Global Champions - MSCI

MSCI is a leading index provider that has essentially become a global language. In other words, for stock, bond, and derivatives markets, its indices, such as its flagship MSCI All Country World Index, are used by investors and allocators to communicate about investment performance. Because crowded information marketplaces are generally quite inefficient, requiring participants to maintain background knowledge on numerous providers and analytical methodologies, industries such as index construction and maintenance tend to coalesce around one or two standards. While many developed markets primarily use non-MSCI benchmarks (such as the S&P 500 in the U.S.), MSCI’s global and emerging markets stock indices are the globally recognized standards in their categories and possess far larger usage networks and far more data than any of their competitors. Additionally, the scope of their networks is unmatched. They provide the most complete benchmarking solution for global allocators because of their dominant positions in global and regional benchmarking as well as in the emerging markets, which overwhelm the developed markets in number and will eventually overwhelm them in dollars of market capitalization as well. Additionally, they began publishing performance data for their market-leading indices starting, in some cases, over forty years ago, and they provide analytical support and software that increases the use-cases for the data. Thus, subscriptions to their data become a “must have” for industry participants, as demonstrated by their high retention rates. Moreover, most corporations and governments, along with most large endowments, pension plans, and sovereign wealth funds, are run by employees instead of owners, further solidifying MSCI’s competitive position because employees are incentivized to make the “safe” choice (in this case, by selecting the industry standard MSCI benchmark instead of an upstart). Additional tailwinds we believe MSCI will continue to capitalize on are the trend towards indexing and the “slicing-and-dicing” of portfolios based on ESG characteristics. As a result of these industry and competitive dynamics, we believe MSCI is likely to grow volume and pricing at attractive rates for years to come. Remarkably, it is likely that very little capital will need to be reinvested to achieve this growth, increasing the earnings multiple investors should be willing to pay for the business.  

To read a more detailed description on MSCI as discussed in a prior investment letter, click here.

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