EUR 850.00 For Business Accounts Only

Morningstar | MSCI's First-Mover Advantage Cements the Company's Leadership

MSCI is the unquestioned leader in providing global benchmarks to institutional investors. The company's recognized brand and high switching costs represent a steep challenge for rivals that is unlikely to be surmounted in the near to distant future. The company calculates over 215,500 benchmarks and 12,00 custom benchmarks for clients each day, making MSCI's indexes a requirement for pension consultants. The firm's index segment currently accounts for three fourths of operating profits, with its analytics division generating another 18% of operating income.During the past four calendar years, MSCI has improved operating margins by a staggering 1,100 basis points to 47.9%. Previously, activist investors made the argument that MSCI was inefficient, hadn't integrated acquisitions well, and invested too much in analytics. In their view, it should have operating margins in the high 50s, comparable with those of main rival S&P. While we believe MSCI can approach 50% margins by 2023, we worry that investors place too much of an emphasis on margins. We appreciate MSCI's recent comments about spending growing along with sales and that margin expansion shouldn't be its only goal. Now that MSCI is liberated from the scrutiny of activists, we believe management has the ability to increase investment in new products, facilitating future growth. We believe this investment and first-mover advantage has enabled MSCI to become a leader in rapidly growing environmental, social, and governance products.Few companies have benefited more from the shift to low-cost passive investing than MSCI. While we believe this secular trend will continue, it does represent a risk for MSCI. A substantial amount (23% in 2018) of the firm's revenue is now directly or indirectly linked to fund asset levels, which would be severely affected in a major market downturn. MSCI also faces the risk that indexes become commodities where price rather than brand and reputation becomes the key differentiator for end users, as active asset managers deal with an environment where fees and performance are under greater scrutiny than they ever have been and look for more ways to cut costs.