MSCI Emerging
Markets Value
Factor Select Index
October 2023

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OCTOBER 2023

MSCI Emerging Markets Value Factor Select Index | October 2023

Contents

1

Introduction ............................................................................ 3

2

Index Construction Methodology .......................................... 4
2.1

Applicable Universe ............................................................................ 4

2.2

Defining the Value Score .................................................................... 4

2.2.1

Calculating the Z-Score ............................................................................. 4

2.2.2

Calculating the Value Score ...................................................................... 4

2.3

3

Defining the Quality Score .................................................................. 5

2.3.1

Winsorizing the Variable............................................................................ 5

2.3.2

Calculating the Z-Score ............................................................................. 5

2.3.3

Calculating the Quality Score .................................................................... 6

2.4

Security Selection ............................................................................... 6

2.5

Security Weighting .............................................................................. 6

2.5.1

Defining the Value Coverage (VC) Score.................................................. 6

2.5.2

Defining the Quality Coverage (QC) Score ............................................... 6

2.5.3

Defining the Tilt Score ............................................................................... 7

2.5.4

Security Weighting ..................................................................................... 7

Maintaining the Index ............................................................. 8
3.1

Semi-Annual Index Reviews ............................................................... 8

3.1.1

Buffer Rule.................................................................................................. 8

3.1.2

Turnover Threshold ................................................................................... 8

3.2

Ongoing Event Related Changes ....................................................... 8

Appendix I: Calculation of the Value Fundamental Variables .. 11
Appendix II: Value Z-Score Computation ................................... 12
Appendix III: Calculation of the Quality Fundamental Variables..................................................................................................... 14
Appendix IV: Quality Z-Score Computation ............................... 15
Appendix V: The Capping Methodology .................................... 16© 2023 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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MSCI Emerging Markets Value Factor Select Index | October 2023

1

Introduction
The MSCI Emerging Markets Value Factor Select Index (herein ‘the Index’) is
designed to represent the performance of a strategy that seeks higher exposure to avalue factor.
The Index selects securities from the MSCI EM (Emerging Markets) Index (herein,‘the Parent Index’) with higher Value Score, while covering 30% of weight within eachcountry in the Parent Index. Additionally, the capping is applied on constituent
weights, country weights and sector weights to mitigate the concentration in the
Index.

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MSCI Emerging Markets Value Factor Select Index | October 2023

2

Index Construction Methodology
The Index construction rules are defined in sections 2.1 to 2.5 below.

2.1

APPLICABLE UNIVERSE
The Applicable Universe includes all the constituents of the Parent Index.

2.2

DEFINING THE VALUE SCOREThe Value score for each security is calculated by combining the z-scores of threevaluation descriptors, namely Forward Price to Earnings (Fwd P/E), Enterprise
Value/Operating Cash Flows (EV/CFO) and Price to Book Value (P/B). The details of
the calculation of the fundamental variables are provided in Appendix I.

2.2.1

CALCULATING THE Z-SCORE
The z-score for each of the three variables for each security is calculated using themean and standard deviation of the inverse of the corresponding variable. The zscore for each individual variable is computed within the Parent Index. The variables
used are as follows:
1. Fwd P/E, P/B, EV/CFO for all securities except for those classified in“Financials” or “Real Estate” Sector (Sector “40” and “60” of the Global
Industry Classification Standard (GICS®)1 respectively)
2. Fwd P/E, P/B for all securities classified in the “Financials” Sector
3. EV/CFO for all securities classified in the “Real Estate” Sector

2.2.2

CALCULATING THE VALUE SCORE
After calculating individual variable z-scores, a composite Value z-score for eachsecurity is computed by taking the weighted average of individual variable z-scoresfor each security. Each individual variable z-score is assigned an equal weight (e.g.,
1/3 weight is assigned when 3 variables are used). Computation of the composite
Value z-score also depends on the availability of fundamental variables as describedin Appendix II.
A sector relative score is then derived from the composite Value z-score. It is arrived
at by standardizing the composite Value z-score within each GICS® Sectors. The
Value score is computed by winsorizing sector-relative score at +/- 3.
In case of missing Value score, the Value score is set at -3.

1 GICS is the global industry classification standard jointly developed by MSCI and S&P Global Market

Intelligence.

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MSCI Emerging Markets Value Factor Select Index | October 2023

2.3

DEFINING THE QUALITY SCOREThe Quality score for each security is calculated by combining z-scores of threewinsorized fundamental variables, namely Return on Equity, Debt to Equity andEarnings Variability. The details of the calculation of the fundamental variables areprovided in Appendix III.

2.3.1

WINSORIZING THE VARIABLE
As part of the standardization process, outlier fundamental variable values are
winsorized to ensure that the average values used to standardize the variables areless affected by extreme values. To do this, for a given variable, the values for all
securities are first ranked in ascending order within the Parent Index. Missing values
are excluded from the ranking. Then, for securities that lie below the 5th percentile
rank or above the 95th percentile rank, their value is set equal to the value of the 5th
percentile ranked or 95th percentile ranked security, as applicable. This process isrepeated for each of the three fundamental variables.
Example: Winsorization
For example, assume there are 200 securities ranked in ascending order of thevariable value. The 5th percentile security is the 10th ranked security and the 95th
percentile security is the 191st ranked security. For all the 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.

2.3.2

CALCULATING THE Z-SCORE
After winsorizing all the three variables within the Parent Index, the z-score for eachof the three variables for each security can be calculated using the mean andstandard deviation of the relevant variable within the Parent Index. Computing a zscore 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 mean value of 0 and standard deviation of 1, the value of z-scoresshow how many standard deviation (𝜎) a given value lies from the mean (µ).
The z-score is defined as follows for ROE (Return on Equity):𝑧=(𝑥 − µ)𝜎

A negative z-score is calculated to ensure that a security having higher Debt to Equity
or higher Earnings Variability gets a lower respective z-score.

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MSCI Emerging Markets Value Factor Select Index | October 2023

2.3.3

CALCULATING THE QUALITY SCORE
After standardizing each of the three variable values for each security, MSCI
calculates a Quality score for each security.
The composite Quality z-score is computed by averaging the z-scores of all the threefundamental descriptors as calculated in section 2.3.2. Computation of thecomposite Quality z-score also depends on the availability of fundamental variables
as described in Appendix IV.
A sector-relative Quality score is then derived from the composite Quality z-score. It
is arrived at by standardizing the composite Quality z-score within each GICS®
Sectors. The Quality score is computed by winsorizing sector-relative Quality score at+/- 3.
In case of missing Quality score, the Quality score is set at -3.

2.4

SECURITY SELECTION
The securities in the Applicable Universe are ranked in descending order of Value
Score and securities in the top 30% of the cumulative weight (calculated using thefree float-adjusted market capitalization) within each country in the Parent Index(including the first security that results in exceeding the 30% country coverage
weight threshold) are selected to construct the Index. In case the country coverage
weight exceeds 40%, the last security added in the above step within that country isremoved.
If two securities have the same Value score, then the security with higher weight in
the Parent Index is selected first.

2.5

SECURITY WEIGHTING

2.5.1

DEFINING THE VALUE COVERAGE (VC) SCOREThe Value Coverage score (VC-Score) for each security is calculated as thecorresponding cumulative weight within the Parent Index, when sorted by the Valuescore in descending order.
If two securities have the same Value score, then the security with higher free floatadjusted market capitalization is selected first in the calculation of cumulative
weight.

2.5.2

DEFINING THE QUALITY COVERAGE (QC) SCOREThe Quality Coverage score (QC-Score) for each security is calculated as its
cumulative weight (calculated using the free float-adjusted market capitalization)
within the Value Universe, when sorted by the Quality score in descending order.

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MSCI Emerging Markets Value Factor Select Index | October 2023

The Value Universe is defined as the securities with higher Value score that covers
30% of the weight within the Parent Index, including the first security that results inexceeding the 30% weight threshold.
If two securities have the same Quality score, then the security with higher free floatadjusted market capitalization is selected first in the calculation of cumulative
weight.
In case of missing QC-Score, the QC-Score is set to 100%.
2.5.3

DEFINING THE TILT SCOREThe Tilt Score for the selected securities is defined as below:
VC-Score ≤15% and
QC-Score≤50%

VC-Score >15% and
QC-Score >50%

All Other Cases

Top 50% by
weight2

1.25

0.75

1

Rest of theselected
securities3

1.5

0.5

1

2.5.4

SECURITY WEIGHTING
The selected securities are weighted by the product of their market capitalization
weight in the Parent Index and the Tilt Score. The weights are then normalized tosum up to 100%.
Additionally, capping is applied on constituent weights, country weights and sector
weights, as described in Appendix V.

2 The securities that cover the top 50% cumulative weight (calculated using the free float-adjusted market

capitalization) of the selected securities (as per Section 2.4), including the first security that results inexceeding the 50% weight threshold.
3 All the remaining selected securities (as per Section 2.4) not in ‘Top 50% by weight’.

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MSCI Emerging Markets Value Factor Select Index | October 2023

3

Maintaining the Index

3.1

SEMI-ANNUAL INDEX REVIEWS
The Index is rebalanced on a semi-annual basis, usually as of the close of the lastbusiness day of May and November, coinciding with the May and November Index
Reviews of the MSCI Global Investable Market Indexes. Fundamental variables data
as of the end of April and October are used respectively. The pro forma Index is in
general announced nine business days before the effective date.
To reduce the Index turnover and enhance Index stability, Buffer Rule and Turnover
Threshold are applied as described below.

3.1.1

BUFFER RULE
Buffers are applied to the 30% cumulative coverage target of each country weight in
the Parent Index between cumulative coverage of 15% and 45%. Securities in the top
15% cumulative coverage, including the first security that results in exceeding the
15% cumulative coverage threshold will be added to the Index on a priority basis. The
current constituents with cumulative coverage in the top 15% to 45%, including thefirst security that results in exceeding the 45% cumulative coverage threshold arethen successively added until the coverage reaches 30%. If the coverage is still
below 30% after this step, the remaining securities of that country from theApplicable Universe in the descending order of their Value score are added until thecountry weight in the Parent Index reaches 30% target.

3.1.2

TURNOVER THRESHOLD
The Index applies the Turnover Threshold after the capping step of Section 2.5.4. Any
additions, deletions, and weight changes in range of +/-10bps, compared to thecurrent Index constituents, will not be implemented in the pro forma Index
constituents, and will be maintained at the current Index constituent weight4. The net
excess weight resulting from the above adjustment is distributed proportionally to all
the other pro forma Index constituents. Deletions from the Parent Index will be
implemented simultaneously in the pro forma Index.

3.2

ONGOING EVENT RELATED CHANGESThe general treatment of corporate events in the Index aims to minimize turnoveroutside of Index Reviews. The methodology aims to appropriately represent an
investor’s participation in an event based on relevant deal terms and pre-event
weighting of the Index constituents that are involved. Further, changes in index
4 The turnover buffer may, on occasion, result in the retention of constituents with small absolute weights (lessthan 10 bps) for more than one Index Review.

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MSCI Emerging Markets Value Factor Select Index | October 2023

market capitalization that occur as a result of corporate event implementation will be
offset by a corresponding change in the Variable Weighting Factor (VWF) of theconstituent.
Additionally, if the frequency of Index Reviews in the Parent Index is greater than thefrequency of Index Reviews in the Index, the changes made to the Parent Indexduring intermediate Index Reviews will be neutralized in the Index.
The following section briefly describes the treatment of common corporate events
within the Index.
No new securities will be added (except where noted below) to the Index between
Index Reviews. Parent Index deletions will be reflected simultaneously in the Index.
EVENT TYPE

EVENT DETAILSNew additions to the Parent Index

A new security added to the Parent
Index (such as IPO and other early
inclusion) will not be added to theIndex.

Spin-Offs

All securities created as a result of thespin-off of an existing Index
constituent will be added to the Index
at the time of event implementation.
Reevaluation for continued inclusionin the Index will occur at thesubsequent Index Review.

Merger/Acquisition

For Mergers and Acquisitions, theacquirer’s post event weight willaccount for the proportionate amountof shares involved in dealconsideration, while cash proceeds
will be invested across the Index.
If an existing Index constituent isacquired by a non-Index constituent,
the existing constituent will be deleted
from the Index and the acquiring nonconstituent will not be added to theIndex.

Changes in Security Characteristics

A security will continue to be an Index
constituent if there are changes incharacteristics (country, sector, size
segment, etc.). Reevaluation for© 2023 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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MSCI Emerging Markets Value Factor Select Index | October 2023

continued inclusion in the Index will
occur at the subsequent Index Review.
Further detail and illustration regarding specific treatment of corporate events
relevant to this Index can be found in the MSCI Corporate Events Methodology bookunder the sections detailing the treatment of events in Capped Weighted and NonMarket Capitalization Weighted indexes.
The MSCI Corporate Events methodology book is available at:https://www.msci.com/index/methodology/latest/CE.

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MSCI Emerging Markets Value Factor Select Index | October 2023

Appendix I: Calculation of the Value Fundamental
Variables
Fundamental Variable

Calculation Details

Enterprise Value (EV)Market capitalization at fiscal yearend date +Preferred Stock + Minority Interest + Total Debt Cash and cash equivalents

Cash Flow fromOperations (CFO)Net cash receipts and disbursements resulting fromthe operations of the company

For more details on the fundamental data, please refer to the MSCI Fundamental
Data Methodology (https://www.msci.com/index-methodology).

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MSCI Emerging Markets Value Factor Select Index | October 2023

Appendix II: Value Z-Score Computation
If the value for variable EV/CFO is missing for any security, it is substituted by thevalue of ratio price-to-cash earnings (P/CE) for that security. Similarly, if the value forvariable Fwd P/E is missing for any security, it is substituted by the value of trailing
price-to-earnings (P/E) for that security. After the substitution, the composite Valuez-score is computed as mentioned in the table below:
Case

DetailActionCase 1

Security does not belong to“Financials” or “Real Estate”
sector and all variables areavailable

Composite Value z-score =(1/3)*z1 + (1/3)*z2 + (1/3)*z3

Case 2

Security does not belong to“Financials” or “Real Estate”
sector and one variable (e.g.,z3) is missing

Composite Value z-score =(1/3)*z1 + (1/3)*z2

Case 3

Security does not belong to“Financials” or “Real Estate”
sector and two variables(e.g., z2 & z3) are missing

Composite Value z-score =(1/3)*z1

Case 4

Security belongs to“Financials” sector and all
variables are available

Composite Value z-score =0.5*z1 + 0.5*z2

Case 5

Security belongs to“Financials” sector and one
variable (e.g., z2) is missing

Composite Value z-score =0.5*z1Case 6

Security belongs to “RealEstate” sector

Composite Value z-score = z1

Case 7All three variables are
missing (for securities notbelonging to “Financials” or“Real Estate” sector)

Composite Value z-score =NULL© 2023 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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MSCI Emerging Markets Value Factor Select Index | October 2023

Case

DetailActionBoth variables are missing(for securities belonging to“Financials” sector)
EV/CFO is missing (forsecurities belonging to “RealEstate” sector)
The z1, z2 & z3 represent the individual variable z-scores.

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MSCI Emerging Markets Value Factor Select Index | October 2023

Appendix III: Calculation of the Quality Fundamental
Variables
Fundamental
Variable

Calculation Details(ROE) is calculated using the trailing 12-month earnings per
share figure and latest book value per share

Return on Equity(ROE)

Debt toEquity(D/E)

Earnings
Variability

𝑅𝑂𝐸 =𝑇𝑟𝑎𝑖𝑙𝑖𝑛𝑔 12 𝑚𝑜𝑛𝑡ℎ 𝑒𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
𝐿𝑎𝑡𝑒𝑠𝑡 𝐵𝑜𝑜𝑘 𝑉𝑎𝑙𝑢𝑒 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒

Debt to Equity is calculated using the latest fiscal year Total
Debt and Book Value
𝐷 ⁄𝐸 =

𝑇𝑜𝑡𝑎𝑙 𝐷𝑒𝑏𝑡
𝐵𝑜𝑜𝑘 𝑉𝑎𝑙𝑢𝑒

Earnings Variability is defined as the standard deviation of yo-y earnings per share growth over the last five fiscal years

For more details on the fundamental data, please refer to the MSCI Fundamental
Data Methodology (https://www.msci.com/index-methodology).

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MSCI Emerging Markets Value Factor Select Index | October 2023

Appendix IV: Quality Z-Score Computation
Computation of the Composite Quality z-score also depends on the availability offundamental variables as described below:
Case

DetailActionCase 1

ROE is missing

If ROE is missing, Composite
Quality z-score is not
calculatedCase 2

Debt to Equity is
missing, but other two
variables are available

Composite Quality z-score is
calculated using ROE andEarnings Variability z-scores

Case 3

Earnings Variability is
missing, but other two
variables are available

Composite Quality z-score is
calculated using ROE & Debt toEquity z-scores

Case 4

Debt to Equity andEarnings Variability are
missing but ROE isavailable

Composite Quality z-score isnot calculatedCase 5All three variables are
missing

Composite Quality z-score isnot calculated© 2023 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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MSCI Emerging Markets Value Factor Select Index | October 2023

Appendix V: The Capping Methodology
A.

Parameters for Capping•

The maximum weight of an Index constituent at an issuer level will be
restricted to 5%. The maximum weight of an Index constituent will be
restricted to 20 times the weight of security in the Parent Index.

•

Among the countries that do not use IFRS® Accounting Standards ofreporting (herein, ‘the non-IFRS5 countries'), the countries with weight greaterthan 2.5% in the Parent Index, the maximum country weight in the Index will
not deviate more than +/-2.5% from the country weight in the Parent Index.

•

Among the countries that use IFRS® Accounting Standards of reporting(herein, ‘the IFRS countries’), the countries with weight greater than 2.5% in
the Parent Index, the maximum country weight in the Index will not deviate
more than +/-5% from the country weight in the Parent Index.

•

Among the non-IFRS countries, countries with weight less than 2.5% in the
Parent Index, the maximum country weight in the Index will be capped atlower of ((+2.5% from the country weight in the Parent Index) and 3 times
their weight in the Parent Index).

•

Among the IFRS countries, countries with weight less than 2.5% in the Parent
Index, the maximum country weight in the Index will be capped at 3 times
their weight in the Parent Index.

•

The maximum GICS® sector weights in the Index will be 1.05 times the sector
weights in the Parent Index. The minimum GICS® sector weights will be 0.95
times the sector weights in the Parent Index. If no securities are selectedfrom any particular GICS® sector of the Parent Index during rebalancing, theabove GICS® sector weights constraint will be applied after the proforma
weight of that GICS® sector in the Parent Index is re-distributed amongst
remaining sectors of the Index.

B.

Initial Relaxation Parameters•

For each country, if the aggregated upper bound weight of all the issuers
within that country is lower than their country lower bound weight constraint,
then the lower bound weight of that country is relaxed to the aggregatedupper bound weight value of all the issuers within that country.

5 For details about the countries which use IFRS Accounting Standards of reporting, please refer to:https://www.ifrs.org/use-around-the-world/use-of-ifrs-standards-by-jurisdiction/. The country list is determinedas per ‘IFRS Standards required for domestic companies’. The country list will be reviewed annually once with
cut-off date of October end. The updated country list will be used for November Index Review and same list will
be used for subsequent Index Review.

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MSCI Emerging Markets Value Factor Select Index | October 2023•

C.

For each sector, if the aggregated upper bound weight of all the issuers
within that sector is lower than their sector lower bound weight constraint,
then the lower bound weight of that sector is relaxed to the aggregated upperbound weight value of all the issuers within that sector.
The Capping Methodology
The Capping methodology is iteratively applied with the following steps:•

Find the most violating constraint from all the given constraints (sector
minimum bound, sector maximum bound, country minimum bound, country
maximum bound and issuer maximum bound).

•For each group (for example, Energy sector) within all the constraints, thedeviation ratio is calculated based on:▪

ratio of current value (for example, issuer ‘A’ weight in the Index) toupper bound (for example, issuer ‘A’ upper bound value), in case of
upper bound constraint.

▪

ratio of lower bound value (for example, Energy sector lower boundvalue) to current value (for example, Energy sector weight in the
Index), in case of lower bound constraint.

The most violating constraint is the maximum of all the deviation ratios.
•

The most violating constraint is adjusted first to the respective bound value.

•

The excess weight (difference of current value to the respective bound value)
is distributed proportionally to all the other constituents.

•

The iterative capping stops when the most violating constraint ratio (rounded
off to 5 decimals) is less than or equal to 1 or it has reached the maximum
iteration count. In case of maximum iteration count, the capping steps will
return the solution found till this maximum iteration step.

•

If the most violating constraint ratio value for each group (for example,
Energy sector in sector minimum bound) is repeated in more than 10
iterations, the capping methodology applies relaxation steps.

D.

Relaxation Steps
The following conditions are alternatively relaxed until the most violating
constraint ratio (rounded off to 5 decimals) is less than or equal to 1 or it has
met the maximum iteration criteria of 2000 steps:•

Relax the minimum weight for countries in steps of -1% up to a maximum of
5 iterations.

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MSCI Emerging Markets Value Factor Select Index | October 2023•

Relax the minimum sector weights in multiples of 0.95x (for example, fromstep of 0.95x to 0.9025x), up to a maximum of 5 iterations.

•

Relax the maximum weight for countries in steps of 1% up to a maximum of
5 iterations.
At each step of relaxation, if the most violating constraint ratio value for eachgroup is repeated more than 10 times, the next step of relaxation is initiated.

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