Portfolio managers constantly assess equity and portfolio performance, as well as risk -- but who provides the tools and sets the bar used to evaluate those positions?
MSCI ( MSCI ) for one. The company has been building and updating equity indexes for 40 years. It calculates 160,000 daily equity indexes for use by asset managers and institutional investors. MSCI's other main business involves tools for portfolio analytics.
Further, MSCI says that as of Dec. 31, 2015, more than 790 top exchange-traded funds -- securities that track indexes or index funds, commodities or bonds -- were based on MSCI indexes, more than on the products of any other index provider. It also says that 95% of U.S. pension fund assets invested in global equities are benchmarked to MSCI indexes.
"MSCI's long-established index franchises continue to drive the company," UBS analyst Alex Kramm told IBD. Kramm has a buy rating on the stock. He says global investing is driving the business, as well as "the macro trend of more passive investing," as managers are using indexes and "exchange traded funds to construct macro portfolios."
Getting Honors
MSCI was named a top-five risk management technology firm in the 2015 RiskTech100, a study of risk and compliance technology companies by Chartis Research of New York. According to data from MSCI and industry news source Pensions & Investments, MSCI serves 97 of the top 100 largest asset managers.
It also won Market Risk Technology Product of the Year at the 2016 Risk Magazine Awards for its LiquidityMetrics product, a tool for measuring liquidity risk across asset classes.
Peter Zangari , MSCI's managing director and global head of analytics, said in an announcement of the award on Feb. 1 that measuring liquidity risk "across all asset classes" has been of "paramount concern to investors" since the 2008 financial crisis.
"Our products have been helping clients address complex liquidity issues," he said.
MSCI's main competitor in the analytics arena is FactSet Research Systems ( FDS ). Its competition in the index business includes Dow Jones Indexes, now majority owned by McGraw-Hill ( MHFI ); Standard & Poor's, a division of McGraw Hill; Russell Investment Group and FTSE Group , wholly owned by the London Stock Exchange .
Index Gains
In the fourth quarter ended Dec. 31, 2015, MSCI reported a rise in total revenue of $21.8 million or 8.7% to $272.9 million, up from $251.1 million in the year-earlier period. Total revenue for just the index business rose 11% for the quarter to $143.7 million from $129.5 million in the year-earlier period.
Net income for the 2015's fourth quarter rose 34% to $59.4 million from $44.3 million. And diluted earnings per share rose 46.2% to 57 cents from 39 cents in the year-earlier period.
On Feb. 8, after the release of MSCI's fourth-quarter results, Cantor Fitzgerald analyst Joseph Foresi reiterated a buy rating on MSCI, with a price target of 79. Foresi said in a note to clients: "MSCI's indexing business continued to produce healthy top-line results … 52% of its revenue (comes) from its index business … providing high visibility, steady revenues and healthy cash flows."
Bill Warmington, an analyst with Wells Fargo, also has an outperform rating on MSCI's stock. And at the beginning of February, William Blair analyst Christopher Shutler boosted his first-quarter 2016 earnings estimate for MSCI to 67 cents per share, up from a prior forecast of 64 cents.
According to Zacks Investment Research, the consensus estimate for MSCI's 2016 first-quarter earnings is 64 cents a share.
"Based on our accomplishments in 2015, and, more importantly, the opportunities before us, we have multiple levers that we believe will drive our future growth and profitability," said Henry Fernandez, MSCI's chairman and chief executive, in the fourth-quarter earnings release on Feb. 4. "In 2015, we made significant strides in accelerating revenue growth, improving operational efficiency and optimizing our capital base."
Assets Under Management
MSCI's index business isn't just a subscription service for performance measurement. As mentioned above, MSCI also licenses indexes to companies such as BlackRock ( BLK ), which then offers ETFs based on them. MSCI gets paid from customers who do this on the basis of the assets under management.
In its fourth quarter, assets under management revenue for its indexes grew 10.4%, or $4.8 million, to $50.2 million, up from $45.4 million a year earlier.
MSCI's asset-based fees have been increasing, "driven primarily by an increase in revenues from ETFs, as well as strong growth in revenues from non-ETF institutional passive funds," MSCI said in its latest earnings report.
However, MSCI's portfolio of very large customers -- asset managers and institutional investors -- can be a blessing … and a sizable risk. Back in 2012, MSCI's stock took a hit when Vanguard dropped MSCI as a benchmark for some of its large funds to cut its costs. Vanguard moved to the University of Chicago's Center for Research in Security Prices for benchmarks.
Blackrock is a huge MSCI customer, along with other big investing names. MSCI must work to keep these giants fed, happy and grazing in its stable.
MSCI's stock began climbing pretty steadily from 2013 onward. On Jan. 7, 2013, its share price closed at 31.97. It hit a 52-week intraday high of 73.71 on February 23, 2016. Shares have slipped to around 70 since then.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
