Index provider of the year: MSCI

Asia Risk Awards 2020

Douglas Walls, MSCI

These days, index providers need to adapt to new dimensions of indexing. Beyond providing a pure tracker, they need to intellectually contribute to strategy implementation and benchmarking. Doug Walls, head of Apac index products at MSCI, believes indexers globally must acknowledge that bespoke products are now mainstream.

“Bespoke is increasingly normal,” says Walls, referring to a growing number of customised indexes provided in the market, including from MSCI. The rise of tailored ESG – environmental, social and corporate governance – indexes, are a clear sign of the growing interest in sustainability mandates, reflecting specific needs and values, he adds.

MSCI’s unique approach to index construction was able to help out one asset owner from the Greater China area, who was looking at introducing ESG factors to its US equity portfolio, without disrupting the current factor exposure, even though its original investment policy – linked to the MSCI All Country World Index – did not contain any ESG filters. 

MSCI’s solution was to create an ESG overlay on top of the factor-based mandate through careful screening of equities. MSCI designed a global equities universe that factored in ESG and re-weighted the portfolio with corresponding constituents based on MSCI’s homegrown ESG ratings. The firm’s Shanghai-based head of ESG client coverage for Asia-Pacific, Chitra Hepburn, says that not only were the client’s sustainability convictions properly reflected in the portfolio, but the client had complete visibility over what impact each of the ESG factors had on the portfolio.

The engine behind bespokes

Data and analytics are the enabler of such an enhanced indexing and tailored tweaks. “For index providers, technical strength and knowledge of portfolio implementation need to be combined with a commercial skillset when it comes to matching index solutions aligned to client needs,” says Walls.

He adds that proprietary research and analytical know-how are all important in constructing these indexes. MSCI’s ESG analytics function is represented by a 200-strong team globally, who corroborate data and produce ratings on a daily basis, scoring securities based on non-financial drivers. 

Around 45% of data that MSCI uses in its ESG research is non-public or unstructured data, says Hepburn.

“We use, for example, satellite images for something that may be looking at climate change,” says Hepburn. “Again, we could be looking at employer ratings on human resource platforms when gauging companies and how they handle social issues.”

For index providers, technical strength and knowledge of portfolio implementation need to be combined with a commercial skillset when it comes to matching index solutions aligned to client needs

Doug Walls, MSCI

Hepburn says the research and rating process is thorough and the firm takes that responsibility seriously.

“It’s not something that changes overnight on the basis of one article. It’s also not something that we would choose to do purely because it is suddenly going viral on social media, though that may add to the urgency of assessment. The critical issues would have already hit our radar in advance of that, because of the analysts that have been doing their research on those issues on an ongoing basis.”

Moreover, the firm also employs artificial intelligence machines to help extract investment-relevant insights from unstructured data. Machine learning and natural-language processing help boost the timeliness and precision of data collection, analysis and validation, enabling the index-provider to deliver the kind of dynamic data that can then feed into these bespoke indexes.

Performance explained

Other than ESG and bespoke, another dimension of today’s indexing world is factor and non-traditional beta investing. The firm believes there is a lack of clear definition for material factors that investors and consultants can use to communicate.

MSCI’s innovative Factor Classification Standards (FaCS), which was officially launched in 2018, seeks to narrow the gap of understanding in factors in the market.

FaCS is a tool that defines factor drivers in a basket of securities and examines the overall style of investments. The interactive scorecard is based on a total of eight factors: value, size, momentum, quality, yield, volatility, growth and liquidity.

Although the system has been up and running for a few years, the firm has been continuing to enhance the digital experience and educating the public about how to invest in factors as a performance driver.

Zhen Wei, MSCI

Zhen Wei, head of Apac index research solutions, likens the factor standards to the Global Industry Classification Standard, a sector classification method that was jointly developed by MSCI and its peer S&P.

“We created a common language to speak of factor, exposure and portfolio construction. But, when we compared with defining sectors, the language of ‘factor’ is more complex. Thus, what we do in this information is to integrate interactivity on the digital side,” says Wei. 

Also, because of the complexity of factors, specific explanations with stock examples are helpful for investors in understanding how different factors can be used to drive risk-adjusted returns. These explanations feature visual illustrations, which show key factor performances across different geographies and are updated frequently to reflect the latest market dynamics.

“Creating a simpler language to define and classify the factors helps bridge the knowledge gap of [factor investing] between institutional investors and our wider base of retail and wealth management segment,” says Wei. 

Wei says digitisation has been key to making these improvements, and helping to unlock more avenues for clients to building and manage portfolios. Wei says the firm will continue to use technology to improve productivity.

Stay the course

MSCI sees great potential in the Asia-Pacific region over the coming months and years, despite the expected economic ramifications of the Covid-19 pandemic. For the next 12 months, the firm expects scalable and transparent strategies that integrate ESG factors to continually gain traction. 

But the going could become increasingly tough, as technological innovation explodes across the industry, which Walls says could be “something akin to an arms race”.

However, this is all the more reason to stay the course, he adds: “Now is an exciting time to be in a position to contribute, not only to the evolution of the Apac region’s capital markets but also to influence global connectedness and thereby better serve the Apac investment community.”