Methodology Book
MSCI
Small Cap
Index Series
Methodology
INDEX CONSTRUCTION OBJECTIVES, GUIDING PRINCIPLES AND
METHODOLOGY FOR THE MSCI SMALL CAP EQUITY INDEX SERIES

Last Updated in March, 2007

MSCI Small Cap Index Series Methodology

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MSCI Small Cap Index Series Methodology
About MSCI Barra (www.mscibarra.com)

MSCI Barra develops and maintains equity, fixed income, multi-asset class, REIT and hedge fund indices that serve as
benchmarks for an estimated USD 3 trillion on a worldwide basis. MSCI Barra’s risk models and analytics products help theworld’s largest investors analyze measure and manage portfolio and firm-wide investment risk. MSCI Barra is headquartered in
New York, with research and commercial office around 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.

MSCI Small Cap Index Series Methodology
Table of Contents
INTRODUCTION ..................................................................................................................................................................1
EXECUTIVE SUMMARY ....................................................................................................................................................2
SECTION 1: SMALL CAP INDEX CONSTRUCTION OBJECTIVES AND GUIDING PRINCIPLES.....................3
1.1
PURPOSE AND OBJECTIVES ........................................................................................................................................3
1.2
GUIDING PRINCIPLES .................................................................................................................................................3
1.2.1
Broad and Fair Market Representation .......................................................................................................3
1.2.2
Investability and Replicability .......................................................................................................................4
1.2.3
Consistency of Approach................................................................................................................................4
1.2.4
Continuity and Index Turnover.....................................................................................................................4
1.2.5
Transparency ..................................................................................................................................................4
1.2.6
Independence and Objectivity .......................................................................................................................5
SECTION 2: CONSTRUCTING THE MSCI SMALL CAP INDEX SERIES.................................................................6
2.1
DEFINING THE SMALL CAP EQUITY UNIVERSE ..........................................................................................................6
2.2
CLASSIFYING SECURITIES UNDER THE GLOBAL INDUSTRY CLASSIFICATION STANDARD (GICS) .............................6
2.2.1
Structure of the Global Industry Classification Standard (GICS) .............................................................7
2.2.2
Industry Classification of Companies under the GICS ...............................................................................7
2.3
SELECTING SECURITIES FOR INDEX INCLUSION .........................................................................................................7
2.3.1
Index Constituent Eligibility Rules and Guidelines .....................................................................................8
2.3.1.1
Market Capitalization Size ................................................................................................................................................8
2.3.1.2
Liquidity Screening ..........................................................................................................................................................8
Companies and Securities with FIF Less than 0.15.............................................................................................................................92.3.1.3
Length of Trading............................................................................................................................................................92.3.1.4
Other Index Inclusion Criteria .........................................................................................................................................9

2.3.2
2.3.2.1
2.3.2.2
2.3.2.3

Target Market Representation and Constituent Selection..........................................................................9
Target Market Representation and Constituent Selection ..................................................................................................9
Industry Groups Represented by a Single Security ..........................................................................................................10
Target Market Representation Calculation ......................................................................................................................11

2.4
ADJUSTING THE FULL MARKET CAPITALIZATION OF SELECTED SECURITIES FOR FREE FLOAT ...............................11
2.4.1
Defining and Estimating Free Float ............................................................................................................112.4.1.1
2.4.1.2

2.4.2
2.4.2.1
2.4.2.2
2.4.2.3

2.4.3

Securities Not Subject to Foreign Ownership Limits (FOLs) ..........................................................................................12
Securities Subject to FOLs .............................................................................................................................................12

Assigning a Free Float-Adjustment Factor.................................................................................................12
Securities Not Subject to FOLs......................................................................................................................................12
Securities Subject to FOLs .............................................................................................................................................12
Securities Affected by Other Foreign Investment Restrictions ........................................................................................13

Calculating the Free Float-Adjusted Market Capitalization ....................................................................13

SECTION 3: MAINTAINING THE MSCI SMALL CAP INDEX SERIES...................................................................15
3.1
SEMI-ANNUAL INDEX REVIEW ................................................................................................................................15
3.1.1
Semi-Annual Index Review Process ............................................................................................................15
3.1.2
Semi-Annual Index Review Additions ........................................................................................................15
3.1.3
Semi-Annual Index Review Deletions .........................................................................................................15
3.1.3.1

Buffer Rules for Existing Constituents ...........................................................................................................................16

3.1.4
Semi-Annual Index Review Changes in FIFs and Number of Shares......................................................16
3.1.5
Semi-Annual Index Review Frequency and Timing of Implementation..................................................17
3.2
QUARTERLY INDEX REVIEWS ..................................................................................................................................17___________________________________________________________________________________________________–i–

MSCI Small Cap Index Series Methodology
3.2.1
Quarterly Index Review Changes in FIFs and Number of Shares ...........................................................18
3.2.2
Quarterly Index Review Frequency and Timing .......................................................................................18
3.3
ONGOING EVENT-RELATED CHANGES ....................................................................................................................18
3.3.1
Corporate Events Affecting Existing Index Constituents..........................................................................18
3.3.1.1
3.3.1.2
3.3.1.3

3.3.2
3.3.2.1

Changes in FIFs, Number of Shares or Industry Classification for Existing Constituents................................................18
Early Inclusion of Non-Index Constituents....................................................................................................................20
Early Deletion of Existing Index Constituents................................................................................................................20

Corporate Events Affecting Non-Index Constituents ................................................................................20
IPOs and Other Early Inclusions ...................................................................................................................................20

3.4
ANNOUNCEMENT POLICY ........................................................................................................................................21
3.4.1
Semi-Annual Index Review..........................................................................................................................21
3.4.2
Quarterly Index Review ...............................................................................................................................21
3.4.3
Ongoing Event-Related Changes.................................................................................................................21
3.4.4
Global Industry Classification Standard (GICS).......................................................................................22
APPENDIX I: COUNTRY CLASSIFICATION OF SECURITIES................................................................................24
APPENDIX II: FREE FLOAT DEFINITION AND ESTIMATION GUIDELINES.....................................................27
APPENDIX III: GLOBAL INDUSTRY CLASSIFICATION STANDARD (GICS) .....................................................31
APPENDIX IV: QUARTERLY AND SEMI-ANNUAL INDEX REVIEW CHANGES IN FIFS ................................37
APPENDIX V: PRICE SOURCE FOR SECURITIES .....................................................................................................38
APPENDIX VI: POLICY REGARDING MARKET CLOSURES DURING INDEX REVIEWS...............................39
APPENDIX VII: EQUITY MARKETS AND UNIVERSE ..............................................................................................40
LIST OF UPDATES TO THE METHODOLOGY BOOK ..............................................................................................43___________________________________________________________________________________________________– ii –MSCI Small Cap Index Series Methodology
Introduction
MSCI: A Leading Global Benchmark Provider
Morgan Stanley Capital International Inc. (“MSCI”) is a leading provider of global equity, US equity, fixedincome hedge fund and multi-asset class indices, and benchmark related products and services to investors
worldwide.

Equity Indices
MSCI provides global equity indices, which over the last 30 years have become the most widely usedinternational equity benchmarks by institutional investors. Almost 2,000 organizations worldwide currently
use MSCI global equity benchmarks. Sector, industry groups, and industry indices are calculated based on
the Global Industry Classification Standard (GICS®), developed by MSCI and Standard and Poor’s. In
addition, MSCI provides value and growth indices for developed and emerging markets based upon a twodimensional, multifactor methodology for style definition and segmentation. In 2002, MSCI launched a new
family of US Equity Indices to provide broad and comprehensive coverage of the US equity market. This
family of indices consists of a Broad Market Index and its various capitalization, style and sector subindices.

Fixed Income Indices
MSCI provides a wide range of global fixed income indices for the investment community, including indices
for Sovereign, Investment Grade and High Yield debt markets, as well as the Interest Rate Swaps market.
The MSCI Fixed Income Indices are unique in their use of an industry classification system based on the
GICS.

Hedge Fund Indices
In July 2002, MSCI launched a family of hedge fund indices based on a comprehensive classification system– The MSCI Hedge Fund Classification StandardSM – and a growing fund database, the MSCI Hedge Fund
DatabaseSM. The MSCI Hedge Fund Indices aim to reflect the composition and performance characteristicsof the entire hedge fund opportunity set and as such include open as well as closed funds. In parallel, MSCI
has developed an innovative index construction and maintenance methodology for investable hedge fundindices. The MSCI investable hedge fund composite-level indices aim to reflect the aggregate performanceof a diversified range of hedge fund strategies and are designed to be replicable in investment vehicles linked
to the indices.

Global Capital Markets Indices
MSCI has now launched the MSCI Global Capital Markets Index. This index is designed to provide aframework for global diversification by depicting the global opportunity set of marketable, liquid andinvestable financial securities that are available to all international investors, irrespective of their domicile. It
currently includes equity and fixed income securities which are represented by MSCI’s family of equity and
fixed income indices.

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MSCI Small Cap Index Series Methodology
Executive Summary
The MSCI Equity Index Series
The objective of MSCI, with respect to its Equity Index Series, is to construct global benchmark indices that
contribute to the investment process by serving as relevant and accurate performance benchmarks andeffective research tools, and as the basis for various investment vehicles. As such, the MSCI Equity IndexSeries are designed to fulfill the investment needs of a wide variety of global institutional investors. In
constructing these indices, MSCI consistently applies its equity index construction and maintenancemethodology across regions and markets. This consistency of approach makes it possible to aggregate
individual country and industry indices to create meaningful regional and composite benchmark indices.
MSCI has constructed its equity indices with the same objectives in mind for more than 30 years. The MSCI
Small Cap Index Series was introduced in January 1998 in order to meet the growing interest in international
institutional small cap investing based on a uniform, absolute market capitalization size range applied
globally. Over the years, as the markets have evolved, MSCI’s methodology has also evolved in order toensure that the MSCI Equity Index Series continues to accurately represent the opportunities available toglobal institutional investors. Importantly, while the methodology has evolved, the index construction
objectives and guiding principles have remained paramount.

Methodology and the MSCI Small Cap Index Series
The MSCI Small Cap Index Series adjusts the market capitalization of index constituents for free float andtargets for index inclusion 40% of the full market capitalization of the eligible small cap universe withineach industry group in each country. Currently, MSCI calculates the Small Cap Index Series for 23 countries
in the developed markets. The market capitalization range that defines the small cap universe is USD 200 –
1,500 million in terms of the company’s full market capitalization.
This Methodology Book describes MSCI’s index construction objectives, guiding principles, and themethodology for the Small Cap Index Series. Certain specific aspects of MSCI’s Small Cap Index Series
methodology are treated in appendices at the end of the Methodology Book. Any updates for the
methodology will be posted on the web site www.mscibarra.com. Other useful methodology guidelines canbe found in the same link.
This version of the MSCI Small Cap Index Series Methodology Book is effective as of the close of March
28, 2007.

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MSCI Small Cap Index Series Methodology
Section 1: Small Cap Index Construction Objectives and Guiding
Principles
1.1

Purpose and Objectives

MSCI’s objective is to construct small cap equity “benchmark indices” that contribute to the investment
process in the following ways. First, they serve as a gauge for measuring the performance of the small cap
segment of equity markets. In so doing, these indices also serve as performance benchmarks in themeasurement and attribution of the performance of an investment strategy. Second, they may be used as a
research tool for a variety of purposes, including the strategic asset allocation process. Performancebenchmarks provide an important historical perspective on the various dimensions of investment
performance of asset classes, such as returns, volatility of returns, and correlations. This historicalperspective may serve as a useful guide in the determination of an appropriate strategic asset mix. Finally,
benchmark indices may serve as a basis for investment vehicles designed to replicate the performance of amarket or to implement and manage an investment policy. Given these uses, MSCI’s benchmark indices aredesigned to fulfill the investment needs of a wide variety of global institutional investors.

1.2

Guiding Principles

MSCI strives to achieve the objective of providing global benchmark small cap equity indices by adhering to
the following guiding principles in the design and implementation of its index construction and maintenancemethodology.
1.2.1

Broad and Fair Market Representation

MSCI’s Small Cap Index Series is constructed and managed with a view to providing broad and fair
representation of a universe of opportunities defined by a fixed range of company full market capitalization
size. In the abstract, a small cap total universe index, representing all listed securities of companies withinthat range, would achieve this goal. In practice, however, a small cap total universe index may be difficult touse as a true performance benchmark, as it will include a large number of securities, some of which are
illiquid and thus difficult for international small cap investors to reflect in their portfolios. Therefore, MSCI
defines broad and fair market representation as an accurate reflection in the indices of the structure anddistribution of business activities and size of companies across and within industries that international small
cap institutional investors can gain exposure to. MSCI strives to achieve the objective of broad and fairmarket representation by following a bottom-up sampling approach to index construction. This approach,which builds the indices from the industry group level up, aims to capture the structure and othercharacteristics of the underlying small cap range, but does so with securities that are practically replicable inglobal small cap institutional portfolios of reasonable size. Specifically, to implement this approach, a targetof 40% of the full market capitalization of the eligible small cap universe within each industry group, withineach country is used as a guideline. This guideline, given the structure of the small cap universe, strikes anappropriate balance between broad and fair market representation and investability of indices as it does not
result in a disproportionate number of securities represented in the indices.
In order to achieve the 40% target representation and simultaneously ensure a good distribution of
constituents by size within the targeted range, constituents within each industry group are selected in–3–

MSCI Small Cap Index Series Methodology
descending order of Annualized Traded Value Ratio (ATVR) rather than descending order of size. A formal
definition of the ATVR is available in section 2.3.1.2. This sampling approach implies that MSCI does nottarget a specific number of securities in its country indices. The number of constituents included in an index
is dependent on the breadth and depth of the underlying small cap equity market segment and on the
distribution of securities ranked by ATVR within each industry group.
1.2.2

Investability and Replicability

MSCI’s Equity Index Series is constructed and managed with a view to being investable from theperspective of international institutional investors. MSCI strives to achieve this objective by providing
indices that are replicable. This includes representing constituents in the index at weights that can easily andcost effectively be reflected in global institutional small cap portfolios of reasonable size. This objective isachieved by a) free float adjusting constituent weights, taking into account any Foreign Ownership Limits(FOLs) and other restrictions that hinder the implementation of the investment process for international
institutional investors and b) selecting securities with the highest ATVR for inclusion in the indices.
1.2.3

Consistency of Approach

MSCI’s Equity Index Series is constructed and managed with a view to providing consistency of approachacross all markets around the world. This objective is achieved by applying MSCI’s index construction andmanagement methodology, including its rules and guidelines, in a consistent fashion across all developed
markets. The consistent application of index methodology to all markets also makes it possible to apply a“building block” approach in the construction of regional and composite indices. Under this approach,individual MSCI Small Cap country indices can be aggregated to create relevant, accurate, and comparable
regional (e.g., MSCI Europe Small Cap Index) and composite (e.g., MSCI EAFE Small Cap Index)
benchmark indices.
1.2.4

Continuity and Index Turnover

MSCI’s Equity Index Series is managed with a view to ensuring the continuity of the indices. Continuity
refers to the consistent application of index methodology over time. It also implies that the primary, but not
the only, concern when considering additions and deletions is the continuity of eligible constituents in theindex being reviewed. In emphasizing continuity, MSCI wishes to provide improved predictability of andgreater stability to, the indices.
MSCI’s Equity Index Series is also managed with the objective of keeping the level of index turnover
relatively low, while at the same time reflecting the evolution of markets in a timely fashion. As such, costs
associated with reflecting the changes in the MSCI Indices in a portfolio may be maintained at a reasonablelevel.
1.2.5

Transparency

MSCI’s Equity Index Series is constructed and managed with a view to being transparent in the context of
MSCI’s index construction objectives, guiding principles and methodology. These objectives, guiding
principles and methodology are clearly specified and published. MSCI also has a policy of announcing all
significant changes to its indices in advance of implementing such changes. As a matter of policy, MSCI
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MSCI Small Cap Index Series Methodology
generally does not comment on any potential changes to the indices, including but not limited to thepotential inclusion of constituents before the changes are made known to clients. In addition, MSCI does
not comment in detail or provide a breakdown of the shareholder ownership of securities due to thepotentially price-sensitive nature of such information.
1.2.6

Independence and Objectivity

MSCI’s Equity Index Series is constructed and managed with a view to providing independent and objective
editorial and content decisions. With respect to editorial decisions, MSCI operates completely independentlyof all interest groups, including its shareholders, and manages its family of equity indices based on publicly
available information. The fact that MSCI is editorially independent and objective does not preclude MSCIfrom considering the views and suggestions of our clients and other users of our products and services. To
the contrary, MSCI believes in engaging all stakeholders by frequently soliciting feedback, counsel, andguidance relating to all aspects of index construction and maintenance. MSCI carefully considers andanalyzes all the feedback received from various constituencies, and the final decisions are taken
independently of any single interest group or stakeholder and have the sole objective of preserving or
enhancing the quality of the MSCI indices.

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MSCI Small Cap Index Series Methodology
Section 2: Constructing the MSCI Small Cap Index Series
To construct relevant and accurate equity indices for global institutional investors under the Small Cap
Index Series Methodology, MSCI undertakes an index construction process, which involves:
•
•
•
•

2.1

Defining the small cap equity universe.
Classifying the securities in the small cap equity universe under the Global Industry Classification
Standard (GICS).
Selecting securities for inclusion according to MSCI’s Small Cap Index construction rules andguidelines.
Adjusting the full market capitalization of all selected securities for free float available to foreign
investors.

Defining the Small Cap Equity Universe

The index construction process starts at the country level, with the identification of the universe ofinvestment opportunities. Currently, MSCI creates the Small Cap Index Series for all developed markets asclassified by MSCI.
MSCI classifies each company and its securities in one and only one country. This allows securities to besorted distinctly by their respective countries. In general, companies and their respective securities areclassified as belonging to the country in which they are incorporated. All listed equity securities, or listed
securities that exhibit characteristics of equity securities, except investment trusts 1 , mutual funds, equity
derivatives, and limited partnerships, are generally eligible for inclusion in the universe. Generally, only
equity or equity-like securities listed in the country of classification are included in the universe. These areconsidered fully even if a subset serves as a basis of creation of depository receipts. For further details on
domicile determination, see Appendix I, entitled “Country Classification of Securities”.
All listed equity securities of companies that have a company full market capitalization in the range of USD
200 – 1,500 million comprise the small cap equity universe in each country.

2.2Classifying Securities Under the Global Industry Classification Standard(GICS)

After determining the small cap equity universe, all securities in the universe are assigned to the industry
that best describes their business activities. To this end, MSCI has designed, in conjunction with Standard &Poor’s, the Global Industry Classification Standard (GICS). This comprehensive classification scheme
provides a universal approach to industries worldwide and forms the basis for achieving MSCI’s objectiveof reflecting broad and fair industry representation in its indices.

1

Real Estate Investment Trusts (REITs) in certain countries are eligible for inclusion in the universe. Certain Income Trusts
are eligible for inclusion in the MSCI Canada Equity Universe. Please refer to Appendix I for details.
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MSCI Small Cap Index Series Methodology
2.2.1

Structure of the Global Industry Classification Standard (GICS)

The Global Industry Classification Standard (GICS) consists of 10 sectors, 24 industry groups, 67 industries,
and 147 sub-industries. These four industry groupings are strictly hierarchical, as shown below.
The Global Industry Classification Standard (GICS)
10 Sectors

24 Industry Groups

67 Industries

147 Sub-Industries

2.2.2

Industry Classification of Companies under the GICS

Under the Global Industry Classification Standard (GICS), each company is assigned uniquely to one subindustry according to its principal business activity. Therefore, a company can only belong to one industry
grouping at each of the four levels of the GICS.
Classifying securities into their respective sub-industries can be complex, especially in an evolving anddynamic environment. The GICS guidelines used to determine the appropriate industry classification are:•••A security is classified in a sub-industry according to the business activities that generate
approximately 60% or more of the company’s revenues.
A company engaged in two or more substantially different business activities, none of which
contributes 60% or more of revenues, is classified in the sub-industry that provides the majority ofboth the company’s revenues and earnings.
Where the above guidelines cannot be applied, or are considered inappropriate, further analysis isconducted, and other factors are analyzed to determine an appropriate classification.

For further details on the GICS, see Appendix III, entitled “Global Industry Classification Standard(GICS)”.

2.3

Selecting Securities for Index Inclusion

In order to ensure a broad and fair representation in the indices of the diversity of business activities in thesmall cap universe, the MSCI Small Cap Index Series is built from the industry group level up using asystematic approach based on selecting for index inclusion the securities with the highest ATVR.
In its Small Cap Index Series, MSCI targets 40% of the full market capitalization of the eligible small cap
universe within each industry group, within each country.

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MSCI Small Cap Index Series Methodology
The security selection process within each industry group is based on the careful analysis of:
•
•
•
•
2.3.1

Capitalization size of the company and its individual share classes.
ATVR of the securities in the eligible market capitalization size range.
Estimated free float of the company and its individual share classes.
Length of trading and other index eligibility criteria.
Index Constituent Eligibility Rules and Guidelines

In order to ensure the investability of the MSCI Small Cap Index Series, the following index eligibility rules
and guidelines for index inclusion are applied in the index construction process.
Some rules and guidelines are applied at the security level, rather than the company level. As such, theinclusion or deletion of one share class does not imply the automatic inclusion or deletion of the other shareclasses of the same company.
2.3.1.1

Market Capitalization Size

All new companies and securities that are considered for inclusion in the MSCI Small Cap Index Series musthave a company full market capitalization in the range of USD 200 – 1,500 million and a minimum free
float-adjusted security market capitalization of USD 100 million.
2.3.1.2

Liquidity Screening

All securities that are considered for inclusion or are currently included in the MSCI Small Cap Index Series
must be characterized by an adequate ATVR as determined by the liquidity screening procedure described
below.
Liquidity screening is carried out by ranking securities in a country’s small cap universe in descending orderof ATVR.
The ATVR of each security is calculated as a 3-step process described below:•

First, monthly median traded values are computed using the daily median traded value, multiplied by the
number of business days in the month. The daily traded value of a security is equal to the number ofshares traded during the day, multiplied by the closing price of that security. The daily median tradedvalue is defined as the median of the daily traded values in a given month.

•

Second, the monthly median traded value ratio is obtained by dividing the monthly median traded valueof a security by its full market capitalization at the end of the month.

•

Third, the ATVR is obtained by taking the average of the monthly median traded value ratios of theprevious 12 months - or the number of months for which this data is available - and multiplying it by
12.

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MSCI Small Cap Index Series Methodology
Only securities with an ATVR of at least 5% and that belong to the top 80% of the cumulative full market
capitalization of the country’s small cap universe ranked by descending order of ATVR are eligible for index
inclusion.
Companies and Securities with FIF Less than 0.15
Securities of companies with an overall FIF of less than 0.15 across all share classes are generally not eligible
for inclusion. In addition, an individual share class with a FIF of less than 0.15 is also generally not eligible
for inclusion in the MSCI Small Cap Equity Indices.
2.3.1.3

Length of Trading

New issues become eligible for index inclusion only if they have a minimum of six months of trading
history.
2.3.1.4

Other Index Inclusion Criteria

After the index constituents have been initially determined through the application of liquidity screens andother rules, qualitative checks are carried out to ensure that companies in bankruptcy or under a formal
takeover bid are not selected for index inclusion.
2.3.2

Target Market Representation and Constituent Selection

As mentioned above, in constructing the MSCI Small Cap Index Series, MSCI aims to achieve a uniform
40% full market capitalization representation of the eligible small cap universe within each industry group,
within each country. This target coverage level is achieved by ranking all eligible securities within eachindustry group in descending order of ATVR and selecting securities for index inclusion until approximately
40% of the full market capitalization of the industry group is covered by the selected securities. This security
selection procedure also implies that MSCI does not target a specific number of securities for inclusion in
the indices.
In order to ensure the continuity of the indices and to minimize index turnover, the security selection
process begins with the existing eligible constituents. Thereafter, securities are selected for index inclusion inorder to come as close to the 40% target representation as possible.
2.3.2.1

Target Market Representation and Constituent Selection

The size distribution, ATVR ranking and availability of eligible securities within an industry group may leadto a representation level which may be different from the 40% target level. As a result, the realized market
representation for an industry group may remain below or exceed the 40% target representation guideline.
In these instances the security selection is carried out with the objective of minimizing the divergence
between the 40% representation guideline and the representation level actually achieved in the indices.

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MSCI Small Cap Index Series Methodology
Example:Over-representation
Suppose that 5 securities, 4 of them eligible for index inclusion, constitute the Banks industry group in agiven country. In descending order of ATVR, the eligible securities are Little Bank, Micro Bank, Medium
Bank, and Small Bank, accounting for 10%, 5%, 45% and 20% of the full market capitalization of theindustry group, respectively.
Including the first two securities Little Bank and Micro Bank in the index would yield an industry grouprepresentation of 15%, which is 25 percentage points below the desired target representation of 40%.
Including Medium Bank in the index, in addition to Little Bank and Micro Bank, would result in theindustry group representation increasing to 60%, which is 20 percentage points above the 40% targeted
guideline. Therefore, it would be more appropriate to include the Little Bank, Micro Bank and Medium
Bank such that the resulting industry group representation would be closer to the 40% target.

Example:Under-representation
Suppose that 4 securities, 3 of them eligible for index inclusion, constitute the Capital Goods industry groupin a given country. In descending order of ATVR, the eligible securities are Construction Company,
Engineering Corp and Building Co, accounting for 20%, 10% and 60% of the full market capitalization of
the industry group, respectively.
Including Construction Company and Engineering Corp in the index would yield an industry grouprepresentation of 30%, which is 10 percentage points below the desired target representation of 40%. In
addition to these securities, if Building Co was added to the index, the industry group representation would
increase to 90%, which is 50 percentage points above the 40% targeted guideline. In this case, Building Co
would not be added to the index and the industry group representation would remain at 30%.
2.3.2.2

Industry Groups Represented by a Single Security

In cases where only one eligible security represents an industry group, that security will be chosen for index
inclusion.

– 10 –MSCI Small Cap Index Series Methodology
2.3.2.3

Target Market Representation Calculation

It should be noted that the calculation of the target market representation does not take into accountexisting index constituents that lie outside the small cap universe range of company full market
capitalization of USD 200 – 1,500 million and, due to the application of buffer rules during the semi-annual
index reviews, are maintained in the MSCI Small Cap Index Series. Buffer rules are size, liquidity andindustry group representation criteria allowing existing constituents to remain in the indices to reduceturnover and are detailed in section 3.1.3.1. These buffer rules facilitate a relatively stable representation of
the MSCI Small Cap Index Series. The calculation of the MSCI Small Cap Index representation of a given
industry group within a given country is given by the following ratio:
Full market capitalization of all securities in the MSCI Small Cap Index within the small cap range
Full market capitalization of all securities in the small cap range

2.4

Adjusting the Full Market Capitalization of Selected Securities for Free Float

After selecting securities, MSCI calculates the free float-adjusted market capitalization of each security inorder to represent the securities in the Small Cap Index Series at their investable weight. The process of free
float adjusting market capitalization involves:
•
•
•
2.4.1

Defining and estimating the free float available to foreign investors for each security, using MSCI’s
definition of free float.
Assigning a free float-adjustment factor to each security.
Calculating the free float-adjusted market capitalization of each security.
Defining and Estimating Free Float

MSCI Barra defines the free float of a security as the proportion of shares outstanding that are deemed to
be available for purchase in the public equity markets by international investors. In practice, limitations on
free float available to international investors include:••

Strategic and other shareholdings not considered part of available free float.
Limits on share ownership for foreign investors.

MSCI Barra’s estimation of free float is based solely on publicly available shareholder information obtained
from multiple information sources. For each security, all available shareholdings are considered where
public data is available, regardless of the size of the shareholding. MSCI Barra may consult with analysts,
other industry experts and official company contacts, particularly where disclosure standards or data quality
make the estimation of free float difficult.
For further details on the MSCI Barra’s free float definition, see Appendix II, entitled “Free Float
Definition and Estimation Guidelines”.

– 11 –MSCI Small Cap Index Series Methodology
The estimation of free float available to international investors for securities with or without foreign
ownership limits is explained below.
2.4.1.1

Securities Not Subject to Foreign Ownership Limits (FOLs)

For securities not subject to FOLs, the free float of a security is estimated as its total number of shares
outstanding less shareholdings classified as strategic and/or non-free float. Examples of shares excluded
from free float are stakes held by strategic investors such as governments, corporations, controllingshareholders and management.
Non-Free Float Shareholdings (%) =Number of Shares Classified as Non-Free Float divided by
the Total Number of Shares

Free Float (%)

100% minus Non-Free Float Shareholdings (%)

2.4.1.2=

Securities Subject to FOLs

For securities subject to FOLs, the estimated free float available to foreign investors is equal to the lesser of:••

Estimate of free float, as defined above.
FOL adjusted for non-free float stakes held by foreign investors.

Free Float for Foreign Investors (%) =Minimum of:• 100% minus Non-Free Float Shareholdings, Including Domestic and Foreign Shareholdings• FOL minus Foreign Non-Free Float Shareholdings
2.4.2

Assigning a Free Float-Adjustment Factor

MSCI Barra free float adjusts the market capitalization of each security using an adjustment factor referred
to as the Foreign Inclusion Factor (FIF).
2.4.2.1

Securities Not Subject to FOLs

For securities not subject to FOLs, the FIF is equal to the estimated free float, rounded up to the closest
5%.
2.4.2.2

Securities Subject to FOLs

For securities subject to FOLs, the FIF is equal to the lesser of:••

Estimated free float available to foreign investors, rounded up to the closest 5%.
FOL rounded to the closest 1%.

– 12 –MSCI Small Cap Index Series Methodology
2.4.2.3

Securities Affected by Other Foreign Investment Restrictions

For securities affected by other foreign investment restrictions, which hinder the efficient implementationof the investment process for foreign investors, an additional adjustment factor, referred to as the Limited
Investability Factor (LIF), is applied. In these special cases, the free float adjusted for limited investability isdefined as the product of the available free float for foreign investors and the Limited Investability Factor.
Free Float-Adjusted for Limited Investability = Free Float for Foreign Investors times the LIF
Therefore, for securities subject to other foreign investment restrictions, the Foreign Inclusion Factor isequal to the lesser of:
•
•
2.4.3

Estimated free float adjusted for limited investability, rounded up to the closest 5%.
FOL rounded to the closest 1%.
Calculating the Free Float-Adjusted Market Capitalization

The free float-adjusted market capitalization of a security is calculated as the product of the FIF and the
security’s full market capitalization.
Free Float-Adjusted Market Capitalization = FIF times the Security’s Full Market Capitalization
The following examples illustrate the calculation of the free float-adjusted market capitalization of securities
with and without FOLs.
Example:Calculating Free Float-Adjusted Market Capitalization:
Securities Not Subject to FOLs
Company A
Total number of shares outstanding
10,000,000
Number of shares classified as non-free float
4,300,000
Non-free float shareholding (%)
43.0%
Free float (%)
57.0%
Foreign Inclusion Factor (FIF)
0.60
Market price ($)
50
Full market capitalization ($ mm)
500
Free float-adjusted market capitalization ($ mm) 300– 13 –MSCI Small Cap Index Series Methodology
Example:Calculating Free Float-Adjusted Market Capitalization:
Securities Subject to FOLs
Company B
Total number of shares outstanding
10,000,000
All shares classified as non-free float
4,000,000- those held by foreign investors as strategic
Total non-free float shareholdings (%)
40.0
Free float (%)
60.0
Foreign ownership limit (%)
33.3
Foreign strategic shareholding (%)
0.0
Foreign ownership limit less the foreign
strategic shareholding (%)
33.3
Foreign Inclusion Factor (FIF)
0.33
Market price ($)
50
Full market capitalization ($ mm)
500
Free float-adjusted market capitalization ($ mm) 165– 14 –

Company C
10,000,000
4,000,000
1,000,000
40.0
60.0
33.3
10.0
23.3
0.25
50
500
125

MSCI Small Cap Index Series Methodology
Section 3: Maintaining the MSCI Small Cap Index Series
The MSCI Small Cap Index Series is maintained with the objective of reflecting the evolution of theunderlying small cap universe on a timely basis. In maintaining the indices, emphasis is also placed oncontinuity and on minimizing unnecessary index turnover.
Maintaining the indices involves many aspects, including additions to, and deletions from the indices andchanges in number of shares and changes in FIFs as a result of updated free float estimates.
The Small Cap Index Series is fully reviewed on a semi-annual basis, at the end of May and November.
During the quarterly index reviews minor adjustments are made, including changes in FIFs and updates in
number of shares, which are implemented at the end of February and August. In addition, consistent with
the index methodology in maintaining existing MSCI international equity indices, MSCI reflects corporate
events in the indices as they occur.
Generally, index maintenance falls within the following three broad categories of implementation ofchanges:
•
•
•

3.1

Semi-annual index reviews, intended to reconstitute the Small Cap Index Series on the basis of a
new eligible small cap universe while taking buffer rules into consideration. During the May Semiannual Index Review, the free float of all constituents is also systematically reassessed.
Quarterly index reviews, aimed at promptly reflecting significant market events and theircorresponding impact on FIFs.
Ongoing event-related changes, which are generally implemented in the indices as they occur.

Semi-Annual Index Review

The semi-annual index review involves a comprehensive review of the Small Cap Index Series. In addition,
during the May Semi-annual Index Review, the free float of all constituents is also systematically reassessed.
3.1.1

Semi-Annual Index Review Process

During each semi-annual index review, a new eligible small cap universe is identified. The index review
process is based on the index construction methodology outlined in Section 2 and the application of thebuffer rules, which are detailed in Section 3.1.3.1.
3.1.2

Semi-Annual Index Review Additions

Potential additions of eligible securities are considered, based on their ranking in descending order of
ATVR, with a view to bringing the representation in each industry group in each country as close as
possible to the targeted 40% full market capitalization of eligible securities within the small cap range.
3.1.3

Semi-Annual Index Review Deletions

During the Semi-annual Index Review, securities will be considered for deletion if they become ineligible orif the industry group representation significantly exceeds the 40% target. However, in order to avoid– 15 –MSCI Small Cap Index Series Methodology
excessive short-term turnover, buffer rules are put in place for existing constituents. Potential deletions of
securities due to excessive industry group representation are considered, starting with securities with thelowest ATVR.
3.1.3.1 Buffer Rules for Existing Constituents
Existing constituents, which satisfy the size and liquidity eligibility criteria for new constituents (sections
2.3.1.1 and 2.3.1.2) are generally maintained in the MSCI Small Cap Index unless the representation of theindustry group significantly exceeds 60%.
Existing constituents, which do not satisfy the size and/or liquidity eligibility criteria for new constituentsdescribed in Sections 2.3.1.1 and 2.3.1.2 are generally maintained in the MSCI Small Cap Index, unless:
•

•
•
3.1.4

The full market capitalization of the company•
exceeds USD 2,500 million,•
has exceeded USD 1,500 million for at least 9 consecutive months,•
falls below USD 120 million,
The free float-adjusted market capitalization of the security falls below USD 60 million
The security’s ATVR falls below 2.5% or in the bottom 10% of the market capitalization in thesmall cap range calculated by descending order of ATVR.
Semi-Annual Index Review Changes in FIFs and Number of Shares

During the November Semi-annual Index Review, significant changes in free float estimates andcorresponding changes in the FIFs for constituents, related to relatively large events, are reflected in theindices. Changes may result from the following:
•
•
•
•
•
•
•
•
•

Large market transactions, involving strategic shareholders, that are publicly announced (Forexample transactions made by way of immediate book building and other processes, e.g. block salesor block buy).
Secondary offerings that, given the lack of sufficient notice, were not reflected immediately, andsecondary offerings that represent less than 5% of the security’s number of shares.
Increases in FOLs.
Decreases in FOLs not applied earlier as they did not oblige foreign investors to immediately sellshares in the market.
Corrections resulting from the reclassification of shareholders from strategic to non-strategic, (andvice versa) and rectification of treasury number of shares outstanding.
Update of FIFs following the public disclosure of the new shareholder structure for companies
involved in mergers, acquisitions or spin-offs, where different from MSCI’s pro forma free float
estimate at the time of the event.
Large conversions of exchangeable bonds and other similar securities into already existing shares.
End of lock-up periods or expiration of loyalty incentives for non-strategic shareholders, which
determine the reclassification of these shareholdings and result in an increase in free float.
Changes in FIFs resulting from other events of similar nature.

– 16 –MSCI Small Cap Index Series Methodology
In addition, during the May Semi-annual Index Reviews, MSCI conducts a detailed review of theshareholder information used to estimate free float for constituents. The review is comprehensive, covering
all aspects of shareholder information.
For further details on FIF changes that are implemented during the May and November Semi-annual Index
Reviews, see Appendix IV, entitled “Quarterly and Semi-Annual Index Review Changes in FIFs”.
During the November Semi-annual Index Review, updates in number of shares are also implemented. They
are generally small changes in a security’s shares outstanding and result from, among other things:
•
•
•
•
•
•
•

Exercise of options or warrants and employee stock option plans.
Conversion of convertible bonds or other instruments, including periodical conversion ofpreferred stocks, and small debt-to-equity swaps.
Periodical share buybacks and cancellation of treasury shares
Increases in a security’s number of shares resulting from acquisition of non-listed companies
and conversion of unlisted shares.
Increases of less than 5% in a security’s number of shares resulting from any equity offerings.
Other changes in number of shares resulting from events that could not be implemented on ornear the effective dates, and where no price adjustment factor (PAF) is necessary.
Share cancellations.

Updates in number of shares implemented as part of the Semi-annual Index Review could also trigger areview of the free float of the security. Any resultant change in FIF would be implemented simultaneously.
The updates in number of shares policy applies to both May and November Semi-annual Index Reviews.
3.1.5

Semi-Annual Index Review Frequency and Timing of Implementation

The Semi-annual Index Review is conducted every 6 months and is implemented as of the close of the lastbusiness day of May and November.

3.2

Quarterly Index Reviews

The quarterly index review process is designed to ensure that the indices continue to be an accurate
reflection of evolving equity markets. This is achieved by rapidly reflecting significant market eventsaffecting constituents and their corresponding impacts on FIFs, which were not captured at the time of
their actual occurrence.
Quarterly index reviews may result in changes in FIFs and updates in number of shares for existing
constituents. There are no new additions to the Small Cap Index Series at the quarterly index review.
Deletions are limited to securities that have become ineligible for inclusion.

– 17 –MSCI Small Cap Index Series Methodology
3.2.1

Quarterly Index Review Changes in FIFs and Number of Shares

The scope of the changes in FIFs at the quarterly index reviews is equivalent to the scope of the November
Semi-annual Index Review changes in FIFs, as described in Section 3.1.4 entitled “Semi-Annual Index
Review Changes in FIFs and Number of Shares.”
Changes in number of shares during the quarterly index reviews are those typically implemented duringSemi-annual Index Reviews, as outlined in Section 3.1.4.
For further details on FIF changes that are implemented during a quarterly index review, see Appendix IV,
entitled “Quarterly and Semi-Annual Index Review Changes in FIFs”.
3.2.2

Quarterly Index Review Frequency and Timing

The implementation of changes resulting from a quarterly index review occurs on only two dates
throughout the year: as of the close of the last business day of February and August.

3.3

Ongoing Event-Related Changes

Ongoing event-driven changes to the indices are the result of mergers, acquisitions, spin-offs, bankruptcies,
reorganizations and other similar corporate events. They can also result from capital reorganizations in theform of rights issues, bonus issues, public placements and other similar corporate actions that take place on
a continuing basis. These changes are generally reflected in the indices at the time of the event.
General principles that are applied in the treatment of these ongoing event-related changes are described in
the following pages. The handling of ongoing event-related changes can be classified in two broad
categories:
•
•
3.3.1

Corporate events affecting existing index constituents.
Corporate events affecting non-index constituents.

Corporate Events Affecting Existing Index Constituents

Corporate events can affect existing index constituents in various ways:•••

Changes in Foreign Inclusion Factors (FIFs), number of shares or industry classification forexisting index constituents
Early inclusions of non-index constituents
Early deletions of existing index constituents

3.3.1.1 Changes in FIFs, Number of Shares or Industry Classification for Existing Constituents
In order to ensure that the index accurately reflects the investability of the underlying securities, it is a policy
to coordinate changes in number of shares with changes in FIFs.

– 18 –MSCI Small Cap Index Series Methodology
Therefore, when two companies merge, or a company acquires or spins-off another company, the free floatof the resulting entity is estimated on a pro forma basis, using pro forma number of shares if applicable, andthe corresponding FIF is applied simultaneously with the event. Other corporate events, which result inchanges in shareholder structure, and therefore the FIFs, are typically reflected in the indices simultaneouslywith the implementation of the event in the index. Any other pending shareholder information updates orreclassifications are generally also reflected in the pro forma free float estimations related to the event. In
addition, when appropriate, the number of shares changes resulting from the corporate event also
incorporates any pending updates in number of shares.
Other corporate events, which result in a change in shareholder structure or FOLs and therefore the FIFs,
will typically be reflected in the indices simultaneously with the implementation of the event in the index.
Any other pending shareholder information updates or reclassifications will generally also be reflected in the
pro forma free float estimation related to the event.
In the cases of a decrease in FOLs in which foreign investors are obliged to immediately sell shares in themarket, such change will be implemented in the indices as soon as possible.
Changes in number of shares and FIF resulting from primary equity offerings representing more than 5% of
the security’s number of shares are generally implemented as of the close of the first trading day of the newshares, if all necessary information is available at that time. Otherwise, the event is implemented as soon aspracticable after the relevant information is made available. A primary equity offering involves the issuanceof new shares by a company.
Changes in number of shares and FIF resulting from primary equity offerings representing less than 5% of
the security’s number of shares are deferred to the next regularly scheduled Quarterly Index Review
following the completion of the event.
For public secondary offerings of existing constituents representing more than 5% of the security’s numberof shares, where possible, MSCI Barra will announce these changes and reflect them shortly after the resultsof the subscription are known. Secondary public offerings that, given lack of sufficient notice, were notreflected immediately will be reflected at the next Quarterly Index Review. Secondary offerings involve the
distribution of existing shares of current shareholders’ in a listed company and are usually pre-announced by
a company or by a company’s shareholders and open for public subscription during a pre-determined
period.
For US securities, increases in number of shares and changes in FIF resulting from primary equity offerings
and from secondary offerings representing at least 5% of the security’s number of shares will be
implemented as soon as practicable after the offering is priced. Generally, implementation takes place as of
the close of the same day that the pricing of the shares is made public. If this is not possible, theimplementation will take place as of the close of the following trading day.
Changes in industry classification resulting from a corporate event are generally implemented simultaneouslywith the event. Other changes in industry classifications are implemented at the end of the month.

– 19 –MSCI Small Cap Index Series Methodology
3.3.1.2 Early Inclusion of Non-Index Constituents
When there is a corporate event affecting index constituents, non-index constituents that are involved in themarket event are generally considered for immediate inclusion in the MSCI indices as long as the post-event
company’s full market capitalization is in the range of USD 120 – 2,500 million and its free float-adjusted
security market capitalization is above USD 60 million.
For example, if a non-constituent company acquires a constituent company, the constituent company’s
securities may be replaced by the securities of the acquiring company. Similarly, if a constituent company
merges with a non-constituent company, the merged company may replace the constituent company. In
addition, securities spun-off from existing constituents may be considered for early inclusion at the time ofthe event.
3.3.1.3 Early Deletion of Existing Index Constituents
MSCI will remove from the Small Cap Index Series as soon as practicable, securities of companies that filefor bankruptcy, companies that file for protection from their creditors and/or are suspended and for which
a return to normal business activity and trading is unlikely in the near future.
When the primary exchange price is not available, MSCI will delete securities at an over the counter or
equivalent market price when such a price is available and deemed relevant. If no over the counter or
equivalent price is available, the company will be deleted at the smallest price (unit or fraction of thecurrency) at which a security can trade on a given exchange.
Securities may also be considered for early deletion in other significant cases, such as decreases in free float
and FOLs, resulting in FIFs falling below 15%, or other corporate events resulting in significant changes ina constituent’s market capitalization. In particular, a constituent will be considered for early deletion if its
full company market capitalization exceeds USD 2,500 million or falls below USD 120 million, or if its
security free float-adjusted market capitalization falls below USD 60 million, as a result of a corporate event(other than a simple rights issues).
For securities that are suspended, MSCI will carry forward the market price immediately prior to thesuspension during the suspension period.
3.3.2

Corporate Events Affecting Non-Index Constituents

3.3.2.1 IPOs and Other Early Inclusions
Newly listed equity securities with at least six months of trading history and which are available to foreign
investors are considered for inclusion in the MSCI Small Cap Index Series only at the time of the Semiannual Index Review.

– 20 –MSCI Small Cap Index Series Methodology
3.4

Announcement Policy

3.4.1

Semi-Annual Index Review

The results of the Semi-annual Index Reviews are announced at least two weeks in advance of theireffective implementation dates as of the close of the last business day of May and November.
3.4.2

Quarterly Index Review

The results of the quarterly index reviews are announced at least two weeks in advance of their effective
implementation dates as of the close of the last business day of February and August.
3.4.3

Ongoing Event-Related Changes

All changes resulting from corporate events are announced prior to their implementation in the MSCI
indices.
The changes are typically announced at least ten business days prior to these changes becoming effective in
the indices as an “expected” announcement, or as an “undetermined” announcement, when the effective
dates are not known yet or when aspects of the event are uncertain. MSCI sends “confirmed”
announcements at least two business days prior to events becoming effective in the indices, provided that allnecessary public information concerning the event is available. The full list of all new and pending changes
is delivered to clients on a daily basis, at 5:30 PM US Eastern Standard Time (EST) through the Advance
Corporate Events (ACE) File.
In exceptional cases, events are announced during market hours for same or next day implementation.
Announcements made by MSCI during market hours are usually linked to late company disclosure ofcorporate events or unexpected changes to previously announced corporate events.
In the case of secondary offerings representing more than 5% of a security’s number of shares for existing
constituents, these changes will be announced prior to the end of the subscription period when possible anda subsequent announcement confirming the details of the event (including the date of implementation) will
be made as soon as the results are available.
Both primary equity offerings and secondary offerings for US securities, representing at least 5% of the
security’s number of shares, will be confirmed through an announcement during market hours for next day
or shortly thereafter implementation, as the completion of the events cannot be confirmed prior to thenotification of the pricing.
Early deletions of constituents due to bankruptcy or other significant cases are announced as soon aspracticable prior to their implementation in the MSCI indices.

– 21 –MSCI Small Cap Index Series Methodology
3.4.4

Global Industry Classification Standard (GICS)

Non-event related changes in industry classification at the sub-industry level are announced at least two
weeks prior to their implementation as of the close of the last business day of each month.
MSCI announces GICS changes twice a month, the first announcement being made on the first US
business day of the month and the second being made at least ten US business days prior to the last US
business day of the month. All GICS changes announced in a given month will be implemented as of theclose of the last US business day of the month.

– 22 –MSCI Small Cap Index Series Methodology

Appendices– 23 –MSCI Small Cap Index Series Methodology
Appendix I: Country Classification of Securities
This appendix outlines the guidelines MSCI Barra uses to determine the country classification of equity
securities.
General framework
Each of the securities followed in the MSCI index universe is classified in one and only one country.
The country classification of a security is generally determined by the country of incorporation of theissuing company and the primary listing of the security. This approach determines the country
classification of the vast majority of securities.
In the few cases where a company is incorporated in one country while its securities have a primary listingin a different country, additional factors need to be considered to determine the country classification.
Companies may choose to incorporate in a different country than the country of primary listing to benefit
from tax, legal, and/or regulatory advantages. These companies often incorporate in countries withlimited, if any, public domestic equity markets, such as the Bahamas, Bermuda, British Virgin Islands,
Cayman Islands, Channel Islands, Luxembourg, Marshall Islands, Netherlands Antilles, and Panama. In
some other cases, companies may seek to benefit from tax, legal and/or regulatory advantages by
incorporating in a different country than their country of primary listing where such country ofincorporation is one of the countries in the MSCI All Country World Index (ACWI). In both of thesecases of special benefit incorporations, MSCI Barra will generally classify the company in the country of
the primary listing of its securities.
Companies incorporated outside of the US which have their securities’ primary listing in the US may be
included in the USA index universe, provided that they file a Form 10-K/10-Q.
Companies incorporated in a European Developed Market country (including Luxembourg) which havetheir securities’ primary listing in a different European Developed Market country are generally classified
in the country of primary listing.
Other cases
In the few remaining cases where the general framework proves to be insufficient, an additional analysis
may be performed to determine the company’s country classification. In such circumstances, MSCI Barra
uses a set of rules, the most important of which are:••••

The company's primary listing, secondary listings, if any, and the geographic distribution of its
shareholder base;
The geographical distribution of its operations (in terms of assets and production);
The location of its headquarters; andThe country in which investors consider the company to be most appropriately classified.

The outcome of that analysis may lead to some companies not being eligible for any MSCI country index
if the country of classification resulting from the analysis remains different from the country of listing.
This may happen in particular, but not exclusively, for companies incorporated in an Emerging Market
country and having their only listing in a Developed Market country.
_________________________________________________________________________________________________– 24 –MSCI Small Cap Index Series Methodology
Country specific cases
China, Russia, and Israel have a number of large companies incorporated within them but with securities
listed only outside of them. MSCI Barra considers such companies for inclusion in the index universe of
the country of incorporation subject to the following:
Israel: The MSCI Israel universe includes companies incorporated in Israel with a listing on either the TelAviv Stock Exchange or a US stock exchange.
Russia: The MSCI Russia universe includes companies incorporated in Russia with a listing in either
Russia, London or New York. Companies with incorporation in a special benefit country, as describedabove, may also be included in the Russia universe if they have a listing in Russia.
China: The MSCI China universe includes companies incorporated in the People’s Republic of China(PRC) and listed in the form of B shares on the Shanghai Stock Exchange (in US$) or Shenzhen Stock
Exchange (in HK$), or H shares in Hong Kong (in HK$). The MSCI China universe also includes
companies not incorporated in the PRC or the Hong Kong Special Administrative Region, provided thatthey satisfy both of the following conditions:••

The company is listed on the Hong Kong Stock Exchange; andThe company’s majority shareholders (directly or indirectly) are at least one of the following:o organizations or enterprises owned by the state, provinces, or municipalities of the PRC, orcompanies incorporated in the PRC, oro PRC individuals.

The MSCI China universe excludes companies which satisfy these two conditions but derive more than
80% of their revenues and profits from the Hong Kong Special Administrative Region. Those companies
will be included in the MSCI Hong Kong universe.
Change of Incorporation
In the event that a company that is already classified in one of the countries in the MSCI All Country
World Index (ACWI) changes its incorporation to another country, it generally will remain in the initialcountry of classification. However, it may be re-classified if the company’s geographical profile
fundamentally differs following the reincorporation.
A change in the country classification of a company generally takes place at a Semi-Annual Index Review,
except if the change is the result of a corporate event. In that case the company may be reclassified
simultaneously with the change in country of incorporation or at a Quarterly Index Review following thecorporate event.
When MSCI Barra changes a company's country classification, the company’s equity securities are notautomatically included in the index of the new country classification even if the company was a constituent
of its original country's index. The securities would have to meet all constituent selection criteria for theindex of the new country.

– 25 –MSCI Small Cap Index Series Methodology
Review and Maintenance
MSCI periodically reviews the country classification of companies not classified into their country ofincorporation.

– 26 –MSCI Small Cap Index Series Methodology
Appendix II: Free Float Definition and Estimation Guidelines
MSCI defines the free float of a security as the proportion of shares outstanding that is deemed to beavailable for purchase in the public equity markets by international investors. In practice, limitations on theinvestment opportunities available to international institutional investors include:•••

Strategic and other non-free float shareholdings: Stakes held by private or public shareholders
whose investment objectives or other characteristics suggest that those holdings are not likely to beavailable in the market. In practice, disclosure requirements generally do not permit a clear
determination of these investment objectives. Therefore, MSCI primarily classifies shareholdings
as free float or non-free float based on a categorization of investor types into non-strategic andstrategic respectively.
Limits on share ownership for foreign investors: Limits on the proportion of a security’s sharecapital that is authorized for purchase by non-domestic investors. Where they exist, these foreign
share-ownership limits are set by law, government regulations, company by-laws and otherauthoritative statements.
Other foreign investment restrictions: Investment restrictions, other than those describedabove, which materially limit the ability of international investors to freely invest in a particularequity market, sector or security. There is typically no simple way to account for these limitations
in a benchmark, as these restrictions tend to be more subtle and complex, and may affect different
market participants in different ways.

Classification of Shareholder Types
MSCI primarily classifies shareholdings as free float or non-free float based on a categorization of investor
types.
STRATEGIC SHAREHOLDER TYPES (NON-FREE FLOAT)
Governments
Shareholdings owned by governments and affiliated entities
are generally classified as non-free float.
Companies

Shares owned by companies, including treasury shares ownedby the company itself. 2

Banks

Shareholdings by banks are considered as strategic, excluding
shareholdings held in trust on behalf of third parties that are
deemed to be non-strategic. (Shareholding by Trust banks inJapan are considered non-strategic).

Principal officers
Board Members

and Shares owned by the company’s principal officers or membersof the Board of Directors, including shares owned byindividuals or families that are related to or closely affiliated2

For most countries, treasury shares are included in the total shares outstanding used in the calculation of the indices, andtherefore MSCI Barra takes them into account in its calculation of free float. In other countries, where treasury shares are
excluded from the determination of the total shares outstanding, they are accordingly not taken into consideration for thefree float calculation..

– 27 –MSCI Small Cap Index Series Methodology
with the company’s principal officers, members of the Boardof Directors, or founding members deemed to be insiders.
Employees

Shares of the employing companies, held by both officers andnon-officers, which are held in a variety of ways including
plans sponsored by the employer for the purpose ofretirement and savings plans, incentive compensation
programs and other deferred and employee pension funds
NON-STRATEGIC SHAREHOLDER TYPES (FREE-FLOAT)
Individuals
Shares owned by individuals, excluding shares owned byindividuals or families that are related to or closely affiliatedwith the company’s principal officers or members of theBoard of Directors or founding members deemed to beinsiders, and, also excluding those shareholdings held byindividuals, the significant size of which suggests that they are
strategic in nature.
Investment funds, mutual Shares owned in investment funds, mutual funds and unit
funds and unit trusts
trusts, including shares owned in passively managed funds.
Security brokers

Pension funds
Insurance companies

Social security funds

Non-strategic interests held by broker dealers (e.g., trades in
the process of settlement, holdings in the process of beingtransferred, as part of underwriting activity etc), unless held
within the same group or the nature of holding is deemedstrategic.
Shares owned in employee pension funds, excluding shares ofthe employing company, its subsidiaries or affiliates.
In principle, all stakes held by insurance companies are part offree float. For exceptions to this general principle, please referto the additional discussion on insurance companies presented
below.
Shares owned in social security funds, unless the fund’s
management is deemed to exert influence over the
management of the company.

In the event that the above categories should not appropriately capture the nature of a specificshareholding, its classification as free float or non-free float will be determined based on a more extensive
analysis.

Special Cases
The following guidelines will be applied in analyzing the special cases set forth below:•

Nominees or trustees: Shareholdings registered in the name of a nominee or trustee are classified
as strategic or non-strategic based on an analysis of who the ultimate beneficial owner of theshares is, according to the shareholder types described above.

– 28 –MSCI Small Cap Index Series Methodology•

Government agencies and government-related investment funds: Shareholdings ofgovernment agencies and government-related investment funds are classified based on an analysisof the objective of the investment and the extent of government involvement in managing thecompanies.

•

Insurance companies: Shareholdings by insurance companies are considered as non-free float,
when analysis shows that these holdings are unlikely to be made available as free float in themarket. This analysis typically looks at the nature of the insurance business in each country, acompany's business practices with its group-related or other companies, and the regulatoryenvironment in the country, including fiscal incentives. These factors, individually or combined,
could restrict the insurance company's shareholdings from being made freely available in the stock
market. Therefore, the treatment of stakes held by insurance companies may differ from country
to country. Because of the structure of equity ownership and the importance of financial alliances
for the control of companies in some countries, insurance companies’ stakes in other companies
may be treated as strategic. This is the case in France, Germany, Italy and Japan, where stakes
above 2% (FR, DE, IT) and above 5% (JP) are treated as strategic.

•

Depositary Receipts: Shares that are deposited to back the issuance of depositary receipts such as
ADRs and GDRs are classified as non-strategic, unless it is established that a specific stake held in
depository receipts is strategic in nature.

•

Shares with "loyalty" incentives: In a public offering, special incentives are sometimes provided
to retail investors and are subject to a minimum holding period. These shares will not be
considered as part of the free float during the minimum holding period if the incentives are
deemed to be material. In general, a conditional share bonus in a ratio of 1 to 5 (or an equivalent
price discount of 1/6th), or more, will be considered as material.

•

Lock-up periods: Any shares that are subject to lock up periods will be considered as non-freefloat during the lock-up period. At the end of the lock-up period, these shares will be classified as
strategic or non-strategic based on the nature of the shareholder.

Foreign Ownership Limits (FOLs)
For the determination of the FOLs, the following guidelines are used:•

For companies that impose ownership restrictions for non-European Union investors, such
restrictions are fully taken into account in the calculation of the FOL.

•

Regulatory requirements governing the ownership of shares by foreign investors in the country
where the security is included•

In countries where companies are allowed to issue depository receipts such as ADRs or GDRs in
exemption of the outstanding foreign ownership restrictions, the FOL calculation includes thepercentage represented by the depository receipts.

•

Similarly, if a company exceptionally permits certain foreign shareholders to own shares in excessof the maximum stated in the company's by-laws and the exception is publicly disclosed, this istaken into account in the calculation of the FOL.

– 29 –MSCI Small Cap Index Series Methodology•

When a company's foreign ownership restriction is defined as a proportion of the company's total
share capital and the company has multiple listed share classes with no specific limit set for any
one class, MSCI applies the company's FOL equally to each of the company's listed share classes.

•

When a company's foreign ownership restriction is defined as a proportion of the company's total
share capital and the company has multiple share classes but only one share class is listed, MSCI
calculates the FOL by applying the total shares available to foreign investors (after taking into
consideration foreign non-free float shareholdings of non-listed shares, if any) on the listed shares
only.

Example:Calculating Foreign Ownership Limit (FOLs)

Number of shares outstanding
Foreign non-free float shareholdings
Foreign ownership limit applied to the company
Foreign Ownership Limit (FOL) applied to listed shares

ListedNon-Listed

Total

500

500
100

1,000
100

= 40%
= ((0.40*1,000) – 100)/500= 0.60

Other Foreign Ownership Restrictions
In the case where other foreign investment restrictions exist, which materially limit the ability ofinternational investors to freely invest in a particular equity market, sector or security, a Limited
Investability Factor (LIF) may be applied to ensure that the investability objectives of the MSCI Indicescan be achieved.
There is typically no simple way to account for these types of investability limitations in a benchmark, asthey tend to be subtle and complex, and may affect different market participants in different ways.
For example, such restrictions may involve a complex process of investor validation and qualification,
restrictions on funds transfer, individual investment quota limits and various complex administrativerequirements. While instituted at a country level these restrictions may have different consequences
depending on the characteristics of the investor, including legal status, size of assets under management ordate of application.
In the case of individual companies with Foreign Ownership Limits, it may happen that the maximum
ownership by non-national investors is reached while depository receipts may continue to be available toforeign investors. In such cases, the depository receipts typically trade at a persistent premium relative tothe domestic shares, highlighting the difficulties for international investors to replicate the security’s weightin the index.
Therefore, where deemed necessary, a LIF will be determined and applied based on an extensive case-bycase analysis. The application of this LIF permits a more accurate comparison of constituent markets andsecurities that have more complex and subtle restrictions on the investment process to markets andsecurities where investment limitations can be appropriately reflected in their standard FIFs.

– 30 –MSCI Small Cap Index Series Methodology
Appendix III: Global Industry Classification Standard (GICS)
Introduction
The Global Industry Classification Standard (GICS) was developed by MSCI in collaboration withStandard & Poor’s (S&P) to provide an efficient, detailed and flexible investment tool. It is designed torespond to the global financial community’s need for a global, accurate, complete and widely accepted
approach to defining industries and classifying securities by industry. Its universal approach to industry
classification aims to improve transparency and efficiency in the investment process.
Key Features of GICS
The key features of GICS are that it is:••••

Universal: the classification applies to companies globally.
Accurate: the structure precisely reflects the state of industries in the equity investment universe.
Flexible: the classification consists of four levels of analysis, ranging from the most general to themost specialized sub-industry.
Evolutionary: annual reviews are conducted to ensure that the classification remains fully
representative of the universe.

To provide the level of precision critical in the investment process, GICS is designed with four levels ofclassifications:
The Global Industry Classification Standard (GICS)
10 Sectors
24 Industry Groups
67 Industries

147 Sub-Industries

GICS has 10 sector classifications:• Energy• Materials• Industrials• Consumer Discretionary• Consumer Staples• Health Care
• Financials• Information Technology• Telecommunication Services• Utilities.

– 31 –MSCI Small Cap Index Series Methodology
Philosophy and Objectives of GICS
The way in which securities are classified into asset classes forms the basis of many important investment
decisions. The relative merits of each security are judged primarily within these asset classes, andinvestment decisions are taken within this framework.
Approaches to Industry Classification Schemes
While grouping securities by country and regions is relatively straightforward, classifications by industries
are more difficult. There are many approaches to developing industry classification schemes, some ofwhich are discussed below.
At one extreme is the purely statistical approach, which is solely financial market-based and backward
looking, using past returns. Aggregations are formed around correlation, often yielding unintuitive
groupings that are dissimilar across countries and regions. Another approach attempts to define a priori
financial market-oriented groups or themes, such as cyclical, interest rate sensitive, etc. The difficulty,
however, lies in finding widely accepted and relatively stable definitions for these themes.
Two other approaches begin with an economic perspective on companies. The first focuses on a
production orientation while the other adopts a market or demand orientation. The production-oriented
approach was effective in the past in its analysis of the microstructure of industries from the producers’
standpoint. For instance, it segregated goods and services on the premise that it was a different set ofcompanies that provided each to consumers. As the structure of the global economy evolved, limitationsof this approach became increasingly obvious. The ever-increasing share of discretionary income brought
about by economic development, emergence of the service era, and the availability and accessibility of
information with the advent of new communication technology has moved the emphasis from producers
to consumers.
GICS: Market Demand-Oriented
The Global Industry Classification Standard (GICS) is designed to be market demand-oriented in its
analysis and classification of companies. For example, drawing the line between goods and services is
becoming increasingly arbitrary as they are now commonly sold together. This distinction between goods
and services is replaced by adopting the more market-oriented sectors of “Consumer Discretionary” and“Consumer Staples”, which group goods and services sub-industries. In addition, the creation of large
stand-alone sectors such as Health Care, Information Technology and Telecommunication Services
accurately represents industries that provide significant value to the consumer in today’s global andintegrated economy. This further contributes to a more uniform distribution of weights among the 10
sectors.

– 32 –MSCI Small Cap Index Series Methodology
GICS Company Classification
The Global Industry Classification Standard (GICS) is used to assign each company to a sub-industry
according to its principal business activity. Since the GICS is strictly hierarchical, a company can only
belong to one grouping at each of the four levels.
An Illustration of the GICS – Telecommunication Services Sector:
50 – Telecommunication
Services
5010 – Telecommunication
Services
501010 - Diversified
Telecommunication Services

501020 – WirelessTelecommunication Services

50101010 – Alternative
Carriers

50101020 – Integrated
Telecommunication Services

Cable & Wireless (GB)Level 3 Communications (US)

AT&T (US)Verizon Communications (US)

50102010 – WirelessTelecommunication Services
Vodafone Group (GB)Classification by Revenue
In order to provide an accurate, complete and long-term view of the global investment universe, acompany’s revenues often provide a more stable and precise reflection of its activities than earnings.
Furthermore, industrial and geographical breakdowns of revenues are more commonly available thanearnings broken down the same way for most companies. Nevertheless, company valuations are moreclosely related to earnings than revenues. Therefore, earnings remain an important secondary
consideration in a company’s industry classification.
General Guidelines for Classification
The primary source of information used to classify securities is a company’s annual reports and accounts.
Other sources include brokers’ reports and other published research literature. As a general rule, acompany is classified in the sub-industry whose definition most closely describes the business activities
that generate at least 60% of the company’s revenues.
Example: Nokia (FI)2006 Results
Revenues
Earnings

Mobile Phones
60%
75%

Multimedia
19%24%Enterprise Solutions
3%0%– 33 –

Networks
18%
15%

MSCI Small Cap Index Series Methodology
Classified as:

GICS Level

GICS Code

Code Description

Sector45

Information Technology

Industry Group4520

Technology Hardware & Equipment

Industry

452010Communications Equipment

Sub-Industry

45201020

Communications Equipment

However, a company engaged in two or more substantially different business activities, none of which
contribute 60% or more of revenues, is classified in the sub-industry that provides the majority of both thecompany’s revenues and earnings. When no sub-industry provides the majority of both the company’s
revenues and earnings, the classification will be determined based on further MSCI research and analysis.
In addition, a company significantly diversified across three or more sectors, none of which contributes
the majority of revenues or earnings, is classified either in the Industrial Conglomerates sub-industry(Industrial Sector) or in the Multi-Sector Holdings sub-industry (Financials Sector).
Example: General Electric (US)2006 Results
Revenues
Earnings

Infrastructure
30%
34%

Industrial
21%
10%

Healthcare NBC Universal Commercial Finance Consumer Finance
10%
10%
15%
14%
12%
11%
19%
13%

Classified as:
GICS Level

GICS Code

Code Description

Sector20

Industrials

Industry Group2010

Capital Goods

Industry

201050Industrial Conglomerates

Sub-Industry

20105010

Industrial Conglomerates

In the case of a new issue, the classification will be determined based primarily on the description of thecompany’s activities and pro forma results as given in the prospectus.
Review of Sub-Industry Classification
A company’s sub-industry classification will be reviewed either when a significant corporate restructuring
occurs or when the new annual report is made available. In any case, in order to provide a stable subindustry classification, when reviewing a company’s classification, changes will be minimized in the subindustry classification to the extent possible by disregarding temporary fluctuations in the results of acompany’s different activities.
In the event that the above guidelines should not appropriately capture a particular company’s businessactivity, its classification will be determined based on a more extensive analysis.

– 34 –MSCI Small Cap Index Series Methodology
GICS (Global Industry Classification Standard)
Effective after close of business (US, EST) Friday April 28, 2006
SectorIndustry Group

Industry

Sub-Industry

10 - Energy

1010 - Energy

101010 - Energy Equipment & Services

10101010 - Oil & Gas Drilling
10101020 - Oil & Gas Equipment & Services
10102010 - Integrated Oil & Gas
10102020 - Oil & Gas Exploration & Production
10102030 - Oil & Gas Refining & Marketing
10102040 - Oil & Gas Storage & Transportation
10102050 - Coal & Consumable Fuels
15101010 - Commodity Chemicals
15101020 - Diversified Chemicals
15101030 - Fertilizers & Agricultural Chemicals
15101040 - Industrial Gases
15101050 - Specialty Chemicals
15102010 - Construction Materials
15103010 - Metal & Glass Containers
15103020 - Paper Packaging
15104010 - Aluminum
15104020 - Diversified Metals & Mining
15104030 - Gold
15104040 - Precious Metals & Minerals
15104050 - Steel
15105010 - Forest Products
15105020 - Paper Products
20101010 - Aerospace & Defense
20102010 - Building Products
20103010 - Construction & Engineering
20104010 - Electrical Components & Equipment
20104020 - Heavy Electrical Equipment
20105010 - Industrial Conglomerates
20106010 - Construction & Farm Machinery & Heavy Trucks
20106020 - Industrial Machinery20107010 - Trading Companies & Distributors
20201010 - Commercial Printing
20201030 - Diversified Commercial & Professional Services
20201040 - Human Resource & Employment Services
20201050 - Environmental & Facilities Services
20201060 - Office Services & Supplies
20301010 - Air Freight & Logistics
20302010 - Airlines
20303010 - Marine
20304010 - Railroads
20304020 - Trucking
20305010 - Airport Services
20305020 - Highways & Railtracks
20305030 - Marine Ports & Services
25101010 - Auto Parts & Equipment
25101020 - Tires & Rubber
25102010 - Automobile Manufacturers
25102020 - Motorcycle Manufacturers
25201010 - Consumer Electronics
25201020 - Home Furnishings
25201030 - Homebuilding
25201040 - Household Appliances
25201050 - Housewares & Specialties
25202010 - Leisure Products
25202020 - Photographic Products
25203010 - Apparel, Accessories & Luxury Goods
25203020 - Footwear
25203030 - Textiles
25301010 - Casinos & Gaming
25301020 - Hotels, Resorts & Cruise Lines
25301030 - Leisure Facilities
25301040 - Restaurants
25302010 - Education Services
25302020 - Specialized Consumer Services
25401010 - Advertising25401020 - Broadcasting & Cable TV
25401030 - Movies & Entertainment
25401040 - Publishing
25501010 - Distributors
25502010 - Catalog Retail25502020 - Internet Retail25503010 - Department Stores
25503020 - General Merchandise Stores
25504010 - Apparel Retail25504020 - Computer & Electronics Retail25504030 - Home Improvement Retail25504040 - Specialty Stores
25504050 - Automotive Retail25504060 - Homefurnishing Retail101020 - Oil, Gas & Consumable Fuels

15 - Materials

1510 - Materials

151010 - Chemicals

151020 - Construction Materials
151030 - Containers & Packaging
151040 - Metals & Mining

151050 - Paper & Forest Products
20 - Industrials

2010 - Capital Goods

201010 - Aerospace & Defense
201020 - Building Products
201030 - Construction & Engineering
201040 - Electrical Equipment
201050 - Industrial Conglomerates
201060 - Machinery2020 - Commercial Services & Supplies2030 - Transportation

201070 - Trading Companies & Distributors
202010 - Commercial Services & Supplies

203010 - Air Freight & Logistics
203020 - Airlines
203030 - Marine
203040 - Road & Rail
203050 - Transportation Infrastructure

25 - Consumer Discretionary

2510 - Automobiles & Components

251010 - Auto Components

2520 - Consumer Durables & Apparel

252010 - Household Durables

251020 - Automobiles

252020 - Leisure Equipment & Products
252030 - Textiles, Apparel & Luxury Goods
2530 - Consumer Services

253010 - Hotels, Restaurants & Leisure253020 - Diversified Consumer Services
2540 - Media

254010 - Media

2550 - Retailing

255010 - Distributors
255020 - Internet & Catalog Retail255030 - Multiline Retail255040 - Specialty Retail– 35 –MSCI Small Cap Index Series Methodology
SectorIndustry Group

Industry

Sub-Industry

30 - Consumer Staples

3010 - Food & Staples Retailing

301010 - Food & Staples Retailing

3020 - Food, Beverage & Tobacco

302010 - Beverages

30101010 - Drug Retail30101020 - Food Distributors
30101030 - Food Retail30101040 - Hypermarkets & Super Centers
30201010 - Brewers
30201020 - Distillers & Vintners
30201030 - Soft Drinks
30202010 - Agricultural Products
30202030 - Packaged Foods & Meats
30203010 - Tobacco
30301010 - Household Products
30302010 - Personal Products
35101010 - Health Care Equipment
35101020 - Health Care Supplies
35102010 - Health Care Distributors
35102015 - Health Care Services
35102020 - Health Care Facilities
35102030 - Managed Health Care
35103010 - Health Care Technology
35201010 - Biotechnology
35202010 - Pharmaceuticals
35203010 - Life Sciences Tools & Services
40101010 - Diversified Banks
40101015 - Regional Banks
40102010 - Thrifts & Mortgage Finance40201020 - Other Diversified Financial Services
40201030 - Multi-Sector Holdings
40201040 - Specialized Finance40202010 - Consumer Finance40203010 - Asset Management & Custody Banks
40203020 - Investment Banking & Brokerage
40203030 - Diversified Capital Markets
40301010 - Insurance Brokers
40301020 - Life & Health Insurance
40301030 - Multi-line Insurance
40301040 - Property & Casualty Insurance
40301050 - Reinsurance
40402010 - Diversified REIT's
40402020 - Industrial REIT's
40402030 - Mortgage REIT's
40402040 - Office REIT's
40402050 - Residential REIT's
40402060 - Retail REIT's
40402070 - Specialized REIT's
40403010 - Real Estate Management & Development
45101010 - Internet Software & Services
45102010 - IT Consulting & Other Services
45102020 - Data Processing & Outsourced Services
45103010 - Application Software
45103020 - Systems Software
45103030 - Home Entertainment Software
45201020 - Communications Equipment
45202010 - Computer Hardware
45202020 - Computer Storage & Peripherals
45203010 - Electronic Equipment Manufacturers
45203020 - Electronic Manufacturing Services
45203030 - Technology Distributors
45204010 - Office Electronics
45301010 - Semiconductor Equipment

302020 - Food Products
3030 - Household & Personal Products
35 - Health Care

3510 - Health Care Equipment & Svcs

302030 - Tobacco
303010 - Household Products
303020 - Personal Products
351010 - Health Care Equipment & Supplies
351020 - Health Care Providers & Services

4010 - Banks

351030 - Health Care Technology
352010 - Biotechnology
352020 - Pharmaceuticals
352030 - Life Sciences Tools & Services
401010 - Commercial Banks

4020 - Diversified Financials

401020 - Thrifts & Mortgage Finance402010 - Diversified Financial Services

3520 - Pharma., Bio. & Life Sciences
40 - Financials

402020 - Consumer Finance402030 - Capital Markets

45 - Information Technology

4030 - Insurance

403010 - Insurance

4040 - Real Estate404020 - Real Estate Investment Trusts (REITs)

4510 - Software & Services

404030 - Real Estate Management & Development
451010 - Internet Software & Services
451020 - IT Services
451030 - Software

4520 - Technology Hardware & Equipment 452010 - Communications Equipment
452020 - Computers & Peripherals
452030 - Electronic Equipment & Instruments

4530 - Semicondt. & Semicondt. Equip.

452040 - Office Electronics
453010 - Semiconductors & Semiconductor Equipment

50 - Telecommunication

5010 - Telecommunication Services

501010 - Diversified Telecommunication Services

55 - Utilities

5510 - Utilities

501020 - Wireless Telecommunication Services
551010 - Electric Utilities
551020 - Gas Utilities
551030 - Multi-Utilities
551040 - Water Utilities
551050 - Independent Power Producers & Energy Traders45301020 - Semiconductors
50101010 - Alternative Carriers
50101020 - Integrated Telecommunication Services
50102010 - Wireless Telecommunication Services
55101010 - Electric Utilities
55102010 - Gas Utilities
55103010 - Multi-Utilities
55104010 - Water Utilities
55105010 - Independent Power Producers & Energy Traders

GICS Structure Review Frequency
MSCI and Standard & Poor’s are committed to ensuring that the GICS structure remains relevant and upto-date. This is accomplished through an annual review of the structure. This review includes a detailed
internal analysis to develop a proposal for potential structural changes and public request for comments
and in-depth client consultations with various market participants as a means of obtaining feedback on
proposed structural changes.

– 36 –MSCI Small Cap Index Series Methodology
Appendix IV: Quarterly and Semi-Annual Index Review Changes in FIFs
Quarterly Index Review changes in FIF
As stated in section 3.1.4 “Semi-Annual Index Review Changes in FIFs and Number of Shares”,
significant changes in free float estimates and corresponding changes in the FIFs for constituents related
to relatively large events are reflected in the indices at the quarterly index reviews.
All FIF changes, such as changes resulting from large market transactions involving strategic shareholders,that are publicly announced (for example transactions made by way of immediate bookbuilding and otherprocesses, or secondary offerings that were not implemented immediately) will be implemented during aquarterly index review provided they satisfy one of the following conditions:•

The absolute size of the FIF change is 0.15 or more, or•

The change in free float-adjusted market capitalization resulting from the FIF change represents atleast:USD 1bn for securities classified in the US
USD 500 mm for securities classified in developed markets other than the US

The thresholds above only apply to FIF changes at quarterly index reviews.
All FIF changes resulting from an increase in FOL are implemented during a quarterly index review unlessa corporate event takes place during the quarter, in which case the FIF (including the FOL) will be
updated at the time of this event.
Buffer rule for FIF changes at Quarterly and Semi-Annual Index Reviews
FIF changes resulting from a change in free float of less than 1% will not be implemented, except in casesof corrections.

– 37 –MSCI Small Cap Index Series Methodology
Appendix V: Price Source for Securities
For a full updated list of prices used in MSCI end of day index calculations by country, please refer to
MSCI’s web site at www.msci.com/smallcap.
In some countries where significant Foreign Ownership Limits exist for certain companies and/or
industries, when this limit is reached, foreign investors may trade with each other in an organized local
market, frequently at a price higher than that available to domestic investors. As a result, there may beseparate domestic and foreign board quotations.
MSCI regularly monitors the relative liquidity and foreign ownership availability of constituents withseparate domestic and foreign board quotations to determine whether prices for these constituents shouldreflect the domestic or foreign board quotations. This review occurs on a quarterly basis to coincide with
the quarterly index review.

– 38 –MSCI Small Cap Index Series Methodology
Appendix VI: Policy Regarding Market Closures During Index Reviews
For both quarterly index reviews and the semi-annual index reviews, the following principles apply in caseof market closures on the day of implementation. As a reminder, the effective implementation date forquarterly index review is as of the close of the last business day of February and August. The effective
implementation date for the Semi-annual Index Review is as of the close of the last business day of May
and November.
Market Closures Due to Scheduled Stock Market Holidays
When a given stock market is closed on the “as of the close of” date due to stock market holiday, thechange will be effective on the next day, using the price of the previous day’s close.
Unexpected Market Closures
In the event that the primary stock market in a country fails to open for trading and remains closed for theentire trading day on the effective implementation date of the review due to an unexpected market closure,
MSCI will, in principle, postpone the review of the MSCI Small Cap Index Series for that specific country
index. MSCI will implement the country index review affected as of the close of the first business day(Monday to Friday) that the specific market reopens for trading and closing prices are available. In theevent of unexpected closures of stock markets in more than one country, MSCI will evaluate the situationand may apply a different policy.
For smaller countries, however, in the event of unexpected market closures, MSCI reserves the right toimplement the index review as planned using the closing price of the last day the market was open.
Market Outage during the Trading Day
In the event that a market is affected by an outage during the trading day on the effective implementation
date, MSCI will determine its pricing policy for the relevant country on a case by case basis. In making its
decision, MSCI will take into consideration a number of factors, including the time and duration of theoutage, information on the outage provided by the specific stock exchange, and other relevant market
information.
MSCI will communicate all decisions taken with respect to market outages during the day through theregular client communication channels as well as via Reuters (Pages MSCIA and following) andBloomberg (MSCN).
In some exceptional cases, that a stock market holidays in many countries coincide with the “as of theclose of” date, MSCI may decide to move the “as of the close of” date to a more appropriate date. In suchcases, MSCI would announce such a change in advance.

– 39 –MSCI Small Cap Index Series Methodology
Appendix VII: Equity Markets and Universe
The tables below provide a list of Stock Exchanges, Market Segments and Eligible Security Classes thatMSCI Barra uses as the basis of the construction of the MSCI Small Cap Index Series
Eligible Markets
Country Name

Stock Exchange

AUSTRALIA
AUSTRIA

Australian Stock Exchange
Vienna Stock Exchange

BELGIUM
CANADA
DENMARKFINLAND

Euronext
Toronto Stock Exchange
Copenhagen Stock Exchange
Helsinki Stock Exchange

FRANCE

Euronext

GERMANY

Deutsche Börse

GREECE

Athens Exchange

HONG KONG

Stock Exchange of Hong Kong

IRELAND

Irish Stock Exchange

ITALY

Borsa Italiana

JAPANTokyo Stock Exchange

Osaka Stock Exchange

JASDAQ
Nagoya Stock Exchange

NETHERLANDSNEW ZEALANDNORWAYEuronext
New Zealand Stock Exchange
New Zealand Alternative Exchange
Oslo Stock Exchange

PORTUGALSINGAPORE

Euronext
Singapore Exchange

SPAIN
SWEDEN

Madrid Stock Exchange
Stockholm Stock Exchange

SWITZERLAND

Nordic Growth Market
Nya Marknaden
AktieTorget
Swiss Exchange

UNITED KINGDOM

London Stock Exchange

USA

New York Stock Exchange
NASDAQ
American Stock Exchange

Market Segment

Prime Market
Standard Market
Eurolist

Main List
I ListNM ListEurolist
Alternext
Official Market
Regulated Market
Big Capitalization
Medium and Small Capitalization
Main Board
Growth Enterprise Market
Official Market
Irish Enterprise Exchange (IEX)
Blue Chip
STAR
Standard
Mercato ExpandiFirst Section
Second Section
Mothers
First Section
Second Section
HerculesFirst Section
Second Section
CentrexEurolist

Main List
SMB List
Primary Capital Certificates List
Eurolist
Main BoardSESDAQ
Primer Mercado
A-listO-list

VIRT-XSWX
SWX Local Caps
Main Market
AIM_________________________________________________________________________________________________– 40 –MSCI Small Cap Index Series Methodology
Eligible Classes of securities
Country NameClasses of Securities

AUSTRALIA

Ordinary shares
Preferred shares (1)Ordinary shares
Preferred shares (1)Participation certificates
Ordinary shares
Preferred shares (1)Ordinary shares
Units of Income Trusts"A" shares"B" shares"A" shares"B" shares"K" shares
Ordinary shares
Preferred shares (1)Certificats d'Investissement
Certificats Coopératif d'Investissement
Ordinary shares
Preferred shares (1)Ordinary shares
Preferred shares (1)"A" shares"B" shares
Ordinary shares
Units
Ordinary shares
Preferred shares (1)Savings shares
Ordinary shares
Ordinary shares
Preferred shares (1)Certificates
Ordinary shares
Preferred shares (1)"A" shares"B" shares
Primary Capital Certificates
Ordinary shares
Ordinary shares
Ordinary shares
Preferred shares (1)"A" shares"B" shares"C" shares
Swedish Depositary Receipts
Registered shares
Bearer shares
Participation certificates
Dividend-right certificates
Ordinary shares
Units
Common shares
Tracking Stock

AUSTRIABELGIUM
CANADA
DENMARKFINLANDFRANCEGERMANYGREECEHONG KONG
IRELAND
ITALY

JAPAN
NETHERLANDSNEW ZEALANDNORWAYPORTUGALSINGAPORE
SPAIN
SWEDENSWITZERLAND

UNITED KINGDOM
USA

1 Preferred shares that exhibit characteristics of equity securities are generally eligible– 41 –MSCI Small Cap Index Series Methodology
REITs
Companies that have adopted the following REITs or REIT equivalent structures in the following
countries will qualify to be classified in the GICS Industry - Real Estate Investment Trusts (REITs):
 Australia: LPT (Australian Listed Property Trust) Belgium: SICAFI (Société d’Investissement à Capital Fixe Immobilière)
 Canada, Hong Kong, Korea, Taiwan and the U.S.: REIT (Real Estate Investment Trust) France: SIIC (Sociétés d’Investissements Immobiliers Cotées) Greece: REIC (Real Estate Investment Company)
 Japan: J-REIT (Japanese Real Estate Investment Trust) Netherlands: FBI (Fiscal investment institution/Fiscale Beleggingsinstelling) New Zealand: Property Trusts
 Singapore: S-REIT (Singapore Real Estate Investment Trust) United Kingdom: UK-REIT United States: REITMSCI Barra closely monitors the potential emergence of REIT equivalent structures in other countries
and announces when appropriate their consideration as REITs in the Global Industry Classification
Standard (GICS).
Canadian Income Trusts
Income Trusts in Canada formed under the laws of provinces which have passed limited liability
legislation and are not designed to invest in a diversified portfolio of Income Trusts, securities, and/or
funds, will be included in the MSCI Canada Equity Universe and will be subject to the same index
eligibility rules applicable to other equity (and equity-like) securities.

– 42 –MSCI Small Cap Index Series Methodology
List of Updates to the Methodology Book
The following sections have been updated in the Methodology Book published in March 2007:
SECTION 2: CONSTRUCTING THE MSCI SMALL CAP INDEX SERIES.................................................................6
2.4
ADJUSTING THE FULL MARKET CAPITALIZATION OF SELECTED SECURITIES FOR FREE FLOAT ...............................11
2.4.1
Defining and Estimating Free Float ............................................................................................................11
SECTION 3: MAINTAINING THE MSCI SMALL CAP INDEX SERIES...................................................................15
3.1
SEMI-ANNUAL INDEX REVIEW ................................................................................................................................15
3.1.4
Semi-Annual Index Review Changes in FIFs and Number of Shares......................................................16
3.3
ONGOING EVENT-RELATED CHANGES ....................................................................................................................18
3.3.1
Corporate Events Affecting Existing Index Constituents..........................................................................18
3.3.1.1

Changes in FIFs, Number of Shares or Industry Classification for Existing Constituents................................................18

3.4
ANNOUNCEMENT POLICY ........................................................................................................................................21
3.4.3
Ongoing Event-Related Changes.................................................................................................................21
APPENDIX I: COUNTRY CLASSIFICATION OF SECURITIES................................................................................24
APPENDIX II: FREE FLOAT DEFINITION AND ESTIMATION GUIDELINES.....................................................27
APPENDIX III: GLOBAL INDUSTRY CLASSIFICATION STANDARD (GICS) .....................................................31
APPENDIX VII: EQUITY MARKETS AND UNIVERSE ..............................................................................................40– 43 –