MSCI ENHANCEDVALUE INDEXESMETHODOLOGY
June 2017

JUNE 2017

MSCI ENHANCED VALUE INDEXES METHODOLOGY | JUNE 2017

CONTENTS

1Introduction.........................................................................3

2

Index Construction Methodology............................................43

2.1

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

2.2

Determination of Value Score...............................................................4

2.2.1

Calculating the z-score for each individual variable............................................. 4

2.2.2

Calculating the sector relative value z-score......................................................... 4

2.2.3

Calculating the Final Value Score ............................................................................ 5

2.3

Security Selection.................................................................................5

2.4

Weighting Scheme ...............................................................................5

Maintaining the Indexes ........................................................6
3.1

Semi-Annual Index Reviews ..................................................................6

3.1.1

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

3.1.2

Turnover Buffer.......................................................................................................... 6

3.2

Ongoing Event Related changes............................................................7

Appendix I: Calculation of the Fundamental Variables .....................9
Appendix II: Value Z-Score Computation ...................................... 10
Appendix III: Rules to Determine Fixed Number of Securities at Initial
Construction and in Ongoing Rebalancing .................................... 12
Algorithm to Determine Fixed Number of Securities at Initial Construction.... 12
Algorithm to reevaluate Fixed Number of Securities at Semi Annual
Rebalancing ................................................................................................. 13© 2017 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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MSCI ENHANCED VALUE INDEXES METHODOLOGY | JUNE 2017

1

INTRODUCTION
The MSCI Enhanced Value Indexes are designed to represent the performance of companies
that exhibit relatively higher value characteristics within the parent universe of securities.
MSCI categorizes the MSCI Enhanced Value Indexes as part of the family of MSCI Factor
Indexes, which are designed to reflect the systematic elements of particular investment
styles or strategies. While capitalization wei ghted indexes aim to represent the broad
market beta, additional sources of systematic return associated with particular investment
styles and strategies, such as value, momentum, volatility, etc. could be represented
through alternatively weighted indexes .

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MSCI ENHANCED VALUE INDEXES METHODOLOGY | JUNE 2017

2

INDEX CONSTRUCTION METHODOLOGY

2.1

APPLICABLE UNIVERSE
The applicable universe includes all the existing constituents of an underlying MSCI parent
index (herein, a “Parent Index”). This approach aims to provide an opportunity set with
sufficient liquidity and capacity. The relevant Parent Index would be any MSCI Regional orCountry Index.

2.2

DETERMINATION OF VALUE SCORE
The value score for each security is calculated by combining the z-scores of three valuation
descriptors, namely Forward Price to Earnings (Fwd P/E), Enterprise Value/Operating Cash
Flows (EV/CFO) and Price to Book Value (P/B).

2.2.1

CALCULATING THE Z-SCORE FOR EACH INDIVIDUAL VARIABLE
The z-score for each of the three variables for each security is calculated using the mean andstandard deviation of the inverse of the corresponding variable. The z-score for eachindividual variable is computed within the MSCI Parent Index. The variables used are as
follows:
1. Fwd P/E, P/B, EV/CFO for all securities except for those classified in “Financials” or“Real Estate” Sector (Sector “40” and “60” of the Global Industry Classification
Standard (GICS®) respectively).
2. Fwd P/E, P/B for all securities classified in the “Financials” Sector.
3. EV/CFO for all securities classified in the “Real Estate” Sector.
The latest available data at the time of rebalancing is used for the individual value
descriptors

2.2.2

CALCULATING THE SECTOR RELATIVE VALUE Z-SCORE
After calculating individual variable z-scores, a composite value z-score for each security iscomputed by taking the weighted average of individual variable z-scores for each security.
Each individual variable z-score is assigned an equal weight (e.g. 1/3 weight is assigned when
3 variables are used).
A sector relative score is then derived from the composite value z-score. It is arrived at bystandardizing the composite value z-score within each sector. A sector relative score is
winsorized at +/- 3.

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MSCI ENHANCED VALUE INDEXES METHODOLOGY | JUNE 2017

2.2.3

CALCULATING THE FINAL VALUE SCOREThe Final Value Score is computed from sector relative z-score as follows:

{

(

)

Where Z_rel is the sector relative z-score determined in the previous step.

2.3

SECURITY SELECTION
The MSCI Enhanced Value Indexes are constructed with a fixed number of securities
approach. All the existing constituents of the relevant Parent Index are ranked based on
their Final Value Scores. If multiple securities have the same Final Value Scores, then the
security having a higher weight in the Parent Index is given a higher rank. A fixed number of
securities with the highest positive Final Value Scores are predetermi ned for every MSCI
Enhanced Value Index at initial construction with an aim to attain a greater weight in the
Value factor while maintaining sufficient index market capitalization and number of
securities coverage. Rules for arriving at a fixed number of constituents at initialconstruction are explained in Appendix III. The fixed number for security selection
determined at initial construction is evaluated at every Semi -Annual Index Review (SAIR).
Rules for evaluating the fixed number of constituents at every SAIR are also explained inAppendix III

2.4

WEIGHTING SCHEME
The securities selected in the previous step are assigned weights in the proportion of market
cap weight* Final Value Score.
These weights are then updated to implement sector neutrality i.e. the weight of eachsector in the MSCI Enhanced Value Index is equated with the weight of that sector in the
Parent Index. This is done by normalizing the weights of the constituents within each sector
to reflect the effective Parent Index sector weight.
The final security level inclusion factor is determined as the ratio of the final security level
weight and the security level pro forma market capitalization weight in the relevant Parent
Index.

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MSCI ENHANCED VALUE INDEXES METHODOLOGY | JUNE 20173

MAINTAINING THE INDEXES

3.1

SEMI-ANNUAL INDEX REVIEWSThe MSCI Enhanced Value Indexes are rebalanced on a semi -annual basis, usually as of theclose of the last business day of May and November, coinciding with the May and November
Semi-Annual Index Reviews (SAIRs) of the MSCI Global Investable Market Indexes.
Fundamental variables as of the end of April and October are used respectively. Thisapproach aims to capture timely updates to the Value characteristics of the companies andcoincide with the rebalancing frequency of the relevant Parent Index. The pro forma MSCI
Enhanced Value Indexes are in general announced nine business days before the effective
date.
Buffer Rules:
To reduce Index turnover and enhance index stability, buffer rules are applied as follows:

3.1.1

SECURITY SELECTION BUFFER
A security selection buffer of 50% is applied during the on-going index review.
For example, the MSCI World Enhanced Value Index targets 400 securities and the buffers
are applied between rank 201 and 600. The securities in the Parent Index with a value scorerank at or above 200 will be added to the MSCI World Enhanced Value Index on a priority
basis. The existing constituents that have a value score rank between 201 and 600 are thensuccessively added until the number of securities in the MSCI World Enhanced Value Indexreaches 400. If the number of securities is below 400 after this step, the remaining securities
in the Parent Index with the highest value score rank are added until the number of
securities in the MSCI World Enhanced Value Index reaches 400.

3.1.2

TURNOVER BUFFER
A turnover buffer of 50% is applied during the on-going index review.
For example, if the on-going rebalancing results in changing the weight of a security from x%
to y%, then the effective change in weight will be:
Effective pro forma constituent weight = x + (y-x)/2
The turnover buffer is not applied on deletions.

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MSCI ENHANCED VALUE INDEXES METHODOLOGY | JUNE 2017

3.2

ONGOING EVENT RELATED CHANGESThe general treatment of corporate events in the MSCI Enhanced Value Indexes aims tominimize turnover outside of Index Reviews. The methodology aims to appropriately
represent an investor’s participation in an event based on relevant deal terms and pre-event
weighting of the index constituents that are involved. Further, changes in index market
capitalization that occur as a result of corporate event implementation will be offset by acorresponding change in the Variable Weighting Factor (VWF) of the constituent.
Additionally, if the frequency of Index Reviews in the Parent Index is greater than thefrequency of Index Reviews in the MSCI Enhanced Value Index, the changes made to the
Parent Index during intermediate Index Reviews will be neutralized in the MSCI Enhanced
Value Index.
The following section briefly describes the treatment of common corporate events within
the MSCI Enhanced Value Indexes.
No new securities will be added (except where noted below) to the Index between Index
Reviews. Parent Index deletions will be reflected simultaneously.
EVENT TYPE

EVENT DETAILSNew additions to the Parent Index

A new security added to the parent index(such as IPO and other early inclusions)will not be added to the index.

Spin-Offs

All securities created as a result of thespin-off of an existing Index constituent
will be added to the Index at the time of
event implementation. Reevaluation forcontinued inclusion in the Index will occur
at the subsequent Index Review.

Merger/Acquisition

For Mergers and Acquisitions, theacquirer’s post event weight will accountfor the proportionate amount of shares
involved in deal consideration, while cash
proceeds will be invested across theIndex.
If an existing Index constituent is acquiredby a non-Index constituent, the existing© 2017 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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MSCI ENHANCED VALUE INDEXES METHODOLOGY | JUNE 2017

constituent will be deleted from the Index
and the acquiring non-constituent will not
be added to the Index.
Changes in Security Characteristics

A security will continue to be an Index
constituent if there are changes incharacteristics (country, sector, size
segment, etc.) Reevaluation for continued
inclusion in the Index will occur at thesubsequent Index Review.

Further detail and illustration regarding specific treatment of corporate events relevant tothis Index can be found in the MSCI Corporate Events Methodology book under the sections
detailing the treatment of events in Capped Weighted and Non-Market Capitalization
Weighted indexes.
The MSCI Corporate Events methodology book is available at:https://www.msci.com/index-methodology© 2017 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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MSCI ENHANCED VALUE INDEXES METHODOLOGY | JUNE 2017

APPENDIX I: CALCULATION OF THE FUNDAMENTAL VARIABLES
This appendix specifies the fundamental variables for the MSCI Enhanced Value Indexes
Fundamental Variable

Calculation Details

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

Cash Flow from Operations (CFO)Net cash receipts and disbursements resulting from the operations of
the company

For more details on the fundamental data, please refer to the MSCI Fundamental Data
Methodology (https://www.msci.com/index-methodology)© 2017 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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MSCI ENHANCED VALUE INDEXES METHODOLOGY | JUNE 2017

APPENDIX II: VALUE Z-SCORE COMPUTATION
If the value for variable EV/CFO is missing for any security, it is substituted by the value ofratio price-to-cash earnings (P/CE) for that security. Similarly, if the value for variable Fwd
P/E is missing for any security, it is substituted by the value of trailing price-to-earnings (P/E)
for that security. After the substitution, the value z-score is computed as mentioned in thetable below.
Case

DetailActionCase 1

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

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

Case 2

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

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

Case 3

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

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

Case 4

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

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

Case 5

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

Value z-score = 0.5*z1

Case 6

Security belongs to “Real Estate”
sectorValue z-score = z1

All three variables are missing (forsecurities not belonging to“Financials” or “Real Estate” sector)
Case 7

Both variables are missing (forsecurities belonging to “Financials”
sector)Value z-score = NULL

EV/CFO is missing (for securities© 2017 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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MSCI ENHANCED VALUE INDEXES METHODOLOGY | JUNE 2017

belonging to “Real Estate” sector)

The z1, z2 & z3 represent the individual variable z-scores.

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MSCI ENHANCED VALUE INDEXES METHODOLOGY | JUNE 2017

APPENDIX III: RULES TO DETERMINE FIXED NUMBER OF SECURITIESAT INITIAL CONSTRUCTION AND IN ONGOING REBALANCINGALGORITHM TO DETERMINE FIXED NUMBER OF SECURITIES AT INITIALCONSTRUCTION
Rank the securities in the proforma parent universe in the descending order of final valuescore© 2017 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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MSCI ENHANCED VALUE INDEXES METHODOLOGY | JUNE 2017

NumSec: Number of securities
Mcap: Float market capitalization
Rounding Off Rules:
Upward rounding off is done depending on NumSec Obtained in the Previous Box Step

If NumSec in Previous Step < 100, Nearest Rounding = 10 Securities



If NumSec in Previous Step > = 100 but < 300, Nearest Rounding = 25 Securities



If NumSec in Previous Step >= 300, Nearest Rounding = 50 Securities

ALGORITHM TO REEVALUATE FIXED NUMBER OF SECURITIES AT SEMI ANNUAL
REBALANCING© 2017 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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MSCI ENHANCED VALUE INDEXES METHODOLOGY | JUNE 2017

The following sections have been modified since May 2015:


Added a description for calculation of value score for the “Real Estate” sector in Section
2.2.1.



Updated the table to reflect the calculation of value score for the “Real Estate” sector in
Appendix II.

The following sections have been modified since August 2016:
Appendix IV in the previous version of the methodology book describing the Corporate
Events treatment has been deleted. The details on the Corporate Events treatment are
now included in Section 3.2.

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