Msci Inc. · NYSE:MSCI
Msci — Investor Presentation (March 2006)
62 slides from Msci's investor presentation, March 2006
Slide 1: Consultation on proposed enhancements to the Standard and Small Cap Indices
www.msci.com Consultation on proposed enhancements to the Standard and Small Cap Indices and on the resulting global investable equity market index family March 2006
Slide 2: Table of Contents
Table of Contents Executive Summary Background Critical Considerations in Index Design Proposal − Index design − Transition analysis Merits of the Proposal Appendix © 2006 MSCI Please refer to the important notice and disclaimer at the end of this document All rights reserved. 2
Slide 3: Executive Summary
Executive Summary The evolution of the international investment management process has led investors to seek exposure to a deeper opportunity set, with ability to focus on specific size and style segments These needs may be met by a family of investable market indices that: − Provides broad cove
Slide 4: Background
Background © 2006 MSCI Please refer to the important notice and disclaimer at the end of this document All rights reserved. 4
Slide 5: Introduction
Introduction For over 30 years, MSCI has constructed global equity benchmark indices that assist the international investment management process MSCI continually tries to assess, understand and address index needs that arise from the evolution of the investment process The MSCI equity indices
Slide 6: Evolution of the International Investment Process
Evolution of the International Investment Process Meaningful changes have continued to occur in international markets and investment processes, such as − Increased liquidity and greater ease of access to international markets − Increased sophistication and specialization of asset managers/asset ow
Slide 7: MSCI's Response to the Evolving International Investment Process
MSCI’s Response to the Evolving International Investment Process This development in the investment process has implications for the way benchmark indices are designed to best serve research, asset allocation, portfolio construction and performance measurement needs In response, MSCI is conducti
Slide 8: Enhanced Standard Index
Enhanced Standard Index MSCI proposes to enhance the Standard Index by moving from the current sampled approach targeting 85% at the industry group level to an exhaustive coverage of the large and mid cap segments of the universe The enhanced Standard Index would retain the many key features of
Slide 9: Enhanced Small Cap Index
Enhanced Small Cap Index MSCI also proposes to transition the existing Small Cap Index to an enhanced Small Cap Index that targets all companies with market capitalization below that of the companies in the enhanced Standard Index in the investable universe, subject to minimum investability criter
Slide 10: An Enhanced Index Family
An Enhanced Index Family The enhanced Standard and the enhanced Small Cap indices would be combined to create an investable market index Together, the enhanced Standard, enhanced Small Cap, and the investable market indices would become an investable market index family and provide − Deeper cove
Slide 11: Purpose of Consultation
Purpose of Consultation MSCI is seeking investor feedback on the need for and the design of the proposed enhancement to its Standard and Small Cap indices, which together would form a family of global investable market indices − MSCI may or may not enhance the existing indices as described in this
Slide 12: Proposed Structure of Enhanced MSCI Indices
Proposed Structure of Enhanced MSCI Indices Proposed structure of the global investable market index family: − The global index family and its size and style segments would be the result of the aggregation of the investable market indices and size and style segment indices constructed within each
Slide 13: Critical Considerations in Index Design
Critical Considerations in Index Design © 2006 MSCI Please refer to the important notice and disclaimer at the end of this document All rights reserved. 13
Slide 14: Defining Size: Percentile Approach
Defining Size: Percentile Approach Traditionally, indices built for depicting the global investable universe have largely followed a percentile approach to defining size segments − For example, the large capitalization segment may include companies in the top 70% by market capitalization, the mid
Slide 15: Defining Size: Percentile Approach (cont'd)
Defining Size: Percentile Approach (cont’d) However, a fixed percentile approach offers very little size integrity within each size segment Company Full Market Capitalization (USD million) at the 85th Percentile Percentile Canada USA Europe ex UK UK Japan Hong Kong Australia Singapore New Zealand
Slide 16: Defining Size: USD Cut-off Approach
Defining Size: USD Cut-off Approach Alternatively, size segments in the global investable market index family could be based on a fixed USD market capitalization level − For example, a USD 2 billion cut-off could be used to define large + mid cap companies globally, while companies below that leve
Slide 17: Defining Size: Number of Companies Approach
Defining Size: Number of Companies Approach Yet another alternative is to use a fixed number of companies to define size segments within each market − For example, in the US, the top 750 companies by full market capitalization could be chosen to depict the large and mid cap segment, with the next
Slide 18: Defining Size: Issues
Defining Size: Issues None of the previously mentioned approaches for size segmentation can, independently, achieve the critical, but conflicting objectives of: − Size integrity in multi-country index composites − Appropriate country representation in size composites − Index stability and reasonab
Slide 19: Index Design Proposal
Enhancement of Standard and Small Cap Indices to Create a Global Investable Market Index Family: Index Design Proposal © 2006 MSCI Please refer to the important notice and disclaimer at the end of this document All rights reserved. 19
Slide 20: Broad Methodology
Broad Methodology The methodology proposed by MSCI balances the different objectives by achieving: − Index stability, through the use of a fixed number of companies − Size integrity, by using minimum USD size guidelines globally or regionally − Consistent country representation, − by choosing the
Slide 21: Definition of the Investable Market Index Family
Definition of the Investable Market Index Family MSCI proposes to evolve the existing Standard Index and the existing International Small Cap Index, which use a sampled approach, to an enhanced Standard Index and an enhanced Small Cap Index that would use a top-down exhaustive coverage approach
Slide 22: Country/Region for Index Construction
Country/Region for Index Construction The investment process in Europe appears to have shifted to one where investors’ focus is on regional – rather than national – equity markets − However, investors from different blocs within the region may still have different perceptions as to what region (Eu
Slide 23: Investability & Coverage
Investability & Coverage To be considered as investable, similar to the current Standard and Small Cap eligibility screenings, companies would have to pass the following screens: − Size: Full company market capitalization must exceed USD 200 million for DM (USD 100 million for EM) and free float-a
Slide 24: Approach to Size Segmentation
Approach to Size Segmentation MSCI proposes to define the size segments of the global investable market index family on the basis of fixed number of companies − Fixed number of companies is a superior approach in terms of index stability and low turnover and it is also more reflective of how asset
Slide 25: Enhanced Standard Index: Developed Markets
Enhanced Standard Index: Developed Markets Within the enhanced Standard Index, the number of companies is proposed to be determined: − using minimum size levels in terms of both company full market capitalization and security free float-adjusted market capitalization, in order to preserve size int
Slide 26: Enhanced Standard Index: Emerging Markets
Enhanced Standard Index: Emerging Markets The enhanced Standard Index of emerging markets would be constructed under the same principles as the developed markets − To achieve size integrity and investability minimum size guidelines would be used − For Brazil, Mexico, Chile, South Africa, Russia, K
Slide 27: Enhanced Small Cap Index: Developed and Emerging Markets
Enhanced Small Cap Index: Developed and Emerging Markets For the enhanced Small Cap Index, the number of companies is proposed to be set to capture the companies in the investable market segment that are not included in the enhanced Standard Index As a result, the enhanced Small Cap Index would
Slide 28: Developed Markets: Summary
Developed Markets: Summary Number of companies by country / region for developed markets Pacific United Europe Segment Australia Hong Kong Singapore New Zealand Japan EAFE Canada USA World ex Japan Kingdom ex UK Large 30 20 10 - 60 150 50 150 410 45 300 755 Mid 45 20 10 5 80 250 75 175 580 60 450
Slide 29: Emerging Markets: Summary
Emerging Markets: Summary Summary Number of Companies Segment LATAM ASIA EMEA EM Large 15 70 30 115 Mid 64 278 113 455 Enhanced Standard 79 348 143 570 Enhanced Small Cap 70 862 217 1,149 Investable Market Index 149 1,210 360 1,719 Mimimum Full Market Cap of Companies Segment LATAM ASIA EMEA EM La
Slide 30: Style Segments
Style Segments MSCI proposes to continue to use the existing global value/growth methodology to segment the market into value and growth for both developed and emerging markets MSCI proposes to create value and growth indices, where appropriate, for the large cap and mid cap segments separately
Slide 31: Periodic Maintenance
Periodic Maintenance MSCI proposes to retain many of the existing principles for the maintenance of the global investable market index family In particular, in representing the evolution of equity markets in the indices, MSCI proposes to continue: − To reflect in the indices significant corporat
Slide 32: Periodic Maintenance (cont'd)
Periodic Maintenance (cont’d) The semi-annual index reviews, in May and November, would involve a comprehensive review of the size segment indices as well as the value and growth indices − The number of companies in the size segment indices within the investable market indices would be brought bac
Slide 33: Structural Maintenance
Structural Maintenance MSCI would review periodically and could change, if needed, the number of companies in each investable market index and size segment: − If the representation of the enhanced Standard and/or Small Cap indices deviated significantly from the targeted coverage − If there were l
Slide 34: Transition Analysis
Transition Analysis © 2006 MSCI Please refer to the important notice and disclaimer at the end of this document All rights reserved. 34
Slide 35: Transition Analysis
Transition Analysis This section analyzes country and sector weight changes and transition turnover of the proposed enhancements This analysis, based on proforma data as of June 30, 2005, shows that country and sector weight changes and one-off transition turnover are modest for the Standard Ind
Slide 36: Proforma Comparison: Standard to Enhanced Standard Index: Developed Markets
Proforma Comparison & Transition Analysis: Standard to Enhanced Standard Index: Developed Markets Proforma comparison of the MSCI Standard and the proposed enhanced Standard Index and turnover analysis Pro forma Current Enhanced Number of Standard Index Standard Companies Mkt Cap Index Mkt Cap Num
Slide 37: Proforma Weight Comparison: Standard vs. Enhanced Standard Index: Developed Markets
Proforma Weight Comparison : Standard vs. Enhanced Standard Index: Developed Markets World EAFE Pacific Europe World EAFE Pro forma Pro forma Pro forma Pro forma Weight Weight Current Enhanced Current Enhanced Current Enhanced Current Enhanced Change Change Standard Standard Standard Standard Standa
Slide 38: Proforma Comparison: Standard to Enhanced Standard Index: Emerging Markets
Proforma Comparison & Transition Analysis: Standard to Enhanced Standard Index: Emerging Markets Proforma comparison of the MSCI EM Standard and the proposed enhanced Standard Index and turnover analysis Pro forma Current Enhanced Standard Standard Number of securities Index Index Mkt Cap Mkt Cap
Slide 39: Proforma Weight Comparison: Standard vs. Enhanced Standard Index: Emerging Markets
Proforma Weight Comparison: Standard vs. Enhanced Standard Index: Emerging Markets EM ASIA EMEA LATAM EM Pro forma Pro forma Pro forma Pro forma Enhanced Enhanced Enhanced Enhanced Current Standard Current Standard Current Standard Current Standard Weight Standard Index Standard Index Standard Index
Slide 40: Proforma Comparison: Small Cap to Enhanced Small Cap Index: Developed Markets
Proforma Comparison & Transition Analysis: Small Cap to Enhanced Small Cap Index: Developed Markets Proforma comparison of the MSCI Small Cap and the proposed enhanced Small Cap Index and turnover analysis Pro forma Current Enhanced Small Cap Number of Small Cap Index Companies Index Mkt Cap Mkt C
Slide 41: Proforma Weight Comparison: Int'l Small Cap vs. Enhanced Small Cap Index
Proforma Weight Comparison: Int’l Small Cap vs. Enhanced Small Cap Index: Developed Markets World EAFE Pacific Europe World EAFE Pro forma Current Pro forma Current Pro forma Current Pro forma Weight Weight Current Enhanced Small Enhanced Small Enhanced Small Enhanced Change Change Small Cap Small C
Slide 42: Proforma Transition Analysis Highlights
Proforma Transition Analysis Highlights Developed Markets Standard to enhanced Standard Index − About 400 new large and mid cap companies, mostly from the US and Japan, would be added, partially offset by the deletions of 300 small cap companies predominantly from Europe − The one-way index turnov
Slide 43: Proforma Transition Analysis Highlights (cont'd)
Proforma Transition Analysis Highlights (cont’d) ACWI to enhanced ACWI index − As in the Developed Markets Standard index, the weight of USA increases with a corresponding decline in the weight of Europe − The weight of Emerging Markets declines from 5.9% to 5.5% in ACWI and from 11.8% to 11.4% in
Slide 44: Merits of the Proposal
Merits of the Proposal © 2006 MSCI Please refer to the important notice and disclaimer at the end of this document All rights reserved. 44
Slide 45: Merits: Standard Index User Perspective
Merits: Standard Index User Perspective An evolution of the Standard to the enhanced Standard Index would provide comprehensive, rather than sampled, coverage of the large and mid cap segments of both DM and EM while maintaining very similar − Country exposures − Industry group exposures − Ongoing
Slide 46: Merits: Small Cap Index User Perspective
Merits: Small Cap Index User Perspective An evolution of the Small Cap Index to the enhanced Small Cap Index would provide more comprehensive coverage of the small cap space − Value & growth style segmentation within small cap would be possible − A small cap EM index could be constructed − Ongoing
Slide 47: Appendix
Appendix All comparisons and analysis are proforma based on data as of June 30, 2005 © 2006 MSCI Please refer to the important notice and disclaimer at the end of this document All rights reserved. 47
Slide 48: Standard to Enhanced Standard Index: Europe ex UK
Proforma Comparison & Transition Analysis : Standard to Enhanced Standard Index: Europe ex UK Developed Markets Pro forma Current Enhanced Standard Number of Standard Index Companies Index Mkt Cap Mkt Cap Number of securities Wgt Ave Index ** USD mm USD mm Current + Added - Deleted Pro forma Pro for
Slide 49: Small Cap to Enhanced Small Cap Index: Europe ex UK
Proforma Comparison & Transition Analysis : Small Cap to Enhanced Small Cap Index: Europe ex UK Developed Markets Pro forma Current Enhanced Number of Small Cap Small Cap Companies Index Index Number of securities Wgt Ave Index ** USD mm USD mm Current + Added - Deleted Pro forma Pro forma FIF Turno
Slide 50: Standard to Global Investable Market Index: Developed Markets
Proforma Comparison & Transition Analysis : Standard to Global Investable Market Index : Developed Markets Pro forma Current Global Number of Standard Index Investable Companies Mkt Cap Market Index Mkt Cap Number of securities Wgt Ave Index ** USD mm USD mm Current + Added - Deleted Pro forma Pro f
Slide 51: Weight Comparison: Standard vs. Global Investable Market Index: Developed Markets
Proforma Weight Comparison: Standard vs. Global Investable Market Index : Developed Markets World EAFE Pacific Europe World EAFE Pro forma Global Pro forma Global Pro forma Global Pro forma Global Weight Weight Current Current Current Current Investable Market Investable Market Investable Market Inv
Slide 52: Standard to Global Investable Market Index: Emerging Markets
Proforma Comparison & Transition Analysis : Standard to Global Investable Market Index : Emerging Markets Pro forma Current Global Standard Investable Index Market Index Mkt Cap Mkt Cap Number of securities Wgt Ave Index ** USD mm USD mm Current + Added - Deleted Pro forma FIF Turnover EM 1,291,625
Slide 53: Weight Comparison: Standard vs. Global Investable Market Index: Emerging Markets
Proforma Weight Comparison : Standard vs. Global Investable Market Index: Emerging Markets EM ASIA EMEA LATAM EM Pro forma Pro forma Pro forma Pro forma Weight Current Global Current Global Current Global Current Global Change in Standard Investale Standard Investale Standard Investale Standard Inve
Slide 54: Current All Country World Index to Enhanced All Country Market Index
Proforma Comparison & Transition Analysis : Current All Country World Index to Enhanced All Country Market Index Pro forma Current Standard Enhanced Wt. in Pro forma Index Mkt Wt. in Current Number of securities Standard Index Enhanced Cap Standard Index Mkt Cap Standard Index Wgt Ave Index ** USD m
Slide 55: Global Investable Market Index Proposal: Emerging Markets - Latin America
Global Investable Market Index Proposal: Emerging Markets - Latin America Latin America Number of Companies Segment Argentina Brazil Chile Colombia Mexico Peru Venezuela LATAM Large - 10 - - 5 - - 15 Mid 6 15 19 6 10 6 2 64 Enhanced Standard 6 25 19 6 15 6 2 79 Enhanced Small Cap 7 30 14 2 16 1 -
Slide 56: Global Investable Market Index Proposal: Emerging Markets - Asia
Global Investable Market Index Proposal: Emerging Markets - Asia Asia Number of Companies Segment China Indonesia India Korea Malaysia Philippines Pakistan Thailand Taiwan ASIA Large 10 - 10 20 5 - - 5 20 70 Mid 40 19 55 40 40 10 4 15 55 278 Enhanced Standard 50 19 65 60 45 10 4 20 75 348 Enhanced
Slide 57: Global Investable Market Index Proposal: Emerging Markets - EMEA
Global Investable Market Index Proposal: Emerging Markets - EMEA EMEA Number of Companies Segment Czech Republic Egypt Hungary Israel Jordan Morocco Poland Russia Turkey South Africa EMEA Large - - - 5 - - 5 5 5 10 30 Mid 6 6 6 25 5 4 5 6 15 35 113 Enhanced Standard 6 6 6 30 5 4 10 11 20 45 143 En
Slide 58: Sector Weight Comparison: Standard vs. Enhanced Standard Index: Developed Markets
Proforma Sector Weight Comparison: Standard vs. Enhanced Standard Index: Developed Markets World: Enhanced Standard vs. Current Standard EAFE: Enhanced Standard v s. Current Standard 9.5% Large+ Mid 8.8% Large + Mid ENERGY 9.3% ENERGY 8.9% Standard Standard 4.9% 7.1% MATERIALS 5.1% MATERIALS 7.2% 9.
Slide 59: Sector Weight Comparison: Standard vs. Enhanced Standard Index: Emerging Markets
Proforma Sector Weight Comparison: Standard vs. Enhanced Standard Index: Emerging Markets EM: Enhanced Standard vs. Current Standard ASIA: Enhanced Standard v s. Current Standard 13.6% 9.1% ENERGY 13.3% ENERGY Large + Mid 8.7% 12.0% Large + Mid MATERIALS Standard MATERIALS 8.2% 12.4% 8.6% Standard 6
Slide 60: Sector Weight Comparison: Small Cap vs. Enhanced Small Cap Index: Developed Markets
Proforma Sector Weight Comparison: Small Cap vs. Enhanced Small Cap Index: Developed Markets World: Enhanced Small Cap vs. Current Small Cap EAFE : Enhanced Small Cap vs. Current Small Cap 5.0% Small Cap 3.6% ENERGY 4.8% ENERGY 3.5% Small Cap 7.2% Current Small Cap 9.0% Current Small Cap MATERIALS 7
Slide 61: Trade-Off between Coverage & Investability
Trade-Off between Coverage & Investability One way to achieve deep coverage is to include all securities in the chosen universe − However, practical considerations require the use of some investability constraints in order to target only securities that can be included in reasonably-sized institut
Slide 62: Notice and Disclaimer
Notice and Disclaimer Copyright © 2006 by Morgan Stanley Capital International Inc. ("MSCI"). All rights reserved. The MSCI Consultation Document and any related Questionnaire (the “Consultation Documents”) may not be reproduced or redisseminated in whole or in part without prior written permissio