More than 100,000 equity, REIT and hedge fund indexes. More than $3 trillion in assets benchmarked to those indexes, including more than 90 percent of all U.S.-managed international equity assets. Barra risk models and portfolio analytics covering 56 equity and 46 fixed income markets around the world. Offi ces in 15 countries. More than 3,000 institutional investor clients in 60-plus countries. Put it all together, and you have MSCI Barra - a company literally driven by the numbers.
The firm went public in November 2007 in an initial public offering (IPO) from majority owners Morgan Stanley and Capital Group International - thus, the initials MSCI (NYSE: MXB). New York-based MSCI Barra has attracted a great deal of attention as the first indexing company to become a public, stand-alone entity. MSCI Barra stock more than doubled in price after the company's IPO, although it is trading off its highs in company with other financial stocks. In the second quarter of 2008, MSCI Barra reported a record $108.2 million in revenues, fueled by growth in both index and analytics subscriptions, as well as in equity index asset-based fees.
MSCI Barra also represents an entrepreneurial dream for David Brierwood, who took the chief operating offi cer's position just two years ago.
"You don't get many opportunities in your life like that," recalls Brierwood. "It was an incredibly interesting time in the company's evolution, and we hadn't even considered an initial public offering yet. MSCI's owners at that time saw significant upside potential for growth. Now that we're a public company, we're able to tell our story to a larger audience." And what a story it is. MSCI introduced its first equity index products in 1969 as a tool to help asset managers, institutional investors and financial intermediaries understand the opportunities and consequences of investing outside their home markets - something of a radical concept at the time. Today, MSCI Barra is the market leader in global indexes, with an estimated 85 percent of the market. In particular, its index for Europe, Australasia and the Far East (EAFE) is the pre-eminent benchmark for measuring stock performance in developed markets outside of North America. Beyond EAFE, performance data can be sliced and diced a number of ways based on country, region, market type (developed, emerging, frontier), market capitalization, style and industry. Companies are classifi ed into sectors and industries using standards developed jointly by MSCI Barra and Standard & Poor's.
BARRA'S BUSINESS
Outside the asset management industry, people are less familiar with the Barra product line. Since 1975, Barra's equity risk analytics products have helped institutions identify, measure and manage risk in their investment portfolios. In addition to equities, Barra has branched out to offer fi nancial models and data that measure multiple risk factors and returns for fixed income, cash and derivative instruments, whether as individual assets or part of a portfolio. MSCI acquired Barra in 2004. According to Brierwood, the combination of the two fi rms is a success due to their complementary product lines and philosophies.
"Combining the real world and theory - solving pragmatic, real-world investment problems through applied academic research - is the most central value to both MSCI and Barra,” says Brierwood. "Data quality is paramount whether you're talking about performance or risk."
Now that MSCI Barra is a public company, management expects to increase its number of users, locations and products licensed to current and new customers. Management sees strong growth in business from asset managers such as hedge funds, particularly in equity portfolio analytics; other institutional investors, including multi-asset class portfolio analytics and other products; and licensing its indexes to other fi rms for use as the basis for investment vehicles such as structured products or exchange traded funds (ETFs).
ETFs are a basket of stocks that trade like an individual security. As of June 30, 2008, about $175 billion in ETF assets were linked to MSCI equity indexes. The most popular international ETFs are based on the MSCI EAFE, Emerging Markets and Japan indexes, but there seems to be an ETF fl avor for every taste. Since mid-2007, more than 40 ETFs based on MSCI Barra indexes have been unveiled, including the Vanguard Europe Pacifi c and iShares MSCI EAFE Small Cap funds. But if you'd like to short - bet against price increases in - developed market stocks, ProShares, an investment firm, offers the Short MSCI EAFE ProShares (EFZ), an "inverse ETF" that uses futures contracts rather than short positions in stocks to provide daily returns equal to the inverse of the daily performance of the MSCI EAFE index, minus fees.
MSCI Barra's licensing agreement with CME Group has provided another avenue of growth in listed products. The E-mini MSCI EAFE futures contract was introduced in March 2006, while the E-mini Emerging Markets futures contract began trading in October 2007.
"We have seen an explosion of product innovation, and we have chosen to partner with the leading fi rms in each area," says Brierwood. "CME Group is a key innovation partner for us. Not only do the contracts provide visibility for two of our fl agship brands, but there's a huge wall of money to be managed and hedged against our indexes."
MSCI Barra does not rely on partner innovation alone for growth. Market trends generally spark ideas for new indexes, and MSCI Barra has recently launched a range of thematic and strategy indexes to reflect some of these trends. For example, the company responded to the need for a broad equity proxy for the performance of global commodities in energy, metals and agriculture by introducing the MSCI Commodity Producers indexes in April 2008. In a similar vein, the fi rm also launched MSCI Minimum Volatility indexes and MSCI Short and Leveraged indexes. As appetite for investing in less-developed countries has grown, the company launched the MSCI Frontier Markets index to represent 19 countries from Asia, Europe, the Middle East and Africa. Reacting to increased demand from Middle Eastern investors awash in oil profi ts, the fi rm also introduced the MSCI Global Islamic indexes last year, which screen out securities that do not comply with Islamic Sharia law.
Brierwood says MSCI Barra is well-positioned to capitalize on three long-term secular trends. First, he sees increased demand for standardized ways to calculate risk and return, increasing comparability of investments within a given asset class. Second, as a result of the fi rst trend, he expects information suppliers to consolidate over time. "Asset managers, hedge funds and sovereign wealth funds want to know that their information suppliers are here for the duration," he notes. Finally, he sees increased demand for international investing.
"Not so many years ago, international investing was exotic, and now it is run-of-themill. Money is moving toward more challenging areas, such as frontier markets. Investment products need a basis to trade upon, and investors need to manage the different sources of risk. Those trends favor MSCI Barra."
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