Spruce Point Capital declined to comment on the size of its position in MSCI, but projected that the company's stock could fall 55% to 65%.
Outside of passive asset management giants such as Vanguard Group and Blackrock, which are the top two holders of MSCI, several pension funds including Colorado Public Employees Retirement Association, Denver; Japan's Government Pension Investment Fund, Tokyo; Singapore's Temasek; and South Korea's National Pension Service are among the top 100 largest shareholders of MSCI.
The market, however, registered a mild reaction to Spruce Point's report — shares of MSCI fell less than 1% on Jan. 17 before rebounding the next day. At the time of publication, MSCI's stock was up 5% to $565 per share from the date of the report's release.
"I do think this report brings up some interesting points, but many of these allegations are either old news or not important to the level that you can short the stock and believe that it's a 50% or 60% downside to the stock," said Owen Lau, an analyst for Oppenheimer & Co., who covers MSCI and rates the company "outperform."
Lau acknowledged the risk of downward pressure on MSCI's fees but said he's not currently worried about competition from other index providers having an impact on MSCI's revenues.
"If you were telling me there's a new index provider that provides substantially lower fees than MSCI and people were moving away from MSCI, I would be worried about that. But right now, MSCI is still in a prime, very leading position in the benchmarking business for global indexes," Lau said.
Lau wasn't concerned about some of Spruce Point's allegations of "aggressive accounting," including potentially using segment reporting to "manipulate margins to its benefit."
Lau said that while his firm takes segment margins into consideration, the overall margins for the business are more important — and harder to massage through accounting practices.
"It's not like, not important, but, No. 1, I don't think they have enough evidence to make that claim," Lau said of Spruce Point's allegations. "And No. 2, we also look at overall margins and these kinds of accounting gimmicks cannot hide if there's a margin contraction."
Though the market has shrugged its shoulders at Spruce Point's report, the hedge fund and its founder, Ben Axler, remain steadfast in their price predictions for MSCI."Our report and price expectations are long-term in nature, and we expect that MSCI's share price will underperform the market given its rich valuation and growing challenges across its business segments," Axler said in an emailed statement.