Methodology Book
MSCI
GlobalValue and Growth
Index Series
INDEX CONSTRUCTION OBJECTIVES AND METHODOLOGY FOR
THE MSCI GLOBAL VALUE AND GROWTH INDEX SERIES

Last Updated in December, 2007

Global Value and Growth Index Series Methodology
Notice and Disclaimer
This document and all of the information contained in it, including without limitation all text, data, graphs, charts(collectively, the “Information”) is the property of Morgan Stanley Capital International Inc. (“MSCI”), Barra, Inc.
(“Barra”), or their affiliates (including without limitation Financial Engineering Associates, Inc.) (alone or with one or moreof them, “MSCI Barra”), or their direct or indirect suppliers or any third party involved in the making or compiling of theInformation (collectively, the “MSCI Barra Parties”), as applicable, and is provided for informational purposes only. The
Information may not be reproduced or redisseminated in whole or in part without prior written permission from MSCI orBarra, as applicable.



The Information may not be used to verify or correct other data, to create indices, risk models or analytics, or inconnection with issuing, offering, sponsoring, managing or marketing any securities, portfolios, financial
products or other investment vehicles based on, linked to, tracking or otherwise derived from any MSCI or Barra
product or data.



Historical data and analysis should not be taken as an indication or guarantee of any future performance,
analysis, forecast or prediction.

None of the Information constitutes an offer to sell (or a solicitation of an offer to buy), or a promotion or
recommendation of, any security, financial product or other investment vehicle or any trading strategy, and noneof the MSCI Barra Parties endorses, approves or otherwise expresses any opinion regarding any issuer, securities,
financial products or instruments or trading strategies. None of the Information, MSCI Barra indices, models orother products or services is intended to constitute investment advice or a recommendation to make (or refrainfrom making) any kind of investment decision and may not be relied on as such.

The user of the Information assumes the entire risk of any use it may make or permit to be made of the Information.



NONE OF THE MSCI BARRA PARTIES MAKES ANY EXPRESS OR IMPLIED WARRANTIES OR
REPRESENTATIONS WITH RESPECT TO THE INFORMATION (OR THE RESULTS TO BE OBTAINED BY
THE USE THEREOF), AND TO THE MAXIMUM EXTENT PERMITTED BY LAW, MSCI AND BARRA, EACH
ON THEIR BEHALF AND ON THE BEHALF OF EACH MSCI BARRA PARTY, HEREBY EXPRESSLYDISCLAIMS ALL IMPLIED WARRANTIES (INCLUDING, WITHOUT LIMITATION, ANY IMPLIEDWARRANTIES OF ORIGINALITY, ACCURACY, TIMELINESS, NON-INFRINGEMENT, COMPLETENESS,
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE) WITH RESPECT TO ANY OF THE
INFORMATION.



Without limiting any of the foregoing and to the maximum extent permitted by law, in no event shall any of the MSCI
Barra Parties have any liability regarding any of the Information for any direct, indirect, special, punitive, consequential(including lost profits) or any other damages even if notified of the possibility of such damages. The foregoing shall not
exclude or limit any liability that may not by applicable law be excluded or limited.



Any use of or access to products, services or information of MSCI or Barra or their subsidiaries requires a license fromMSCI or Barra, or their subsidiaries, as applicable. MSCI, Barra, MSCI Barra, EAFE, Aegis, Cosmos, BarraOne, and allother MSCI and Barra product names are the trademarks, registered trademarks, or service marks of MSCI, Barra or theiraffiliates, in the United States and other jurisdictions. The Global Industry Classification Standard (GICS) was developedby and is the exclusive property of MSCI and Standard & Poor’s. “Global Industry Classification Standard (GICS)” is aservice mark of MSCI and Standard & Poor’s.

The governing law applicable to these provisions is the substantive law of the State of New York without regard to its
conflict or choice of law principles© 2007 MSCI Barra. All rights reserved.

Global Value and Growth Index Series Methodology
About MSCI Barra (www.mscibarra.com)
MSCI Barra develops and maintains equity, fixed income, multi-asset class, REIT and hedge fund indicesthat serve as benchmarks for an estimated USD 3 trillion on a worldwide basis. MSCI Barra’s risk models
and analytics products help the world’s largest investors analyze measure and manage portfolio and firmwide investment risk. MSCI Barra is headquartered in New York, with research and commercial officearound the world. Morgan Stanley, a global financial services firm and market leader in securities, asset
management, and credit services, is the majority shareholder of MSCI Barra, and Capital GroupInternational, Inc. is the minority shareholder.
Changes already made and should be reviewed
Changes necessary but not reviewed yetGlobal Value and Growth Index Series Methodology
Table of Contents
SECTION 1: MSCI GLOBAL VALUE AND GROWTH INDEX SERIES METHODOLOGY OVERVIEW ............1
1.1
GENERAL ...................................................................................................................................................................1
1.1.1
Introduction.....................................................................................................................................................1
1.1.2
A Partition of the MSCI Standard Index SeriesSM .......................................................................................1
1.2
DEFINING THE VALUE AND GROWTH INVESTMENT STYLES AND INDICES .................................................................2
1.2.1
Multi-Factor Approach ..................................................................................................................................2
1.2.2
Two-Dimensional Framework .......................................................................................................................2
1.2.3
Index Design ....................................................................................................................................................4
1.2.4
Universe and Approach for Style Segmentation ..........................................................................................4
1.2.5
Construction of the MSCI Global Value and Growth Index Series ...........................................................4
SECTION 2: CONSTRUCTING THE MSCI GLOBAL VALUE AND GROWTH INDEX SERIES...........................5
2.1
VARIABLES USED TO SPECIFY VALUE AND GROWTH CHARACTERISTICS ..................................................................5
2.2
CALCULATING THE Z-SCORES ...................................................................................................................................6
2.2.1
Winsorizing the Variable ...............................................................................................................................6
2.2.2
Calculating the Z-Scores ................................................................................................................................6
2.3
AGGREGATING THE STYLE Z-SCORES .......................................................................................................................7
2.3.1
Calculating the Value Z-Score .......................................................................................................................7
2.3.2
Calculating the Growth Z-Score....................................................................................................................8
2.3.3
Identifying the Overall Style Characteristics ...............................................................................................92.4
ASSIGNING INITIAL STYLE INCLUSION FACTORS .....................................................................................................10
2.4.1
Initial Style Inclusion Factors for Securities with Both Value and Growth or Non-Value and NonGrowth Characteristics ................................................................................................................................................10
2.5
ALLOCATING SECURITIES TO THE VALUE AND GROWTH INDICES ...........................................................................12
2.5.1
Sorting Securities by Distance from the Origin..........................................................................................122.5.2
Applying Buffer Rules ..................................................................................................................................13
2.5.3
Allocating Securities to Reach 50% Target ................................................................................................14
SECTION 3: MAINTAINING MSCI GLOBAL VALUE AND GROWTH INDEX SERIES ......................................16
3.1
3.2

SEMI-ANNUAL STYLE INDEX REVIEW .....................................................................................................................16
SECURITY STYLE REVIEW OUTSIDE OF THE SEMI-ANNUAL STYLE INDEX REVIEWS ...............................................17

APPENDIX I: VARIABLE DEFINITIONS AND COMPUTATIONS ...........................................................................19
APPENDIX II: CALCULATION OF MARKET MEAN AND STANDARD DEVIATION ........................................25
LIST OF UPDATES TO THE METHODOLOGY BOOK ..............................................................................................26___________________________________________________________________________________________________–i–Global Value and Growth Index Series Methodology
Section 1: MSCI Global Value and Growth Index Series Methodology
Overview
1.1

GeneralThis version of the MSCI Global Value and Growth Index Series Methodology Book is effective as of
the close of December 28, 2007.
1.1.1

Introduction

For over 30 years, MSCI has been constructing global equity benchmark indices that contribute to theinternational investment management process. These indices serve as relevant and accurate performancebenchmarks, effective research and asset allocation tools, and are used as the basis for various investment
vehicles designed to gain and/or manage exposure to international markets. As such, the MSCI Equity
Index Series fulfill the investment needs of a wide variety of international investors. In constructing its
equity indices, MSCI consistently applies its equity index construction and maintenance methodology
across developed and emerging markets. This consistency of approach makes it possible to aggregate
individual country and industry indices to create meaningful regional and composite benchmark indicesfor investing internationally.
Since 1997, MSCI has been serving the investment needs of international style investors with its Global
Value and Growth Index Series. From 1997 to May 2003, the value and growth indices have been
constructed based on a single-dimensional framework that allocates securities in a MSCI Standard
Country Index into either value or growth based on their Price to Book Value ratios (P/BV).
As views on style definition and segmentation continue to develop, MSCI’s methodology has also
evolved to ensure that its value and growth indices remain reflective of the philosophy and state-of-theart thinking in international style investing. Effective as of the close of May 30, 2003, MSCI will apply a
two-dimensional framework for style segmentation in which value and growth securities are categorizedusing different attributes. In addition, multiple factors are used to identify value and growth
characteristics
MSCI believes that its enhanced methodology better reflects the evolving views on style definition andsegmentation and that it provides an improved representation of the opportunity sets of global style
managers.
1.1.2

A Partition of the MSCI Standard Index SeriesSM

The MSCI Global Value and Growth Index SeriesSM is constructed from the constituents of the MSCIStandard Index Series on a country-by-country basis for each of the 49 countries included in the MSCIAll Country World Index FreeSM (ACWI Free). Essentially, the MSCI Global Value and Growth IndexSeries is a subset of the MSCI Standard Index Series. Therefore, common index attributes such as free
float estimation, number of shares and industry classification are also identical for constituents of the two
index series. Consequently, changes in the underlying MSCI Standard Index Series will have an impact on
the MSCI Global Value and Growth Index Series. The changes include additions, deletions, changes in
Foreign Inclusion Factors (FIFs), updates in number of shares and changes in industry classification.
_________________________________________________________________________________________________–1–

Global Value and Growth Index Series Methodology
1.2

Defining the Value and Growth Investment Styles and Indices

In constructing the MSCI Global Value and Growth Index Series, MSCI has adopted a two-dimensionalframework for style segmentation in which value and growth securities are categorized using different
attributes. In addition, multiple factors are used to identify value and growth characteristics.
1.2.1

Multi-Factor Approach

The value investment style characteristics for index construction are defined using the following threevariables:•••Book value to price ratio (BV / P)
12-month forward earnings to price ratio (E fwd / P)
Dividend yield (D / P)

The growth investment style characteristics for index construction are defined using the following fivevariables:
•
•
•
•
•

Long-term forward earnings per share (EPS) growth rate (LT fwd EPS G)
Short-term forward EPS growth rate (ST fwd EPS G)
Current Internal Growth Rate (g)Long-term historical EPS growth trend (LT his EPS G)
Long-term historical sales per share (SPS) growth trend (LT his SPS G)

1.2.2

Two-Dimensional Framework

Using the variables mentioned above, value z-score and growth z-scores are calculated and used todetermine the overall style characteristics of each security in the MSCI value and growth style space, as
depicted in Exhibit 1. In the two-dimensional framework, non-value does not necessarily mean growth,and vice versa. Additionally, some securities can exhibit both value and growth characteristics, whileothers may exhibit neither.

–2–

Global Value and Growth Index Series Methodology
Exhibit 1 – MSCI Value and Growth Style Space
Value
4.0

3.0

Value (and Non-Growth)

Value and Growth
2.0

1

3

1.0

Non-Growth

Growth

0.0
-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

-1.0

Non-Value and
Non-Growth-2.0

Growth (and Non-Value)
2

4
-3.0

-4.0

Non-Value

Note: The values on the axes are z-scores. The point where the value and non-value axis intersects growth and non-growthaxis, i.e., the origin, is located at a z-score of zero for each axis.

Hence, under the two-dimensional framework for style segmentation, a security can have the following
four style characteristics:
1. A security with a positive value z-score and a negative or zero growth z-score is situated in the Value(and Non-Growth) quadrant as it exhibits clear value characteristics.
2. A security with a negative or zero value z-score and a positive growth z-score is situated in the
Growth (and Non-Value) quadrant as it exhibits clear growth characteristics.
3. A security with a positive value z-score and a positive growth z-score is situated in the Value and
Growth quadrant as it exhibits both value and growth characteristics.
4. A security with a negative or zero value z-score and a negative or zero growth z-score is situated in
the Non-Value and Non-Growth quadrant as it exhibits both non-value and non-growth
characteristics.

–3–

Global Value and Growth Index Series Methodology
1.2.3

Index Design

The objective of the MSCI Value and Growth Index Series design is to divide constituents of anunderlying MSCI Standard Country Index, into a value index and a growth index, each targeting 50% of
the free float-adjusted market capitalization of the underlying index. The market capitalization of eachconstituent should be fully represented in the combination of the value index and the growth index, and,at the same time, should not be “double-counted”. A security may, however, be represented in both thevalue index and the growth index at a partial weight.
1.2.4

Universe and Approach for Style Segmentation

MSCI adopts a country approach in conducting the style segmentation of the value and growth indices.
Securities in each MSCI Standard Country Index are allocated to the appropriate value and growthindices. The same style segmentation process is applied independently and consistently across all MSCIStandard country indices.
The consistent application of index methodology to all countries also makes it possible to apply a“building block” approach in the construction of regional and composite style indices. Under thisapproach, individual value and growth indices can be aggregated to create various meaningful andcomparable regional and composite benchmark style indices.
Please note that the value and growth style classification and allocation is applied at the security level
rather than at the company level.
1.2.5

Construction of the MSCI Global Value and Growth Index Series

In order to achieve the above-mentioned index design, MSCI constructs and maintains the value andgrowth indices by allocating securities and their free float-adjusted market capitalizations to theappropriate value and growth indices, during the semi-annual style index reviews of May and November.
MSCI’s construction of the value and growth indices for each country index involves the following five
steps:• Determining the values of the variables used to specify value and growth characteristics for each••••security.
Calculating the z-scores of each variable for each security.
Aggregating the style z-scores for each security to determine the security’s overall stylecharacteristics.
Assigning initial style inclusion factors for each security.
Achieving the 50% free float-adjusted market capitalization target by allocating securities to thevalue and growth indices after applying buffer rules.

In the next section, we review each of these steps in detail.

–4–

Global Value and Growth Index Series Methodology
Section 2: Constructing the MSCI Global Value and Growth IndexSeries2.1

Variables Used to Specify Value and Growth Characteristics

The value and growth indices construction process begins by determining the values of the variables
used to specify value and growth characteristics.
The value investment style characteristics for index construction are defined using the following threevariables:•••Book value to price ratio (BV / P)
12-month forward earnings to price ratio (E fwd / P )Dividend yield (D / P)

For these variables, securities of the same company may have different values due to different security
prices. In addition, the dividend rate may differ from one security to another of the same company. As aresult, in certain circumstances, one security of a company may be classified as value and another as
growth. In the above three variables, the price is used in the denominator in order to compute
meaningful market means and standard deviations for these variables.
The growth investment style characteristics for index construction are defined using the following fivevariables:
•
•
•
•
•

Long-term forward earnings per share (EPS) growth rate (LT fwd EPS G)
Short-term forward EPS growth rate (ST fwd EPS G)
Current Internal Growth Rate (g)Long-term historical EPS growth trend (LT his EPS G)
Long-term historical sales per share (SPS) growth trend (LT his SPS G)

For these variables, all securities of the same company have the same variable values for each of the fivevariables used to define growth investment style characteristics for index construction unless there is adifference in dividend payout, which will result in a difference in the Current Internal Growth Rate (g).
In addition, sales are typically not relevant for financial companies. Therefore, no long-term historical
SPS growth trend is calculated for securities classified in the Banks (4010) and Diversified Financials(4020) industry groups, other than securities classified in the Multi-Sector Holdings (40201030) subindustry, under the Global Industry Classification Standard (GICS) SM.
For further details on definitions and computations of the variables, see Appendix I, entitled “Variable
Definitions and Computations”.

–5–Global Value and Growth Index Series Methodology
2.2

Calculating the Z-Scores

After computing the eight variable values for each security, each of the eight variable values are
standardized within each individual MSCI Standard Country Index and assigned a z-score.
Standardization ensures that the variables are comparable to each other and that the combination of thevariables is meaningful.
2.2.1

Winsorizing the Variable

As part of the standardization process, outlier variable values are winsorized to ensure that the market
average values used to standardize the variables are less affected by extreme values.
To do this, for a given variable, the values for all securities are first ranked by ascending order withineach MSCI Standard Country Index. Missing values are excluded from the ranking. Then, for values thatlie in the bottom 5th percentile rank or in the top 95th percentile rank, the value of the 5th and the 95th
percentile rank security is allocated respectively. This process is repeated for each of the eight variables.
Example:Winsorization:
Suppose there are 200 securities ranked by ascending order. For all securities ranked from 1
through 9, their values become equal to the value of the 10th ranked security. Meanwhile, for all
securities ranked from 192 through 200, their values become equal to the value of the 191st ranked
security.
2.2.2

Calculating the Z-Scores

After winsorizing all the eight variables within each MSCI Standard Country Index, the z-score for eachof the eight variables for each security can be calculated using the free float-adjusted market
capitalization weighted market mean and standard deviation of the relevant variable within each MSCIStandard Country Index.
Computing a z-score is a widely used method of standardizing a variable in order to combine it withother variables that may have a different unit of measurement or a different scale. Because it has a meanvalue of zero and a standard deviation of 1, the value of a z-score shows how many standard deviations agiven value lies from the mean. The z-score is defined as follows:Z=(x − μmcap − weighted

σ mcap − weighted)

Where:• x is the winsorized variable value for a given security• μ is the free float-adjusted market capitalization weighted market mean using winsorized variables in
the MSCI Standard Country Index–6–

Global Value and Growth Index Series Methodology•

σ is the free float-adjusted market capitalization weighted market standard deviation using winsorizedvariables in the MSCI Standard Country Index
For further details on the calculation of the market mean and the standard deviation, see Appendix II,
entitled “Calculation of Market Mean and Standard Deviation”.
Example:Calculating Dividend Yield Z-Scores:
Index
Mean dividend yieldfor the country index
Standard deviationof dividend yield for thecountry index
Dividend yield

Security A

Security B

Security C

3.50

0.90

2.50

0.72

-1.16

0.00

2.50

1.38

Dividend yield z-score

Security A has a positive dividend yield z-score. This implies that based on dividend yield, Security
A exhibits clear value characteristics, as its dividend yield value of 3.5 is 0.72 standard deviation
above the market dividend yield of 2.5. On the other hand, a dividend yield z-score of –1.16 forSecurity B implies that its dividend yield value of 0.9 is 1.16 standard deviation below the market
dividend yield. In other words, Security B exhibits clear non-value characteristics, based on
dividend yield. As for Security C, a z-score of 0 implies that the security has the same dividend
yield value as the market mean.

2.3

Aggregating the Style Z-Scores

After standardizing each of the eight variable values for each security, MSCI calculates a value z-scoreand a growth z-score for each security. Value z-scores are computed by averaging the three value variablez-scores while growth z-scores are calculated by averaging the five growth variable z-scores. The value zscore and the growth z-score of a security define its overall style characteristics and its positioning within
the value and growth style space.
2.3.1

Calculating the Value Z-Score

To compute a value z-score, an equally weighted average of the three value variables’ z-scores iscalculated. Only available variable z-scores are used and missing variable z-scores are excluded from thecalculation.
The value z-score is calculated as follows:
Value Z −Score =1(Z BV / P + Z E fwd / P + Z D / P )3–7–

Global Value and Growth Index Series Methodology
For instance, if the E fwd /P variable is missing:
Value Z −Score =1(Z BV / P + Z D / P )2

Example:Calculating the Value Z-Score:

Book value to price z-score
12-month forward earnings to price z-score
Dividend yield z-score
Value Z-Score
2.3.2

Security A

Security B

Security C

0.90
0.78
0.72
0.80

0.80
1.86
-1.16
0.50

-1.60
-2.0
0.00
-1.20

Calculating the Growth Z-Score

For the calculation of the growth z-score, the z-score for long-term forward EPS growth rate is given a
double weight, as it is the most systematically associated with the concept of growth and it captures
growth style attributes relatively more effectively than other variables. Consequently, forward-looking
and historical measures of growth are equally weighted in computing the growth z-score.
Computing the growth z-score differs from computing the value z-score because missing variable zscores are not excluded from the calculation and their z-scores are set to zero (i.e., to the average of the
MSCI Standard Country Index). This is because variables used to define growth investment stylecharacteristics are less correlated to one another compared to those that are used to define value
investment style characteristics. Hence, excluding missing variables from the growth z-score calculation
could result in a biased growth z-score that is influenced too significantly by variable z-scores that are notmissing. In addition, this treatment ensures that in cases where many variables are missing, the resulting
growth z-score is close to the market average.
The long-term historical SPS growth trend is not used to specify growth characteristics for securities
classified in the Banks (4010) and Diversified Financials (4020) industry groups, other than securities
classified in the Multi-Sector Holdings (40201030) sub-industry, under the Global Industry Classification
Standard (GICS) SM. In this case, only five variables are averaged, rather than replacing the sales growthtrend with a zero value.
The growth z-score is calculated as follows:1
Growth Z −Score = (2 * Z LT fwd EPS G + Z ST fwd EPS G + Z g + Z LT his EPS G + Z LT his SPS G )6–8–

Global Value and Growth Index Series Methodology
For instance, if the long-term forward EPS growth rate variable is missing:
1
Growth Z −Score = (Z ST fwd EPS G + Z g + Z LT his EPS G + Z LT his SPS G )6For a financial company:
1
Growth Z −Score = (2 * Z LT fwd EPS G + Z ST fwd EPS G + Z g + Z LT his EPS G )5
Example:Calculating the Growth Z-Score:
Security A

Security B

Security C

Long-term forward EPS growth rate z-score
Short-term forward EPS growth rate z-score
Current Internal Growth Rate z-score
Long-term historical EPS growth trend z-score
Long-term historical SPS growth trend z-score

-0.19
0.25
0.72
0.30
0.10

0.68
0.50
-1.16
1.00

-1.20
-0.20
-0.40

Growth Z-Score

0.17

Not Available

Not Relevant
0.50(Financial Company)

0.34

-0.42

Security A has all 5 variables available. Its growth z-score is the sum of the 5 variables with adouble weight on the long-term forward EPS growth divided by 6. Security B is a financial
company. Therefore, no long-term historical SPS growth trend is used and its growth z-score iscomputed using a 5 as the denominator. Finally, the long-term historical EPS growth ratevariable is missing for Security C, and it will be treated as 0 and the denominator will still be 6.
2.3.3

Identifying the Overall Style Characteristics

After calculating the value and growth z-scores for each security, each security’s overall stylecharacteristics and position within the value and growth style space can be determined based on the tablebelow.

Value Z-Score Growth Z-Score Style Characteristics
Positive
Negative or Zero Value
Negative or Zero Positive
GrowthPositive
Positive
Both Value and Growth
Negative or Zero Negative or Zero Neither Value nor Growth–9–Global Value and Growth Index Series Methodology
2.4

Assigning Initial Style Inclusion Factors

Based on the overall style characteristics, securities are assigned with initial style inclusion factors. At thistime, securities that exhibit both value and growth or neither value nor growth characteristics are also
adjusted for dominant style.
Each security has two style inclusion factors, one for value, defined as the Value Inclusion Factor (VIF)
and the other for growth, defined as the Growth Inclusion Factor (GIF), and they represent the
proportion of a security’s free float-adjusted market capitalization that should be allocated to the value
and/or growth indices. The sum of the VIF and the GIF is always equal to one. There are five possible
values for the style inclusion factors: 1, 0.65, 0.5, 0.35 and 0.
For instance, a VIF of 1 implies that the security’s free float-adjusted market capitalization is fully
allocated to the value index, while a VIF of 0.35 implies that only 35% of the security’s free floatadjusted market capitalization is allocated to the value index. As the sum of VIF and GIF is always equal
to one, for example, a VIF of 0.35 will result in a GIF of 0.65 and the remaining 65% of the security’s
free float-adjusted market capitalization is allocated to the growth index. Exhibit 2 on the next pageshows the various style inclusion factors within the value and growth style space, which will be describedin detail in the following paragraphs.
2.4.1

Initial Style Inclusion Factors for Securities with Both Value and Growth or Non-Valueand Non-Growth Characteristics

For securities with style characteristics of both value and growth or neither value nor growth, their initial
VIF and GIF can range between 0 and 1, depending on the contribution of the value (or non-growth, if
the growth z-score is negative) and growth (or non-value, if the value z-score is negative) z-scores to the
distance of a security from the origin.
The contribution of each style z-score to the distance from the origin is calculated as follows:
value z-score2
value z-score 2=
value contribution =value z-score 2 +growth z-score2
distance2
growth z-score2
growth z-score 2=
growth contribution =value z-score 2 +growth z-score2
distance2
value contributi on + growth contributi on =1

For securities where a style contribution of a positive style z-score (a negative style z-score) is at least
80% (less than 20%), that style is deemed to clearly dominate the other style. Such securities are allocatedwith an initial VIF or GIF of 1, depending on whether value (non-growth) or growth (non-value)
contributed at least 80% (less than 20%) to the distance respectively. This is represented by the 80/20
line (20/80) in Exhibit 2, which corresponds to the value z-score (growth z-score) representing twice thegrowth z-score (value z-score), i.e., representing a contribution of 80% of the total distance from theorigin.
– 10 –

Global Value and Growth Index Series Methodology
Otherwise, if a style contribution ranges between more than 20% and less than 80%, the VIF and GIF
are determined using the table below.
Exhibit 2 – MSCI Value and Growth Style Space, Allocating Initial VIF & GIF
Value

60/40

80/20

4.0

Value and Growth Partial Allocation
3a

3.0

40/60

3b

Value - Full Allocation

3c

20/80

2.0

1

3d

1.0

3e

Non-Growth

Growth

0.0
-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

4a
-1.0

4b

80/20

-2.0

Growth - Full Allocation

4c

2
4d

60/40

4e

Non-Value and
Non-Growth Partial Allocation

-3.0

-4.0

Non-Value

20/80

40/60

Note: The values on the axes are z-scores. The point where the value and non-value axis intersects growth and non-growthaxis, i.e., the origin, is located at a z-score of zero for each axis.
Zone

1

2

3a

3b

3c

3d

3e

4a

4b

4c

4d

4e

Style
Characteristics

Value

GrowthValue/
GrowthValue/
GrowthValue/
GrowthValue/
GrowthValue/
GrowthStyle Bias

Value

GrowthValue

No BiasGrowth

0

1

0.5

0

1

0.5

NonValue/
NonGrowth
GrowthBias
0.35

NonValue/
NonGrowth
Growth1

GrowthBias
0.35

NonValue/
NonGrowth
ValueBias
0.65

NonValue/
NonGrowth
No Bias

Initial VIF

ValueBias
0.65

NonValue/
NonGrowth
Value

Initial GIF

0

1

0

0.35

0.5

0.65

1

0

0.35

0.5

0.65

1

– 11 –

0Global Value and Growth Index Series Methodology
Example:Calculating the Distance and the Style Contribution:
Security A

Security B

Security C

Value z-score
Growth z-score
Value z-score squared
Growth z-score squared
Distance from the origin squared
Value contribution to the distance
Growth contribution to the distance

0.80
0.20
0.64
0.04
0.68
94%
6%

0.50
0.50
0.25
0.25
0.50
50%
50%

-1.20
-0.50
1.44
0.25
1.69
85%
15%

Initial VIF
Initial GIF

1
0

0.5
0.5

0
1

Security A’s value contributes 94% of its overall style characteristics. Hence, the value z-scoreclearly dominates the growth z-score and a VIF of 1 is allocated to Security A. As for Security
B, no style clearly dominates, as the contribution of the two style z-scores is equal at 50%.
Therefore, a VIF and GIF of 0.5 is allocated to security B. For Security C, its value z-scoreand growth z-score are both negative. Hence, the non-value z-score contributes 85% and thenon-growth z-score contributes 15%. This means that the growth z-score clearly dominates
the value z-score, and as a result, a GIF of 1 is assigned to Security C.

2.5

Allocating Securities to the Value and Growth Indices

The value and growth indices target a 50% free float-adjusted market capitalization representation foreach of the value and growth indices in each MSCI Standard Country Index. In order to achieve the 50%
target, the style allocation process involves the following three steps:
•
•
•
2.5.1

Sorting securities by distance from the origin in the style space.
Applying buffer rules and reassigning initial VIF and GIF, as appropriate.
Achieving the 50% free float-adjusted market capitalization target by allocating securities to thevalue and growth indices.
Sorting Securities by Distance from the Origin

In the allocation process, first all securities are sorted by distance from the origin. The strength of the
security style characteristics is measured by the distance from the origin. Therefore, the security with thestrongest style characteristics is the one with the greatest distance from the origin.
The distance from the origin (d) is computed as follows:d = value z−score2 + growth z−score 2– 12 –

Global Value and Growth Index Series Methodology
Example:Calculating the Distance:
Security A
0.80
0.20
0.64
0.04
0.82

Value z-score
Growth z-score
Value z-score squared
Growth z-score squared
Distance from the origin

Security B
0.50
0.50
0.25
0.25
0.71

Security C
-1.20
-0.50
1.44
0.25
1.30

Security C is the furthest away from the origin among the three securities. Therefore, it has thestrongest style characteristics and is allocated to its appropriate style index first.
2.5.2

Applying Buffer Rules

Next, the initial style inclusion factors for all existing constituents are reviewed based on buffer rules.
According to the buffer rules, all securities that fall in the buffers will not change their current styleinclusion factors and remain in their current index or indices, unless they need to be reassigned, if
required, to meet the 50% target. Buffer rules help limit the index turnover caused by temporary
migration of securities from one style index to the other and come into effect only at the semi-annual
style index reviews.
The buffers are represented by a cross resulting from the overlap of a horizontal rectangle around thegrowth axis and a vertical rectangle around the value axis. The horizontal rectangle is defined by a value
z-score between +/- 0.2 and a growth z-score between +/- 0.4 and the vertical rectangle is defined by avalue z-score between +/- 0.4 and a growth z-score between +/- 0.2, as shown in the shaded area in
Exhibit 2.
Example:Reassigning Style Inclusion Factors Based on Buffer Rule:
Security A

Security B

Security C

Value z-score
Growth z-score
Falls in the buffers

0.10
0.80
no

-0.07
-0.05
yes

0.15
-0.05
yes

Current VIF
Initial VIF
Post buffer VIF

1
0
0

0.5
0.35
0.5

0
1
0

Security A is not impacted by the buffer rules as its pro forma value and growth z-scores are
not falling within the buffers. Hence, its initial style inclusion factors remain unchanged.
Securities B and C are impacted by the buffer rules and therefore, their style inclusion factors
are reassigned to the current style inclusion factors.
– 13 –

Global Value and Growth Index Series Methodology
2.5.3

Allocating Securities to Reach 50% Target

The allocation process starts by assigning to the appropriate style index the security that is the greatest
distance away from the origin and hence possesses the strongest style characteristics, based on its initial
VIF and GIF modified for buffers.
Allocating securities starting with those that are furthest away from the origin ensures that securities withthe strongest style characteristics are allocated to their appropriate styles first. During the style allocation
process, if two securities have the same distance, the security with a larger free float-adjusted market
capitalization is allocated to its appropriate style index first.
The allocation process is stopped when adding a security to a particular style index results in the
cumulative weight of that index exceeding the 50% free float-adjusted market capitalization
representation target.
The security, which stopped the allocation process, is defined as the “middle security”. In this step, theallocation of the middle security is reviewed to determine how to best approximate the 50% target. If the
middle security has a free float-adjusted market capitalization weight of less than 5% in the MSCIStandard Country Index, its free float-adjusted market capitalization is allocated to the value or growthindex that comes closest to the 50% target. If the middle security has a free float-adjusted market
capitalization weight of more than 5% in the MSCI Standard Country Index, its free float-adjusted
market capitalization can be partially allocated to the value and growth indices in order to be closer to the
50% target. The VIF and GIF for a middle security can be either 1, 0.65, 0.5, 0.35 or 0. Depending on
the outcome of the attribution of this middle security, neither index may reach the 50% target andtherefore the attribution process may continue.
Once the 50% target is reached, all remaining securities are allocated or reallocated to the index that has
not yet reached the 50% target.
Therefore, some securities may be allocated to a style index that is different from their initial styleclassification. However, as the allocation process starts with securities having the strongest stylecharacteristics and the remaining securities that are reassigned have relatively less pronounced stylecharacteristics, the impact on the style indices is expected to be modest.

– 14 –

Global Value and Growth Index Series Methodology
Example:Reallocating Securities with a Weight of Less than 5% to Reach 50% Target:
Securities

Distance

Security

Cumulative Index Weight

Post Buffer

Weights

Value

GrowthVIF

Final VIF

A

3.74

0.1%

0.1%

0.0%

1.00

1.00

B

2.63

0.2%

0.3%

0.0%

1.00

1.00

C

2.49

0.1%

0.4%

0.0%

1.00

1.00

…

…

…

…

…

…

…

…

…

…

…

…

…

…

X

0.33

1.3%

46.5%

50.2%

0.00

0.00

Y

0.32

0.9%

47.4%

50.2%

0.00

…

…

…

…

…

…

Reallocated

1.00…

Security A is the first security to be allocated as it is the furthest away from the origin andtherefore has the strongest style characteristics. This security is assigned to the value index asits post buffer VIF is 1. As a result, the cumulative value index weight increases from 0% to
0.1%. The process continues until Security X is allocated. This security is allocated to thegrowth index according to its post buffer VIF and as a result, the cumulative growth index
weight reaches 50.2%, above the 50% target. Security X is the “middle security”. As a result,securities starting from Security Y are fully reallocated to the value index, even if their post
buffer VIF is 0.
Example:Reallocating Securities with a Weight of More than 5% to Reach 50% Target:
Securities

Distance

A

3.74

B

Security

Cumulative Index Weight

Post Buffer

Final VIF

Weights

Value

Growth

VIF

0.1%

0.1%

0.0%

1.00

1.00

2.63

0.2%

0.3%

0.0%

1.00

1.00

C

2.49

0.1%

0.4%

0.0%

1.00

1.00

…

…

…

…

…

…

…

…

…

…

…

…

…

…

X

0.33

5.3%

48.5%

50.6%

0.00

Reallocated

0.35

Y

0.32

0.9%

49.4%

50.2%

0.00

Reallocated

1.00

…

…

…

…

…

…

…

In this example, Security X is the “middle security”. It has a free float-adjusted market
capitalization weight of more than 5% in the MSCI Standard Country Index. According to its
post buffer VIF, it should have been allocated to the growth index, resulting in a weight of
52.5% representation, above the 50% target. In this case, the security is partially allocated inorder to most closely approximate the 50% target. As a result, 35% of the security’s weight isreallocated from the growth index to the value index and its final VIF is 0.35.
– 15 –

Global Value and Growth Index Series Methodology
Section 3: Maintaining MSCI Global Value and Growth Index Series
The value and growth indices are maintained with the objective of reflecting the evolution of stylesegments within each country universe on a timely basis. In maintaining the indices, emphasis is also
placed on their continuity and on minimizing unnecessary index turnover.
Maintaining the MSCI Global Value and Growth Index Series involves two main dimensions. The first is
the style maintenance of constituents resulting from the review of the Global Value and Growth Indices,which takes place on a semi-annual basis. The second aspect involves changes driven by the underlying
MSCI Standard Country Indices, which include additions to and deletions from the MSCI Standard
Country Index, changes in Foreign Inclusion Factors (FIFs), updates in number of shares and changes inindustry classification, as a result of quarterly index reviews, annual full country index reviews andongoing event-related changes.
The style index maintenance for the value and growth indices can be described by the following two
broad categories:•

Semi-annual style index reviews.

•

Style review outside of the semi-annual style index reviews.

3.1

Semi-Annual Style Index Review

The style review of the value and growth indices is conducted at the end of May and November,coinciding with the May annual full country index review and the November quarterly index review of
the underlying MSCI Standard country indices.
During the style review, new value and growth z-scores are calculated for the pro forma MSCI Standard
Country Index constituents and after applying the buffer rules, securities are allocated to the value andgrowth indices, targeting 50% of the free float-adjusted market capitalization within each MSCI Standard
Country Index as outlined in Section 2.
Values of the fundamental data used to determine style characteristics are maintained on a monthly basis.
For the May and the November semi-annual style index reviews, fundamental and forward looking data
as of the end of March and the end of September are used respectively. The review date for market
capitalization and prices is generally any one of the last 10 business days of April and October for the
May and the November semi-annual style index reviews respectively. The prices from that same date areused for the calculation of the three price based ratios used to determined value style characteristics.

– 16 –

Global Value and Growth Index Series Methodology
3.2

Security Style Review Outside of the Semi-Annual Style Index Reviews

Style reviews outside the semi-annual style index reviews are conducted for new securities in cases ofadditions to the underlying MSCI Standard Country Indices.
For these securities, the style review involves the following:• Determining the values of the eight variables used to specify value and growth characteristics
of affected securities using the latest available underlying fundamental and forward looking
data.
• Calculating the z-scores of each variable for affected securities using the previous daily free
float-adjusted market capitalization weighted mean and standard deviation of the relevant
variables.
• Aggregating the style z-scores for the affected securities to determine their overall stylecharacteristics.
• Allocating the affected securities with the appropriate style inclusion factors without
considering the buffer rules or the 50% free float-adjusted market capitalization target.
Additions of constituents to the value and growth indices outside the regular index reviews can result
from:
•
•

Inclusions to the underlying MSCI Standard Country Indices during the February and Augustquarterly index reviews for the MSCI Standard Index Series or
Inclusions to the underlying MSCI Standard Country Indices due to M&As, spin-offs, large IPOs
and other early inclusions as described in the MSCI Standard Index Series Methodology Book.

Style reviews are conducted for new index constituents except in the following cases:••••

When a non-constituent company acquires a constituent company and the constituent company’s
securities are replaced by the securities of the acquiring company, the acquiring company will keep
the style of the acquired company.
When a constituent company merges with a non-constituent company and the merged company
replaces the constituent company, the merged company will keep the style of the constituent
company before the merger.
When two constituent companies merge and the merged company replaces the two constituent
companies, the merged company will keep the style of the constituent company to which it ishistorically linked.
When securities spun-off from existing constituents are considered for early inclusion at the time ofthe event and the spinning-off security is not deleted from the Standard Index, the spun-off
securities will keep the style of the spinning-off security.

– 17 –

Global Value and Growth Index Series Methodology

Appendices– 18 –

Global Value and Growth Index Series Methodology
Appendix I: Variable Definitions and Computations
This appendix provides details on the definitions and computations of the eight variables used to define
the value and growth investment style characteristics for index construction.
All forward variables are based on consensus analysts’ estimates are provided by specialized data
vendors. Currently, the primary vendor for forward variables is Thomson I/B/E/S. For Japan, Toyo
Kezai is used as secondary source for securities which are not covered by Thomson I/B/E/S. For allother fundamental data, MSCI data are used. As a general rule, in order to avoid inconsistencies of data
between the different providers, the fundamental data used in the forward variable calculations are also
provided by Thomson I/B/E/S.
Thomson I/B/E/S provides data at the company level. Hence, MSCI propagates the company levelThomson I/B/E/S data to all securities of the same company when combining it with security level
prices. In case of par value difference between multiple securities of the same company, MSCI adjusts
Thomson I/B/E/S data accordingly.
In certain circumstances, such as for securities recently listed or undergoing significant events where
forward-looking data is not yet available from I/B/E/S and Toyo Kezai, MSCI is using an average ofanalyst estimates available from other sources.

Variables Used to Define Value Investment Style Characteristics
1. Book Value to Price Ratio (BV / P)
The BV / P calculation is as follows:
BV / P = book value per share / price of security
The most recently reported book value is used to estimate book value per share.
2. 12-month Forward Earnings to Price Ratio (E fwd / P)
The E fwd / P is calculated as follows:
E fwd / P = EPS12F / price of security

Where:EPS12F is the 12-month forward EPS estimate and is derived on a rolling basis from the consensus
of analysts’ earnings estimates for fiscal year 1 and fiscal year 2.

EPS12 F =M * EPS1 + (12 − M ) * EPS 2
12

Where
• EPS1 is the consensus of analysts’ earnings estimates for fiscal year 1_________________________________________________________________________________________________– 19 –

Global Value and Growth Index Series Methodology•••

EPS2 is the consensus of analysts’ earnings estimates for fiscal year 2
M is the number of months remaining before the fiscal year end
The fiscal year 1 corresponds to the fiscal year following the last fiscal year for which thecompany has made its results publicly available

For cases where EPS2 is not available and M is greater than or equal to 8, EPS1 is used as an
approximation of EPS12F.

Example:Calculating the 12-month forward earnings as of January 20, 2005:
Security A

Security B

Security C

Latest reported Fiscal YearM
EPS1
EPS1 date
EPS2
EPS2 date
EPS3
EPS3 date

Dec 31, 2004
11
0.64
Dec 31, 2005
0.74
Dec 31, 2006

Mar 31, 2004
2
1.04
Mar 31, 2005
1.52
Mar 31, 2006

Dec 31, 2003
11
1.04
Dec 31, 2004
1.52
Dec 31, 2005
1.72
Dec 31, 2006

EPS12F

0.65

1.44

1.54

For Security C, the results for the fiscal year ending December 31, 2004 are not yet available. As aresult, the EPS1 estimates still pertain to the fiscal year ending December 31, 2004. Therefore, inorder to have meaningful 12-month forward earnings, the EPS2 and the EPS3 are used instead of
the EPS1 and EPS2.

– 20 –

Global Value and Growth Index Series Methodology
Example:Calculating the 12-month forward earnings as of January 20, 2005 when EPS2 is missing:
Security A

Security B

Security C

Latest reported Fiscal YearM
EPS1
EPS1 date
EPS2
EPS2 date

Sep 30, 2004
80.64
Sep 30, 2005
0.74
Sep 30, 2006

Jun 30, 20045
1.04
Jun 30, 2005

Dec 31, 200411
1.04
Dec 31, 2005

EPS12F

0.67

N/A

1.04

For security B, estimates for June 30, 2006 are not available. Since M is smaller than 8, EPS12F is
not available. In the case of Security C, estimates for December 31, 2006 are not available but as
M is greater than 8, EPS1 is used as EPS12F
3. Dividend yield (D / P)
D / P = Current Annualized Dividend per Share / Price of Security
The current annualized dividend per share is the sum of all the latest declared dividends representing
one year of dividends. For the USA and Canada, the current annualized dividend per share is
calculated by annualizing the latest published quarterly dividend.
Yields are gross, before withholding tax, and take into account special tax credits when applicable.

Variables Used to Define Growth Investment Style Characteristics
1. Long-term Forward Earnings per Share Growth Rate (LT fwd EPS G)
The LT fwd EPS G is the consensus of analysts’ earnings growth rate estimates typically provided forthe next 3 to 5 years. LT fwd EPS G with values above to 50 or below -33 are not taken into accountand considered as missing if contributed by only one analyst.
2. Short-term Forward Earnings per Share Growth Rate (ST fwd EPS G)
The ST fwd EPS G is a growth rate between the 12-month backward earnings per share and the 12month forward earnings per share.

– 21 –

Global Value and Growth Index Series Methodology
The ST fwd EPS G is computed as follows:
ST forward EPS G =EPS12 F − EPS12 B
EPS12 B

Where
EPS12B = 12-month backward EPS is derived in a similar fashion as the EPS12F but from the lastreported fiscal year and the consensus of analysts’ earnings estimates for fiscal year 1

EPS12 B =M * EPS 0 + (12 − M ) * EPS1
12

Where
• EPS0 is last fiscal year end reported earnings per share
For cases where EPS1 is used as an approximation of EPS12F, EPS0 is used as the value for EPS12B.
Example:Calculating the Short-term forward EPS growth rate as of the January 20, 2005:
Security A

Security B

Security C

Fiscal Year End
M
EPS0
EPS1
EPS2

Dec 31, 2004
11
0.50
0.64
0.74

Nov 30, 2004
10
-0.30
-0.15
0.25

Mar 31, 2004
2
0.89
1.04
1.52

EPS12FEPS12B

0.65
0.51

-0.08
-0.28

1.44
1.02

ST fwd EPS G

26.7%

69.7%

41.9%

– 22 –

Global Value and Growth Index Series Methodology
3. Current Internal Growth Rate (g)The Current Internal Growth Rate is calculated as follows:g = ROE*(1-PO)
Return on Equity (ROE) is calculated using the trailing 12-month EPS divided by the most recently
reported book value. The ROE is considered meaningful and is calculated if the following conditions
are met:••••the book value is positive andthe difference between the book value and earnings date is less than 18 months andthe book value’s date is older than the earnings date andthe issuer results are consolidated or not consolidated for both book value and earnings.

Otherwise, the ROE value is considered missing.
Payout ratio (PO) is calculated using the current annualized dividend per share divided by the trailing
12-month EPS.
In the event of a missing value for either the payout ratio or the ROE, the g value is considered to be
missing.
4. Long-term Historical EPS Growth Trend (LT his EPS G) and
5. Long-term Historical Sales per Share (SPS) Growth Trend (LT his SPS G)
For the calculation of the LT his EPS G and LT his SPS G, first a regression (ordinary least square
method) is applied to the last 5 yearly restated EPS and SPS respectively.
EPSt = a × t + b
Where:• a, the slope coefficient,• b, the intercept,• t, the year expressed in number of months.
Then, an average absolute EPS or SPS is estimated:~ ~ ~ n EPSi
EP S = ∑ni =1The growth trend is finally obtained as follows:aLT his EPS G = ~ ~EPS~
EP S~ ~ ~ n SPSi
S PS = ∑ni =1aLT his SPS G = ~ ~SPS~
S PS– 23 –

Global Value and Growth Index Series Methodology
In order to compute a meaningful long-term historical growth trend for the EPS and SPS, 5 years ofcomparable data are required. In the event that comparable restated pro forma data are unavailable,
MSCI may restate the data using adjustments. A minimum of the last four EPS or SPS values areneeded to compute their historical growth trends. Growth trends for securities without sufficient
EPS or SPS values are considered to be missing.
Example:Calculating Long-term historical EPS and SPS growth trend January 20, 2003:
Fiscal Year End 0
Fiscal Year End 1
Fiscal Year End 2
Fiscal Year End 3
Fiscal Year End 4

Years
Dec 31, 1998
Dec 31, 1999
Dec 31, 2000
Dec 31, 2001
Dec 31, 2002aa, annualized~ ~ ~ ~~ ~EP S & S P S
Growth Trend– 24 –

t
0
12
24
36
48

EPS
-1.11
-0.51
0.29
0.92
1.41

SPS
7.71
8.19
8.57
8.87
11.50

0.05
0.60

0.07
0.84

0.85
70.6%

8.97
9.36%

Global Value and Growth Index Series Methodology
Appendix II: Calculation of Market Mean and Standard Deviation
This appendix explains the calculation of the market mean and standard deviation used in thedetermination of the z-score.
The calculation involves the following three steps:• First, the variable values are winsorized using the 5th and 95th percentile cut-off.
• Second, the winsorized per share values are used to compute the market mean.
• Third, the market standard deviation is computed.
The market mean is the market capitalization weighted average of the variable and is computed asfollows:⎡⎛⎤⎞⎢⎜ Sharesi × Pi × FIFi ⎟winsorized ⎥μ variable = ∑ ⎢⎜⎟ × Variablei⎥
Sharesi × Pi × FIFi ⎟
i
∑
⎜
⎢⎣⎝ i
⎥⎦
⎠
The market standard deviation is computed as follows:⎞⎛⎜ Shares i × Pi × FIFi ⎟2
winsorized
σ variable = ∑ ⎜− μ variable⎟ × Variableii ⎜ ∑ Shares i × Pi × FIFi ⎟
⎠
⎝ i

(

)

For example, the market mean and the market standard deviation for BV/P is calculated as follows:⎡⎛⎞
winsorized ⎤⎢⎜ Sharesi × Pi × FIFi ⎟ ⎛ BV ⎞⎥μ BV = ∑ ⎢⎜
⎟
⎟×⎜
⎥
P
Sharesi × Pi × FIFi ⎟ ⎝ P ⎠ ii⎢⎣⎜⎝ ∑
⎥⎦
i
⎠
2
⎛
⎞
⎞
⎜ Sharesi × Pi × FIFi ⎟ ⎛ ⎛ BV ⎞ winsorized⎜⎟
σ BV / P = ∑ ⎜− μ BV⎟⎟ × ⎜⎜P ⎟P⎝⎠i ⎜ ∑ Sharesi × Pi × FIFi ⎟
i
⎝
⎠
⎝ i
⎠i

Please note that only securities with non-missing variables are included in the market mean andstandard deviation.

– 25 –

Global Value and Growth Index Series Methodology
List of Updates to the Methodology Book
The following sections have been updated in the Methodology Book published in December, 2007:
APPENDIX I: VARIABLE DEFINITIONS AND COMPUTATIONS ...........................................................................19– 26 –