The significance of the exchange-traded fund market is not lost on Diana Tidd, global head of equity index products for MSCI Inc. Indeed, Ms. Tidd's 17-year career at MSCI has been firmly linked to the incessant growth of index investing and passive investment products and derivatives.
Through June 30, global ETF assets for more than 800 products linked to MSCI indexes totaled $440 billion, on which the company reported an average fee of 3.12 basis points. According to XTF Inc., a majority of those assets are held in 142 U.S.-listed ETFs managed by BlackRock Inc., which itself accounted for 10.3% of MSCI's overall revenue in 2015.
The importance of ETFs and BlackRock for MSCI was best highlighted on Oct. 2, 2012. Then, MSCI announced that Vanguard would no longer use its indexes on 22 ETFs. The company's share price fell 27% that day and took nine months to recover. MSCI has since outperformed its own global benchmark, the MSCI All Country World Index, by a factor of 10.
Now, even as market observers believe that traditional market capitalization-weighted benchmark indexes have “covered the waterfront,” due in no small part to MSCI's global equity indexes and roughly $10 trillion in global assets benchmarked to those indexes, Ms. Tidd says that emerging trends in both environmental, social and governance criteria and factor investing have opened up new avenues for index design, consultations and benchmarking.
Pensions & Investments spoke recently with Ms. Tidd, who is based in New York, on ETF and index investing trends and how MSCI is evolving the work it does with both pension and asset management clients.
P&I: How has the ETF marketplace, and the growth of indexing in general, impacted how you manage your business?
Ms. Tidd: Over the past several years, the growth in indexing has meant that more clients and investors really want to understand what is behind the index, the methodology, and how we are considering the evolution of markets. Because we're not linked to a stock exchange or an asset manager, we are able to take an impartial view and consider what indexes are best for passive products. Is rebalancing not only systematic and logical, but also clear and simple? Can corporate actions be appropriately accommodated? Will the product support intraday price ticks?
P&I: Are you surprised by the intense focus of the index market on country and security inclusion in your global equity benchmarks, specifically for China A-shares?
Ms. Tidd: Our goal is to reflect, and not impact, the market. If the perception of the openness or accessibility of a market has changed or is about to change, we will dig in to that market and talk to regulators, exchanges, and investors to determine if the benchmarks can accommodate a shift or if rules have truly tightened. Country issues have always been a key focus for us given that the pool of assets benchmarked to ACWI Investible Market Index is so large—even thinking back to the full inclusion of Taiwan in global indexes more than a decade ago.
P&I: What is an example of a recent innovation that MSCI developed with clients?
Ms. Tidd: Following discussions with many active managers, MSCI set out to build an economic exposure view of MSCI ACWI companies, looking at the geographic distribution of revenues across the indexes. These cuts aren't yet available as listed products — new concepts take time to absorb — but clients were leaning on the data set to understand the revenue exposure to the UK and Europe following the Brexit vote.
P&I: What do you see as the biggest driver of growth in the index business?
Ms. Tidd: Factor investing is here to stay. We saw it from early adopters and now from the largest asset managers. We also see it from the Barra and risk analytics side of the MSCI business, as clients use our tools to understand how factors help to explain risk exposure in their portfolios. Factors have become so integrated into the thinking of the investment community that active managers are reaching out and trying to figure out how to include factors in their process and products.
P&I: How have global investment trends impacted how you work with clients?
Ms. Tidd: Market trends are always an opportunity for index innovation and ESG investing is finally coming to the US. For example, (the California State Teachers' Retirement System) recently announced that it's committing $2.5 billion to a MSCI ACWI Low-Carbon Target passive index portfolio. And we're even seeing clients take an asset-allocation approach to ESG, asking why they might not invest in a security in an ESG portfolio and then include it elsewhere. We've seen a spike in requests about ESG across ACWI over the past six months. n