Contributed by: Ishwar Chidambaram, CFA
IAIP organized a Speaker Session on January 7, 2014 by Baer Pettit, MD & Head of Index Business for MSCI. MSCI is a leading provider of investment decision support tools to around 8,000 clients worldwide, ranging from large pension plans to boutique hedge funds, with over 4 decades of experience. A timeline was presented, depicting the historical evolution of MSCI, from the 1960s till date. This included major milestones in the firm’s history. Leading brands under the MSCI umbrella include Barra, RiskMetrics, IPD, among others. The 4 major areas within financial institutions where MSCI products & services predominate include: Asset Allocation, Portfolio Construction, Portfolio Management and Risk Analysis.
A whopping $7.5 trillion in assets are estimated to be benchmarked to MSCI indices. On average, there was 14% growth in these assets over a 6-month period from September 2012 to March 2013. Other statistics presented also served to highlight the dominance of MSCI across the investment industry.
Building Better Benchmarks
The CFA Curriculum mentions the SAMURAI properties of a valid benchmark as follows: Specified in advance, Appropriate, Measurable, Unambiguous, Reflective of current investment opinion, Accountable/Owned, Investable. By these definitive criteria, no indicator can ever be a benchmark. There is growing interest in benchmarks from regulatory bodies like IOSCO, EMA, etc, and key challenges include the growth of new asset classes, maintaining quality coverage and aligning benchmark purpose with investment process.
Objectives and Foundational Pillars
An info graphic was presented highlighting best practices in Benchmarking, which detailed key objectives and 5 foundational pillars to achieve them. Benchmarks should be Accurate & Objective, Replicable & Investable, Current & Reliable, Fair to all investors, and Cost Effective. The pillars include: Robust Governance, Advanced Methodology and Quality Data, High Transparency, Innovation and Superior Client Service. Each objective and pillar was described at length and the roles of Trustees, Investment Committees and Investment Managers was examined in detail. The cornerstone of best benchmarking practices is to manage tradeoffs between competing objectives, and this can be achieved by focusing on the foundational pillars.
MSCI GIMI Methodology
The GIMI Index construction process was discussed, and the evolution of MSCI Country coverage from 1960s through to the 2000s was described, with a brief description on each phase and the countries involved. Countries classified as Developed, Emerging and Frontier Markets are eligible for inclusion in the relevant MSCI Index. Key features & benefits of the GIMI methodology were presented. These include Completeness, Investability & Replicability and Cost Efficiency. A detailed overview of the MSCI Index families was also presented.
MSCI & India
MSCI has tracked growth of India’s capital markets for nearly 25 years, from 1989 till date. AUM of assets linked to MSCI India stand at $2.9 B, which represents nearly 50% market share of the total universe of global India ETFs. Approximately $90 B of investments is linked to India based on benchmarks to MSCI Indices. MSCI India Index outperformed MSCI ACWI, EM & BRIC indices over Q4 2013, and its forward PE multiple was 14.6- higher than MSCI EM, EM Asia and BRIC Indices as of December 2013.
The speaker observed that best practices in Benchmarking are not only a set of rules, but reflect organizational commitment to develop expertise and consistency needed to achieve them. The five foundational pillars are critical to achieve these objectives, as are the resources required and ability to recover expenses incurred in this regard.
The speaker opened up the discussion for questions. There were several pertinent questions from assembled audience, which were answered by Pettit and other senior MSCI Executives present. IAIP volunteers presented the vote of thanks to Pettit for his enlightening presentation. Directors of IAIP then presented Pettit and other senior MSCI Executives with tokens of appreciation.
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