Many investors that are familiar with MSCI (NYSE:
MSCI
), know the company as one of the dominant provider of benchmark
indexes for exchange-traded products. As of the end of September,
$366 billion in ETP assets
were linked to MSCI indexes.
That is good for 28 percent of the U.S. ETP market and puts
MSCI behind only Standard & Poor's Dow Jones. ETPs that track
S&P Dow Jones indexes had a combined $446 billion in AUM, or
35 percent market share, at the end of September, according to
iShares.
In other words, MSCI is a recognizable brand, but some
investors may not be familiar with the shares of the company. For
those not in the know, MSCI experienced its worst one-day decline
as a publicly traded company in early October when Vanguard
announced it would drop
MSCI indexes being used on 22 of its ETFs
. Pennsylvania-based Vanguard is the third-largest U.S. ETF
provider.
That announcement, arguably the biggest news in the ETF
business this year, was unveiled on October and sent shares of
MSCI plunging by 27 percent. While shares of the index provider
have started to perk up a bit in recent days, the stock has come
nowhere close to wiping out those early October losses.
MSCI's recent price action could beg the question "Is there
value to be had?" The prudent way of answering that query is
"Maybe, maybe not." However, there is no denying the
post-Vanguard news sell-off appears to be greatly overdone.
MSCI's annualized revenue and operating income associated with
the Vanguard funds being transitioned are approximately $24
million,
according to a statement issued by the firm on
October 2
. The impact of the lost Vanguard business for MSCI will be felt
in the first quarter of 2013 as Vanguard begins transitioning
away from MSCI indexes.
Still, $24 million in annualized revenue and operating income
is not a large amount for a company that had $703.1 million in
operating revenue for the first nine months of this year and net
income of
nearly $130 million for the same period
.
With the Vanguard news out in the open and over and done with,
the issue keeping a lid on shares of MSCI is the firm's
relationship with BlackRock (NYSE:
BLK
). BlackRock is the parent company of iShares, the world's
largest ETF sponsor. With the loss of Vanguard, some analysts
view iShares as the only game in town for MSCI. Indeed, all one
needs to do is peruse
the list
of the 280 ETFs offered by iShares
in the U.S. to see MSCI enjoys an important relationship with
BlackRock.
The logic here is that BlackRock
knows it accounted for eight percent of MSCI's
2011 revenue
and that it will press for licensing fee reductions the next time
those agreements between the two firms come up for renewal.
To be sure, BlackRock does hold an important card. The company
has filed plans with the Securities and Exchange Commission to
use its own indexes for some of its
ETFs
. While the company has made no movement on that front since the
filing, it is worth noting more ETF issuers are
moving toward self-indexing
.
There is a bull case for MSCI. BlackRock is by no means the
firm's only customer. The company says it has 6,000 global
clients and in "the first nine months of 2012, ETF providers
around the world have launched a total of 57 new ETFs linked to
MSCI indices, including all of MSCI's flagship indices."
Logically, the ETF industry's growth trajectory adds to the
potential upside for MSCI. Depending on which estimates investors
believe are accurate, ETF assets under management are expected to
double or triple over the next several years. ETF providers that
are looking to either bolster their presences in the market or
pilfer market share from larger rivals can only afford to be so
adventurous with new offerings.
That is to say, brand recognition of MSCI is valuable for ETF
sponsors. Investors know MSCI, but they may not be as familiar
with some of the more obscure index providers out there. In this
case, familiarity breeds confidence among investors and that
confidence could lead to more inflows to ETFs linked to MSCI
indexes than other funds.
Next there is no getting around the fact that investors love
emerging markets and global ETFs. Even when excluding the
Vanguard MSCI Emerging Markets ETF (NYSE:
VWO
) from the conversation because that fund will cease using the
MSCI Emerging Markets Index next year, MSCI is the dominant index
provider to eight of the nine largest country-specific ETFs on
the market today. The firm is the index provider to the two
largest multi-country ETFs after VWO as well.
Still, there are risks to holding MSCI over an extended time
horizon, say multiple years. Currently, the company does not pay
a dividend, meaning investors will be entirely dependent on
capital appreciation. For now, the shares are best used as swing
trade/rebound play. Long-term investors that need mid-cap
exposure should wait for the market to really get over the
Vanguard news, something that has yet to happen.
(c) 2012 Benzinga.com. Benzinga does not provide investment
advice. All rights reserved.