MSCI Diversified
Multiple-Factor Indexes
msci.com

MOMENTUMQUALITYDMF

SIZE

VA L U E

Elements of performance TM
Factors by MSCIV O L AT I L I T Y

VoYIELDYd

MOMENTUM

Mt

QUALITY

Qy

VA L U E

Vl

SIZE

Sz

Factors are the building blocks of many portfolios – the elements
capable of turning data points into actionable insights.

MSCI Diversified
Multiple-Factor Indexes
A factor is any characteristic that helps explain an asset’s long-term risk and return
profile. Certain factors have demonstrated a significant premium over the long run.
As a result, factor investing—which aims to harvest these historically persistentbenefits—has gained popularity in recent years.
Investors introducing factor strategies into their portfolio typically start out
with single factor allocations. However, diversification across factors may help
generate smoother performance and potentially protect against periods of single
factor underperformance. Multiple-factor indexes are designed to represent theperformance of such a strategy.
MSCI Diversified Multiple-Factor Indexes (DMF) are rules-based, transparent indexes
that aim to reflect the performance of a strategy that seeks higher exposure tofour style factors – Value, Momentum, Low Size and Quality – while controlling
forecasted risk.

VALUE

MOMENTUMSIZEQUALITY

3

MSCI Diversified Multiple-Factor Indexes

Relatively Cheap Stocks
The foundation of value investing is the idea that cheap assets have historically outperformed expensive,on average, in the long-term. Value is pro-cyclical, meaning it has tended to perform well in periods ofeconomic expansion.
Graham and Dodd’s Margin of Safety:
Price of the firm is less than conservative estimates of cash flow generated from the firm’s assets

VALUE

How does MSCI target value?
MSCI uses a combination of Price to Earnings (66%) and Price to Book descriptors (33%).

Rising Stocks
The momentum factor is the historical tendency of outperforming stocks to continue performing well in
the near-term. Momentum has tended to benefit from continued trends in the market and economy.
The momentum factor has been well documented in academic literature, with more than 300 studies
across global regions and asset classes.

MOMENTUM

How does MSCI target momentum?
MSCI measures momentum by a 12 month relative strength of alpha.

Sound balance sheets
Quality aims to reflect the performance of companies with durable business models and sustainable
competitive advantages.
Quality is a defensive factor and has tended to benefit during periods of economic contraction. Quality
includes dimensions of profitability, earnings stability and balance sheet strength.

QUALITY

How does MSCI target quality?
MSCI uses a comprehensive view of Investment Quality, Earnings Quality, and Profitability, among otherdimensions.

Smaller companies
The size factors is the historical tendency of small company stocks to outperform stocks with larger
market capitalizations. The size factor is pro-cyclical, meaning it has tended to do well in periods ofeconomic expansion.
Size has been well studied by academics and investors, notably by Banz (1981) and Fama-French (1992).

SIZE

How does MSCI target size?
MSCI implements size through lower market capitalization companies.

4

Long term out performance vs short term cyclicality
Historically, certain factors have generated excess risk-adjusted returns over long time periods, while demonstrating cyclicality
over shorter time periods. Factors have been subject to varying performance cycles — including periods of underperformance thatcan span several years, as shown below.

How six factors have performed relative to each other: MSCI ACWI
1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

61.0%

1.1%

0.2%

-5.8%

63.9%

29.1%

26.8%

30.9%

24.8%

-25.1%

57.1%

19.8%

6.0%

18.6%

27.5%

11.6%

3.4%

11.0%

34.0%

44.9%

0.2%-7.2%

-7.0%

56.4%

27.5%

24.3%

29.8%

20.0%

-35.9%

46.8%

19.8%

2.4%

18.1%

26.8%

8.8%

2.4%

10.6%

30.0%

36.8%

-9.1%

-8.2%

-9.2%

43.0%

24.6%

20.5%

29.7%

16.3%

-41.0%

41.1%

16.3%

2.1%

16.8%

25.0%

8.1%

2.0%

9.3%

29.0%

29.1%

-10.3%

-9.8%

-9.7%

34.6%

22.4%

18.2%

25.9%

15.1%

-41.8%

38.3%

15.0%

0.1%

16.7%

23.9%

6.4%

2.0%

8.5%

26.3%

26.8%

-10.9%-12.0%

-9.8%

32.9%

21.9%11.4%

25.6%

12.9%

-42.7%

36.8%

13.2%

-3.5%

16.6%

23.4%

4.7%

-1.8%

8.1%

26.3%

22.3%

-12.6%-13.2%-11.6%

31.3%

20.5%

10.2%

23.3%

12.2%

-43.3%

35.4%

12.1%

-6.9%

15.5%

19.0%

2.4%

-4.5%

6.2%

24.6%

13.2%

-13.9%-15.9%-16.2%

28.5%

15.8%

9.6%

21.5%

9.8%

-45.0%

19.9%

11.2%

-12.4%

15.3%

17.7%

2.0%

-4.6%

6.1%

19.9%

12.1%

-21.0%-17.2%-19.0%

23.0%

13.4%

8.3%

18.7%

7.6%-45.2%

18.0%

8.7%

-13.7%

10.8%

16.0%

0.1%

-6.1%

4.8%

18.6%

Volatility

Yield

Quality

Momentum

Value

Size

Diversified Multi-Factor

ACWI

Each of the factor indexes has experienced,
MOMENTUM

at a minimum, a consecutive two-to-threeyear period of underperformance.

QUALITY

Some factors have undergone even

DMF

longer drawdowns: The Low Size factor
went through a six-year period ofunderperformance in the 1990s.

SIZE

VA L U E

5MSCI Diversified Multiple-Factor Indexes

Cumulative performance for MSCI factors
600500400300200100

JUN 01OCT 01
FEB 02
JUN 02
OCT 02
FEB 03
JUN 03
OCT 03
FEB 04
JUN 04
OCT 04
JUN 05
OCT 05
FEB 04
JUN 05
OCT 06
FEB 04
JUN 06
OCT 06
FEB 07
JUN 07
OCT 07
FEB 08
JUN 08
OCT 08
FEB 09JUN 09
OCT 09FEB 10
JUN 10
OCT 10
FEB 11
JUN 11
OCT 11
FEB 12
JUN 12
OCT 12
FEB 13
JUN 13
OCT 13
FEB 14
JUN 14
OCT 14
FEB 15
JUN 15
OCT 15
FEB 16
JUN 16
OCT 16
FEB 17
JUN 17
OCT 17
FEB 18JUN 180ACWI MINIMUM VOLATILITYACWI HIGH DIVIDEND YIELDACWI QUALITYACWI MOMENTUMACWI VALUE WEIGHTEDACWI EQUAL WEIGHTEDACWIACWI DMF

A diversification solution: multiple-factor indexes
Although individual factor returns have been highly cyclical, each factor has historically demonstrated distinct drivers and generally
low correlations to other factors. As such, diversification across factors has historically generated smoother performance andprotected against periods of single factor underperformance.

Benefits of MSCI Diversified Multiple-Factor Indexes• Transparent and Systematic: Investors benefit from full transparency into the underlying building blocks of multiple-factorindexes. This fosters easy and consistent analysis of aggregate and underlying positions, exposures and risks—all with thesame level of granularity.
• Efficiency: Multiple-factor indexes aim to maximize their exposures to factor premia. While factor investing is not new,advancements in data and technology allow us to develop factor indexes for a broader audience.

The analysis and observations in this report are limited solely to the period of the relevant historical data, backtest or simulation. Past performance — whether actual,back tested or simulated — is no indication or guarantee of future performance. None of the information or analysis herein is intended to constitute investment advice or arecommendation to make (or refrain from making) any kind of investment decision or asset allocation and should not be relied on as such.
The time periods covered in the charts in this paper were dictated by the data available when we conducted the simulations which produced them.
There are frequently material differences between backtested or simulated performance results and actual results subsequently achieved by any investment strategy.

6MSCI Diversified Multiple-Factor Indexes methodology
MSCI Diversified Multiple-Factor (DMF) Indexes are built to maximize exposure to multiple factors while maintaining total risk
similar to that of the underlying market.

Top-down vs bottom-up approach
The DMF Indexes are constructed using a bottom-up approach versus a top-down approach. In a top-down methodology, factors
such as size, value, quality and momentum are combined at the index level, acting as building blocks in the index construction. Bycontrast, a bottom-up approach constructs the index at the constituent level, targeting select factor exposures while maintaining
market risk.

TOP-DOWN

BOTTOM-UP

Factor blend
at index level

KEY FEATURESKEY FEATURESINDEX LEVELSTOCK LEVEL

TRANSPARENCYCONTROLLABILITYFLEXIBILITY

EFFICIENCY RESPONSIVEPORTFOLIO CHARACTERISTICS

PORTFOLIO CHARACTERISTICS

LOWER AVERAGE FACTOR EXPOSURE

HIGHER AVERAGE FACTOR EXPOSURE

LOWER HISTORICAL ACTIVE RETURNHIGHER HISTORICAL ACTIVE RETURN

LOWER TRACKING ERRORHIGHER TRACKING ERROR
Factor optimization
at stock level

As you can see, each approach provides different benefits and considerations for investors to choose from. If the goal is tomaintain consistent factor exposure over time, a bottom-up, security-level optimization approach—like the one employed by theMSCI Diversified Multiple-Factor Indexes—is designed for more efficient, controlled and persistent capture of the intended factor
exposures.

7

MSCI Diversified Multiple-Factor Indexes

MSCI Diversified Multiple-Factor Indexes
Which factors are targeted?
• Value, momentum, low size and quality.
• Low volatility is excluded because the DMF Indexes aim to deliver a risk profile similar to the market. The inclusion of low
volatility would result in below-market risk. Yield is excluded because of its positive correlation with value and quality factors.

How is the index constructed?
• Aims to maximize exposure to four factors – Value, Momentum, Quality and Low Size -- while maintaining a risk profile similar
to that of the underlying parent index• Bottom-up construction

What constraints are used to meet index objectives?
• At each semi-annual index review, we apply constraints which aim to ensure replicability while achieving a target market
risk profile.
• These constraints include limits on the minimum and maximum weights of sectors, countries and single stocks. We also
limit the maximum turnover to 20% at each semi-annual review.

How are the index constituents identified?
• The DMF Indexes are constructed using Barra Open Optimizer in combination with MSCI’s Barra Equity Factor Model.

Why MSCI?

Using an obsession with data, an innovative spirit, and a drive to go further forour clients, MSCI worked to perfect a breakthrough method for factor investing.
For over 40 years MSCI, beginning with Barra, invented a common language toexplain risk and return through the lens of factors. MSCI is uniquely positioned tohelp investors use factors to explain return, manage risk and construct portfolios.
While factor investing is not new, MSCI factor indexes allow for a broader
audience to utilize the merits of factors. MSCI has developed Factor Indexes inconsultation with the world’s largest investors and has research backed by four
decades of factor data.

8MSCI Diversified Multiple-Factor Indexes

The factor box isUnderweight

NeutralOverweight

powered by MSCIFaCS and provides avisualization designed
to easily compare
factor exposures

MSCI ACWI DMF index
MSCI ACWI index

between indexes andbenchmarks.

9Learn more about Factor Investing at
www.msci.com/factor-investing
Mail us atfactorinvesting@msci.com

About MSCI Inc.
MSCI is a leading provider of critical decision support tools
and services for the global investment community. With
over 45 years of expertise in research, data and technology,
we power better investment decisions by enabling clientsto understand and analyze key drivers of risk and returnand confidently build more effective portfolios. We create
industry-leading research-enhanced solutions that clientsuse to gain insight into and improve transparency across theinvestment process.
To learn more, please visit www.msci.com.

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