Henry A. Fernandez is the only chief executive officer MSCI Inc. — a powerhouse in indexing and risk management analytics — has known since it incorporated in 1998 and became a public company in 2007.
“We are a global company compared to any other index provider,” Mr. Fernandez said, with a staff of 2,024 in 19 countries — the United States accounts for 46.4% of its work force — and 5,000 clients in more than 70 countries. He considers himself a citizen of the world, holding citizenship in Mexico, Nicaragua and the United States. “I'm as comfortable in Shanghai or Beijing as I would be in Cincinnati, Ohio ... That has helped the company, helped me develop, and has helped us really globalize MSCI pretty rapidly.”
A one-time diplomat in the Nicaraguan embassy in Washington, doing economic analysis and diplomatic duties while attending Georgetown University, Mr. Fernandez became a political refugee for seven years after the communists came to power in Nicaragua. Eventually, he wound up on Wall Street at the time investment banking partnerships still ruled: “I saw the value of a lot of talented people coming into a room and debating things,” he said, adopting that kind of collegial-type discussion and decision-making management style for MSCI.
In a life characterized by seizing opportunities that came to him and making some of his own, Mr. Fernandez is looking ahead for MSCI. This year he led MSCI to its biggest acquisition, buying RiskMetrics Group Inc. for $1.55 billion. He brings a keen perspective to the business of institutional investment management in both investment performance and risk management, and trying to integrate these two elements into better working harmony for clients.
What is the biggest risk facing investors today? I worry that investors are not taking enough risk right now. In times like these, investors end up retrenching quite dramatically into an extremely risk-averse portfolio.
What has been the biggest failure of pension funds in risk management? The biggest failure is the absence of risk management. We have lived for generations in a return-driven world, in which people have focused inordinately on the return part of the investment without focusing on the risk-adjusted return of the investment. It is easier and more transparent to just focus on return. It has been much more difficult to understand the risks of the return. The tools haven't been there.
What R&D are you doing, such as involving hedge funds? We now have with RiskMetrics and Measurisk (which MSCI bought last month) two different views of the hedge fund world. RiskMetrics is selling risk management systems to hedge fund mangers; Measurisk is serving the hedge fund investor — the institutional investor, the fund of funds, the endowment, the pension funds. So therefore, we have a very unique window into the world of understanding what hedge funds are doing and a very unique window into what institutional investors, the clients of the hedge funds, are doing in putting together their portfolios of hedge funds. To the extent we want to launch into that kind of business, we clearly have the DNA and the expertise and it's just a question of creating products and building a business.
Is risk good for MSCI's business? Risk is good; risk is your friend. What we normally tell our clients is that risk is something that as an investor you've got to understand, you've got to measure, you've got to manage, and you've got to report.Risk, if you master it, can be a wind at your back not a wind in your face. Therefore, our company is being built on the basis of a simple concept: In the world of investment you need to provide people with the tools to master performance and the tools to master risk and the tools to master the combination of the two. So risk is good for us because we want to make it good for our clients.
How is the current business climate? We are a company of four big divisions. The equity index business, branded MSCI; equity portfolio analytics, branded Barra; risk management, branded currently Barra and RiskMetrics; and then ISS, the proxy research business. In a good market, we grow 20%, 22%. In a bad market, which was 2009, we grew 2.8%, which is the worst we've ever done since I began running the company. We are contrarians. We made the biggest investments in our business in 2009 and 2010. We currently have about 200 open new positions out of a total base of 2,000 people.
Will you fill the positions this year? We are going to try. It's challenging. Our standards of hiring are pretty high. The kind of people we are looking for are unique. Employment is not picking up in general but employment in financial services is picking up. We end up competing with all those people.
What kind of acquisitions will you be looking for? Our acquisition strategy is best described as an acceleration of our organic growth strategy. So ideally the acquisitions we would love to see happen are anything we can buy in the equity index business, particularly the domestic index business, because that is an area we are not as strong in. Another area is in fixed-income portfolio management analytics.
Did you try to buy Lehman's fixed-income indexes? We for sure did. I spent a full month of my life in the fall of 2008 pursing this. With the bankruptcy of Lehman, there was an opportunity to try to extract the indices from the bankrupt company. We tried to buy them from the debtors, creditors, Barclays, but nothing really worked. The alternative would have been just to hire the staff of the bankrupt company and create indices, a liftout. We decided that was not a good strategy because many of the materials or the inputs into the indices are the prices from the trading desks so you could not just extract the people and go on and create the indices without the support of the broker-dealer, at least initially in terms of prices and the like so we decided that it wasn't going to work. We tried extremely hard.
When the Dow Jones indexes became available, did you look at those? We definitely had conversations with Dow Jones about these indices. But they didn't amount to anything. The MSCI equity index business is an institutional benchmark-driven business. The Dow Jones business is much more of a retail brand, less of benchmark and more of an indicator or barometer of market activity.
Did you consider buying the Goldman Sachs commodity indexes before S&P acquired them? No. I wish we had and we would have loved to own them. But my sense is Goldman would never sell those to a Morgan Stanley entity, as we were at the time. So we never saw them; we never had a chance to buy them.
What's new at MSCI? The whole ESG (environmental, social, governance) space. The punch line is the following: The governments of the world and the societies that they represent are not going to allow either investors or corporations to operate without a long-term-basis sustainable plan for economic growth — with the aim of creating a better standard of living for everyone. Ultimately, a lot of people in the investment world will have to invest on the basis of what's sustainable. One of the things you are going to see us do, but it's going to take time, is to create tools for investors that help them make decisions about all that. It's very tricky, it's very challenging. Some of it is quantitative, some of it is editorial or judgmental. We are going to start creating ESG indices, not in lieu of but in addition to our current indices.
Will MSCI create ESG indexes this year? For sure.