Introducing
MSCI Factor Indexes
msci.comElements of performance

TMFactors by MSCIMSCI: A leader in Factor Indexing
MSCI Factor Indexes seek to reflect the performance characteristics of a range ofinvestment styles and strategies using transparent and rules–based methodologies.
Each MSCI Factor Index is derived from the equity universe of a traditional market cap

V O L AT I L I T YYIELDQUALITY

weighted MSCI index.
Evolution in the understanding of portfolio returns

VoQy

Yd

MOMENTUM

VA L U EGROWTH

GrSz

1980sAlphaSIZEVlMt

1960s

Portfolio
returnMarketreturnLIQUIDITY

Li

2000s

Alpha

Activeinvesting

FactorreturnFactorinvestingMarketreturnPassiveinvesting1960s and 1970s
During this period, investors did not distinguish between the sources of portfolio returns. Active investing was predominant way ofmanaging long-term portfolios.

1980s and 1990s

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

In the 1980s, finance research underpinned the adoption of passive investing as an alternative basis for implementation. Investors
started to capture market beta efficiently through passive mandates.

2000s and 2010s
Post 2000, investors increasingly recognized factors as the key drivers of long-term performance. Factor investing implemented
through rules-based transparent indexes offered an alternative for implementation.
3

MSCI Factor Indexes

How factors have performed relative to each otherWhy factors matter?
• A factor is any characteristic that helps explain the long-term risk and return performance of an asset• Factors are well documented in academic research and have been used extensively in portfolio risk models and inquantitative investment strategies. Active fund managers use these characteristics in their security selection and portfolio
construction process.
• Factor indexes provide a transparent and efficient method to seek exposure to factors

Factor investing and the asset allocation process
Factor investing seeks to capture higher risk adjusted returns via systematic exposure to stock characteristics. Factor Investing is
not new; it has long been used in risk models and quantitative investment strategies. Factors also can help explain part of the longterm portfolio performance of fundamental active investors*

Performance & implementation
Over time, individual factors have delivered outperformance relative to the market (see chart below).

MSCI World Factor Indexes

WorldWorld Enhanced Value

World Quality

World Equal Weighted

World Minimum Volatility (USD)

World Momentum

World Growth Target

World High Dividend Yield

Using an obsession withdata, an innovative spirit,and a drive to always gofurther for our clients,
MSCI worked to perfecta breakthrough method
for Factor Investing.

WorldWorld Enhanced Value

World Quality

World Equal Weighted

World Minimum Volatility (USD)

World Momentum

World Growth Target

World High Dividend Yield* For example, see “Buffett’s Alpha”, NBER Paper, Andrea Frazzini, David Kabiller and Lasse Pedersen, December 201345MSCI Factor Indexes

Introducing A Common Language for Factor Investing:
MSCI FaCS
Based on MSCI’s Barra Global Equity Factor Model

VALUE

SIZE

Book-to-price

Size

Earnings yieldMid cap

MOMENTUM
MomentumLong-term reversal

QUALITY
Leverage

YIELD
Dividend yield

Earnings variability

VOLATILITYBeta

GROWTH
GrowthLIQUIDITY
Liquidity

Residual volatility

Earnings qualityInvestment quality

Profitability

Underweight

Factor Investing is transforming theMSCI FaCS creates a common

MSCI’s Barra Global Equity Factor

way investors construct and manage

language and definitions around

Model (GEMLT) extends beyond MSCI

portfolios. The increasing popularity

Factors to be used by broader

FaCS to include 8 Factor Groupsof Factor Investing can create theaudiences. MSCI FaCS is built fromand 16 Factors with an additional 41

need for standards.

MSCI’s Barra Global Equity Factor

Factor Descriptors.

Model and includes 8 Factor Groups
and 16 Factors.

NeutralOverweight

The factor box ispowered by MSCIFaCS and provides aFund exposure
Benchmark exposure

visualization designed
to easily compare
factor exposures
between funds andbenchmarks.

67

MSCI Factor Indexes

Factor groups

MSCI Factor Indexes

MSCI Multiple-Factor Indexes
In addition to Single Factor Indexes MSCI offers Multiple-Factor Indexes, which aim to give institutional investors a foundation

Lower risk stocks
MSCI Minimum Volatility Indexes aim to reflect the performance characteristics of a minimum
volatility strategy by optimizing towards the lowest absolute risk within a given set of constraints toVOLATILITY

minimize unintended risks and exposures

for implementing multi-factor strategies transparently and efficiently. There are two key ways to gain multi-factor exposure:• MSCI Diversified Multiple-Factor Indexes: Aim to maximize exposure to four factors – Value, Momentum, Quality and Low
Size – while maintaining a risk profile similar to that of the underlying parent index.
• MSCI Factor Mix Indexes: Designed to represent the performance of equity in multiple factors, while benefiting fromdiversification and flexibility. The MSCI Factor Mix A-Series, MSCI Factor Mix A-Series Capped and MSCI Quality Mix

Cash flow paid out(E-Series) are part of MSCI Factor Mix Indexes.

MSCI High Dividend Yield Indexes aim to represent the performance of companies that havehistorically demonstrated stable and increasing dividends, while mitigating risks against value traps

YIELD

Factors are the building blocks of a successful portfolio.
Sound balance sheet stocks

The elements capable of turning data points into actionable insights.

MSCI Quality Indexes aim to reflect the performace of high quality stocks by weighting basedon debt‑to-equity, return-on-equity and earnings variability. They are designed to reflect theQUALITY

performance of a quality growth investment strategy

Why MSCI?
Rising stocks
MSCI Momentum Indexes are designed to target securities based on risk-adjusted performance,

MOMENTUM

with the goal of mitigating momentum crashes and reducing unnecessary turnover

Relatively inexpensive stocks
MSCI Enhanced Value Indexes are based on research that has found that combining value ratio

VALUE

descriptors has captured the value factor better than using any individual ratio descriptor alone

MSCI, beginning with Barra, invented a common language to explain risk and return through a lens of countries, sectors andfactors. Our more than 40 years of experience with factors uniquely position MSCI to help investors use factors to explain return,manage risk and construct portfolios.

Research
based
MSCI Factor Indexes arebased on well-established

40+Years offactor
experience

Academic Research.

Smaller companies
MSCI Equal Weighted Indexes and Risk Weighted Indexes give investors several ways to access

SIZE

the size factor premium

Academic findings havesupported the identificationand development of the MSCI
Factor Indexes.

Empiricalevidence
MSCI, beginning with Barra,
invented a common language
to explain risk and return

MSCI Factor
Indexesthr ough the lens of factors.
Barra factor models are used
to cr eate and validate
MSCI Factor Indexes.

Measure of sales and earnings
The MSCI growth target indexes aims to reflect the performance of a growth strategy byGROWTH
8optimizing toward higher growth characteristics controlling for unintended risks and exposures

9

MSCI Factor Indexes

10Learn more about Factor Investing at
www.msci.com/factor-investing

About MSCI Inc.
MSCI is a leading provider of critical decision support tools
and services for the global investment community. With
over 50 years of expertise in research, data and technology,
we power better investment decisions by enabling clientsto understand and analyze key drivers of risk and returnand confidently build more effective portfolios. We create
industry-leading research-enhanced solutions that clientsuse to gain insight into and improve transparency across theinvestment process.
To learn more, please visit www.msci.com.
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