Msci

What Is MSCI?

MSCI, an acronym for Morgan Stanley Capital International, is a leading global provider of investment tools and services, primarily known for its extensive range of equity indexes. Within the broader field of Index Investing, MSCI offers critical decision support tools, including benchmark indexes, advanced portfolio analytics, and environmental, social, and governance (ESG) ratings. The company serves institutional investors and hedge funds by providing data and analytics designed to help them understand and navigate global markets, measure performance, and manage risk. MSCI indexes are widely recognized and used globally as benchmarks for a variety of investment products, such as Mutual Funds and Exchange-Traded Funds (ETFs).

History and Origin

The origins of MSCI can be traced back to 1969 when Capital International S.A. (CISA), an international management company, launched the Capital International World Indices (CIWI). These were among the first comprehensive global stock market indexes for non-U.S. markets, providing a consolidated source of information and a benchmark for international investing at a time when such data was scarce.¹⁵ In 1986, Morgan Stanley & Co., an international investment banking and securities brokerage firm, acquired the licensing rights to the CIWI indices and their underlying data from CIPSA.¹⁴, This acquisition led to the rebranding of the indices as Morgan Stanley Capital International (MSCI). The collaboration combined Morgan Stanley's global distribution and marketing expertise with Capital International's established success in gathering international data and constructing global equity indices.¹³ While Morgan Stanley licensed the indices, the responsibility for their management and maintenance, including index methodology, remained with CIPSA in Geneva, Switzerland.¹² Over time, MSCI expanded its offerings beyond just equity indices to include portfolio risk and performance analytics, which was significantly bolstered by the acquisition of Barra in 2004., In 2007, Morgan Stanley decided to divest MSCI, which subsequently became a fully independent public company in 2009, trading on the New York Stock Exchange.

Key Takeaways

• MSCI is a global financial services company renowned for its equity indexes, portfolio analytics, and ESG research.
• Its indexes, such as the MSCI World and MSCI Emerging Markets indexes, are widely adopted benchmarks for passive and active investment strategies.
• MSCI provides crucial data and tools that support Portfolio Management and Risk Management for institutional investors.
• The company plays a significant role in the growth of ESG investing by providing specialized ratings and indexes.
• MSCI's revenue primarily comes from licensing its indexes and providing data subscriptions to financial institutions.

Formula and Calculation

MSCI Equity Indexes are calculated using a weighted arithmetic average, incorporating the Laspeyres' concept and chain-linking.¹¹ This methodology ensures that the indexes accurately reflect the performance of the underlying securities and adapt to market changes. A key component in the calculation of an index's adjusted market capitalization, which influences the index level, can be represented as:

Where:

• (\text{IndexAdjustedMarketCapUSD}_t) is the adjusted market capitalization of the index in USD at time (t).
• (\sum_{s \in I,t}) denotes the sum over all securities (s) included in index (I) at time (t).
• (\text{EndOfDayNumberOfShares}_{t-1}) is the number of shares of security (s) at the end of day (t-1).
• (\text{PricePerShare}_t) is the price per share of security (s) at time (t).
• (\text{InclusionFactor}_t) is a factor reflecting the proportion of shares available for public trading (also known as free float) for security (s) at time (t). This is crucial for determining the investable Market Capitalization of companies.
• (\text{PAF}_t) is the Price Adjustment Factor for security (s) at time (t), used to account for corporate actions such as stock splits or dividends.
• (\text{FXrate}_t) is the foreign exchange rate at time (t), converting local currency prices to USD for globally calculated indexes.¹⁰

This intricate calculation ensures that MSCI indexes reflect real-world market movements and investable opportunities, considering various factors including liquidity and currency fluctuations. More detailed information on their methodologies can be found on their official website.⁹

Interpreting the MSCI

Interpreting MSCI indexes involves understanding their purpose as Benchmark indicators for specific market segments. For instance, the MSCI World Index measures the performance of large and mid-cap equities across 23 Developed Markets, providing a broad gauge of global equity market health outside of specific regions. Investors use MSCI indexes to assess the performance of their own portfolios, compare against market returns, and gain insight into regional or thematic trends. A rising MSCI index generally indicates positive returns for the underlying market or segment, while a decline suggests losses. The construction of MSCI indexes, considering factors like free float and investability, means they aim to represent realistic investment opportunities rather than just total market size.

Hypothetical Example

Imagine an investor, Sarah, who wants to invest globally but doesn't have the time or expertise to pick individual international stocks. She decides to invest in an ETF that tracks the MSCI World Index. The MSCI World Index comprises a vast number of large and mid-cap companies across developed countries.

If, over a year, the MSCI World Index increases by 10%, assuming the ETF accurately tracks the index before fees, Sarah's investment in the ETF would also gain approximately 10%. This allows her to participate in the collective performance of these global companies without direct stock picking. Conversely, if the MSCI World Index declines by 5%, her investment would similarly reflect that loss. This example highlights how MSCI indexes serve as practical tools for investors to gain Diversification and exposure to various market segments through index-tracking products.

Practical Applications

MSCI indexes are fundamental tools in the financial industry, serving a multitude of practical applications for investors and institutions globally.

1. Benchmarking Investment Performance: Asset managers and institutional investors frequently use MSCI indexes to measure the performance of their Investment Strategy against a relevant market standard. For example, a global equity fund might benchmark its returns against the MSCI All Country World Index (ACWI).
2. Creation of Index-Tracking Products: A significant portion of MSCI's business involves licensing its indexes to financial product providers. This allows for the creation of passively managed investment vehicles, such as Index Funds and ETFs, which aim to replicate the performance of specific MSCI indexes. As of 2025, funds worth over $16.5 trillion were based on MSCI indices.
3. Portfolio Construction and Asset Allocation: Investors and portfolio managers use MSCI indexes to understand market composition, allocate assets across regions (e.g., Emerging Markets vs. developed markets), and build diversified portfolios.
4. Risk and Performance Analytics: Beyond just indexes, MSCI offers comprehensive analytics tools that integrate index data to help clients assess portfolio risk exposures, analyze performance attribution, and make informed investment decisions. This includes tools for Financial Analysis and understanding various market factors.⁸,⁷
5. ESG Integration: MSCI is a leading provider of ESG ratings and indexes, enabling investors to incorporate environmental, social, and governance factors into their investment processes. The company provides frameworks and data to help investors identify and manage ESG-related risks and opportunities.

Limitations and Criticisms

Despite their widespread adoption, MSCI indexes and their methodologies face certain limitations and criticisms. One common critique, particularly of the widely used MSCI World Index, is its significant concentration in U.S. equities. This means that investors solely relying on the MSCI World Index for global exposure might find their portfolios heavily tilted towards the U.S. market, potentially limiting true geographic diversification.⁶ For instance, as of late 2023, the U.S. accounted for a large proportion of the MSCI World Index's market capitalization.⁵ This aspect is discussed in more detail in articles analyzing the MSCI World index.⁴

Another area of criticism relates to "index effects." Research suggests that stocks added to or deleted from MSCI indexes can experience abnormal price movements and increased trading volumes around the announcement and effective dates of these changes. Stocks added to an index may see a price rise before the change and a partial loss after, while deleted stocks tend to decline.³ These effects can create opportunities or risks for traders and can sometimes be attributed to factors like price pressure or liquidity effects, rather than new information about the companies themselves.² Furthermore, while MSCI's methodologies are designed to be robust, the sheer size and complexity of global markets mean that any index is a simplification, and its construction rules may not perfectly capture every nuance of market investability or economic reality.

MSCI vs. FTSE

MSCI and FTSE Russell are two of the world's most prominent providers of Global Equity indexes, often considered competitors in the financial data and benchmarking space. While both aim to provide comprehensive market benchmarks, key differences exist in their methodologies, market classifications, and the specific indexes they offer.

The main point of confusion for investors often arises from their differing country classifications and index construction rules. For instance, a country might be classified as an Emerging Market by one provider but as a Developed Market by the other, impacting the composition of global and regional indexes. This difference necessitates careful examination when choosing an index to benchmark or track, as it can lead to variations in portfolio exposure and performance.

FAQs

What does MSCI stand for?

MSCI stands for Morgan Stanley Capital International. It is the name of a global financial company that provides investment tools and services.

How are MSCI indexes used by investors?

Investors typically use MSCI indexes as benchmarks to measure the performance of their investment portfolios or specific investment products like ETFs and mutual funds. These indexes help investors understand how well their investments are performing relative to a broader market or segment, and they also form the basis for many passive investment strategies.

Does MSCI provide financial advice?

No, MSCI does not provide financial advice or recommendations to buy, sell, or hold securities. Its role is to provide data, indexes, and analytical tools to institutional clients, helping them make their own investment decisions.¹

What is the MSCI World Index?

The MSCI World Index is one of MSCI's most widely recognized benchmarks. It is designed to measure the performance of large and mid-cap companies across 23 developed markets worldwide. It's often used by investors seeking broad exposure to global developed equity markets.

What is the difference between MSCI and ESG?

MSCI is a company that provides various financial services, including environmental, social, and governance (ESG) research and ratings. ESG, on the other hand, refers to a set of non-financial factors that investors use to evaluate companies and countries on sustainability and ethical impact. MSCI's ESG services are a specific offering within its broader suite of investment tools, helping investors integrate ESG considerations into their decision-making process.