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MSCI launches new modified indices for asset owners

The Institutional Client Designed Indexes allows institutional asset owners to modify an index’s methodology to address changes in investment strategies.
by Michelle Ng
Both the GAM and JP Morgan funds invest in Asia-Pacific including Japan, but the main difference is the markets they invest in. GAM is more focused on developed markets, while JP Morgan has a mix of both developed and emerging markets. The difference lies in their benchmarks: GAM’s benchmark index, the MSCI Pacific Index, captures only five developed markets in the region, according to Ng. JP Morgan’s benchmark index, the MSCI AC Asia-Pacific Index, includes five developed market and nine emerging market countries in Asia-Pacific. Fund vs benchmark index (top five country allocations) GAM fund MSCI Pacific Japan 60.16% Japan 65.71% Australia 16.20% Australia 20.06% Hong Kong 15.91% Hong Kong 10.05% China 3.61% Singapore 3.71% Singapore 2.70% New Zealand 0.48% JP Morgan fund MSCI AC Asia Pacific Index Japan 39.50% Japan 37.99% China 19.30% China 17.01% Australia 9.80% Australia 11.60% Hong Kong 8.40% South Korea 8.54% Taiwan 6.20% Taiwan 6.93% Source: MSCI, GAM, JP Morgan Asset Management Ng noted that the GAM fund has an unconstrained strategy and does not need to follow the benchmark. However, its portfolio somewhat resembles the MSCI Pacific Index on a country level. “When I look back to its portfolio history, I think the country allocation has been similar to that of the benchmark that they use,” Ng said. Not only do their benchmarks differ in country allocations, but in sectors as well. On the benchmark level, one of the key differences is the allocation to information technology: the MSCI Pacific only has around 8% in the sector, while the MSCI AC Asia Pacific Index has 20% in IT. It is not surprising then that the JP Morgan fund has 25% in IT, Ng said. Fund vs benchmark index (top five sector allocations) GAM fund MSCI Pacific Financials 23.97% Financials 21.51% Industrials 22.40% Industrials 16.78% Consumer discretionary 21.66% Consumer discretionary 15.03% IT 8.77% IT 8.40% Real estate 7.62% Materials 7.99% JP Morgan fund MSCI AC Asia Pacific Index Financials 26.80% Financial 21.32% IT 25.80% IT 20.46% Consumer discretionary 15.50% Consumer discretionary 12.49% Industrials 9.20% Industrials 12.18% Materials 8.70% Materials 6.97% Source: MSCI, GAM, JP Morgan Asset Management Although both funds look for growth opportunities in the region, the GAM fund prefers equities with lower valuations than the JP Morgan fund, Ng said, adding that the GAM product has a lower price-per-earnings multiple. In comparison, the JP Morgan fund is more growth-oriented and the managers are willing to pay for companies with higher valuations provided they show long-term sustainable growth prospects, he added. Differences in strategy Both funds use different investment strategies. For the GAM fund, managers Michael Lai and Ben Williams employ a top-down and bottom-up approach, according to Ng. The top-down approach is mainly a decision about the fund’s allocation to Japan, depending on macroeconomic factors. After that, they use a bottom-up approach to pick the stocks in Japan and the rest of the APAC markets based on various fundamentals. For the JP Morgan fund, the fund managers, Aisa Ogoshi, Mark Davids and Robert Lloyd, identify “core franchise” and “quality growth” stocks, according to Ng. Core franchise stocks refer to companies that have financial strength and strong corporate governance attributes.. Quality growth stocks are those that have long-term growth prospects.

MSCI has announced the launch of Institutional Client Designed Indexes, a new series of indices that allow asset owners to modify an index’s methodology instead of switching indices when their investment strategies shift.

The announcement comes against a backdrop of pension funds, sovereign wealth funds, endowments and other institutional asset owners evolving their investment strategies to adapt to the current fast-changing market.

“MSCI saw the need for an index solution that asset owners could evolve over time as they adjust their investment strategies in response to new developments and changes in their performance and risk outlook,” said Sebastien Lieblich, head of indexed licensing at MSCI.

“The launch of [the indices] represents a sea change in how asset owners can access MSCI’s solutions, putting customisation and pro-active monitoring at the forefront of index-based investing.”

Asset owners can select initial index criteria for the Institutional Client Designed Indexes such as ESG, thematic or other considerations.

The index can then be used as a benchmark for an indexed mandate managed by the asset owner internally or by a third-party asset manager.

MSCI will also provide insights from its solutions research team on topics such as risk and performance analysis; ESG, climate, and thematic factors; and stress test analysis reflecting the potential impact of the evolving economic and financial environment.

This aims to allow asset owners to pinpoint sources of performance, quantify risks and opportunities and adjust their index methodology accordingly to suit their investment strategies, MSCI said.

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