MSCI index than an alternative they hadn't heard of. Similarly, asset managers would prefer to use the MSCI index, which they too are familiar with, over one they weren't familiar with. Once entrenched, neither the asset allocator nor the asset manager is likely to switch. As allocators and asset managers grow familiar with MSCI's ESG standards, the same effect is occurring, building a stable recurring revenue stream for MSCI to allocate to new products. Given this network effect, for established relationships and benchmarks, there is little competition.

MSCI management has long followed this approach, using stable and growing cash flows from the core index business to build new business lines. ESG and climate tools are only one of two future new growth areas for MSCI. The second is a longer-term opportunity to build what MSCI describes as the "holy grail," an index of all investible assets. Combining listed and unlisted markets across equity and fixed income into one index methodology, MSCI hopes to become a one-stop shop for all investors globally. While there is greater competition in the development of new benchmarks, if MSCI’s history is a guide, the company is well placed to play a leading role in these longer-term opportunities.

Overall, MSCI is a high-quality business that has a unique growth profile and risk exposure to financial markets. MSCI stands to benefit from the long-term growth of passive and ESG investing while displaying defensive characteristics, given the high level of subscription revenues.

Sources: Company filings and website

Important Information: This material has been delivered to you by Magellan Asset Management Limited ABN 31 120 593 946 AFS Licence No. 304 301 (‘Magellan’) and has been prepared for general information purposes only and must not be construed as investment advice or as an investment recommendation. This material does not take into account your investment objectives, financial situation or particular needs. This material does not constitute an offer or inducement to engage in an investment activity nor does it form part of any offer documentation, offer or invitation to purchase, sell or subscribe for interests in any type of investment product or service. You should read and consider any relevant offer documentation applicable to any investment product or service and consider obtaining professional investment advice tailored to your specific circumstances before making any investment decision. A copy of the relevant PDS relating to a Magellan financial product or service may be obtained by calling +61 2 9235 4888 or by visiting 

This material may include data, research and other information from third party sources. Magellan makes no guarantee that such information is accurate, complete or timely and does not provide any warranties regarding results obtained from its use. Statements contained in this material that are not historical facts are based on current expectations, estimates, projections, opinions and beliefs of Magellan. Such statements involve known and unknown risks, uncertainties and other factors, and undue reliance should not be placed thereon. 

Any trademarks, logos, and service marks contained herein may be the registered and unregistered trademarks of their respective owners. This material and the information contained within it may not be reproduced, or disclosed, in whole or in part, without the prior written consent of Magellan.