At Killik & Co, we have long been advocates for using a global outlook when it comes to identifying investment opportunities, with 75% of the equities we cover listed outside of the UK. However, the same cannot be said for all investors. The term “home bias” is used to describe the tendency for investors to be over-exposed to domestic assets in their investment portfolios. A study by the global asset manager Vanguard showed that investors tend to own more equities listed in their own country than a global market-cap-weighted portfolio would suggest. There are lots of reasons for this, including a preference for the familiar, concerns over corporate governance, currency risk and tax considerations, as well as simple inertia.
However, this is changing. The same Vanguard study found that in 2001, the average UK investor was 62% overweight when comparing domestic equity allocations to the UK’s share of the global equity market. By 2014, this had fallen to 19%, demonstrating a trend seen in other countries too, including the United States, Canada, and Australia.
Why is this happening? We believe that a greater appreciation of the benefits of international diversification, as well as an eagerness to access higher growth rates outside one’s own country, especially in emerging markets, go some way to explaining the shift. In our view, the rise of global investing is likely to continue and this should be good news for global index data providers, one of which is MSCI.
MSCI provides financial data to help its clients build better portfolios and improve investment decisions. This includes products such as equity and fixed income indices, performance and risk analytics, and ESG ratings and research. Operating in an effective oligopoly with S&P Global and FTSE Russell, MSCI is one of the dominant global index data providers with c.25% market share. Global investors use index data universes as a starting point for building portfolios and making asset allocation decisions, tapping into an ecosystem of licensed investable products, including exchange-traded-funds (ETFs), derivatives, and funds, to manage allocations to countries.
Global portfolios also require global benchmarks like the MSCI World and the MSCI Emerging Markets, so that asset managers can measure and report performance data to asset owners. MSCI generates most of its revenues from recurring subscriptions and counts 99 of the 100 largest global asset managers as clients. Typically, asset owners like pension funds and sovereign wealth funds specify the relevant benchmark when outsourcing the investment process. This is great for the index data providers as it gets paid twice with both the asset owner and the asset manager subscribing to license the relevant data.
MSCI’s index data subscriptions are renewed annually and are very sticky, evidenced by high client retention rates. Combined with strong pricing power demonstrated by the mid-single-digit price increases the company pushes through every year, you can see why we find the industry attractive.
But it is not only its index business that is benefiting from increased globalisation of investing. Its Analytics business, which helps clients analyse market, credit, and liquidity risks across portfolios and asset classes, is seeing increased demand, as investors realise that they need more sophisticated solutions than simple spreadsheets to understand portfolio risk and return drivers as they put money to work beyond their own borders.
In our opinion, there are substantial synergies to be had by offering clients index data together with analytical tools, which suggests there are significant cross-selling opportunities ahead for MSCI. Given the rise in global investing and the increasing need for better analytics to explain the behaviour of portfolios, we believe that MSCI is well placed to be a long-term winner.
Should you have any questions about anything raised in this article, please don’t hesitate to contact us via email, or on 0207 337 0777.
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This note has been produced by Killik & Co on the basis of publicly available information, and all sources are believed to be reliable, but we have not independently verified such information and we do not give any warranty as to its accuracy. Some of the stocks mentioned in this note are covered by Killik & Co’s Equity Research team and others are not. The mentioning of the stocks does not represent a recommendation to buy or sell any securities, and the note is intended as a marketing communication rather than research. This note does not purport to be a complete description of the securities, markets or developments referred to in the material. All expressions of opinion are subject to change without notice. Nothing in this note should be construed as investment advice or as comment on the suitability of any investment or investment service. Prospective investors should take advice from a professional adviser before making any investment decisions. There are risks with almost every investment that you may not get back the original capital invested. The value of your investments may fall as well as rise and the past performance of investments is not a guide to future performance.