Dear fellow shareholders,
As I write this letter in early March, we have just passed the one-year anniversary of Russia’s unprovoked and unjustified war in Ukraine, an event that has caused massive human suffering and significant disruptions around the world. We may eventually look back on the war as a hinge moment of history that permanently changed the global order. For now, it has forced leaders of all stripes to reimagine the future.
At MSCI, reimagining the future is part of our ethos. We constantly prepare for the unexpected while positioning ourselves to thrive in any environment. The past 15 months have offered a reminder that external challenges can quickly metastasize. Indeed, it is hard to remember another time in the modern era when the global economy and financial markets faced so many different headwinds simultaneously: from war and geopolitical tensions, to high inflation and rising interest rates, to energy and food crises. These are the short-term realities that everyone must navigate.
They have intersected with longer-term, structural trends that are reshaping the investment landscape, such as the expansion of index investing, the shift to outcome-oriented investment strategies, and the increased focus on climate change and its impact on portfolios.
MSCI has always tried to capture the next evolution of global investing. This mindset helps us produce mission-critical data, models, analytics and technology. Today, we see enormous growth opportunities across product lines, asset classes and client segments.
In 2022, these opportunities helped us achieve strong results despite significant market volatility. Among other highlights, MSCI delivered overall revenue growth of 10% — including recurring subscription-revenue growth of 16% — diluted earnings-per-share (EPS) growth of 23%, adjusted EPS growth of 15%, a record full-year retention rate of 95.2%, and share repurchases of nearly $1.3 billion. While the market unrest created headwinds and more variability for asset-linked fees, our index recurring subscriptions and transaction-volume businesses performed well through difficult operating conditions.
We have once again demonstrated the balance, adaptability and resilience of our all-weather franchise, which has enabled us to continue making crucial investments in long-term secular growth areas. These investments are helping us enhance our capabilities to meet the needs of a diverse client base.
To understand MSCI’s performance and potential, it is important to understand some of the key dynamics transforming our industry.
The Expansion of Index Investing
As recently as the 1990s, there was still tremendous skepticism about indexing among investors, analysts and journalists. Many people believed that index funds meant “guaranteed mediocrity.” Others thought indexing held great promise.
Henry A. Fernandez
Chairman and Chief Executive Officer
MSCI has always tried to capture the next evolution of global investing. Today, we see enormous growth opportunities across product lines, asset classes and client segments.
The optimists turned out to be right: Index investing is now increasingly popular across regions, asset classes and investor types. As of June 2022, we estimate that there were $13.5 trillion in assets under management benchmarked to MSCI indexes, of which roughly $4.5 trillion were passively managed.
I often compare index investing to automation. With passive funds, our clients use indexes to make elements of the investment process more efficient. Passive investing allows investors to focus more heavily on asset allocation.
So far, market-cap equity indexes have accounted for the vast majority of the index revolution. Moving forward, three of the biggest possible growth areas for indexing are non-market-cap indexing, direct indexing and fixed-income indexing.
During periods of financial turmoil, the unique strengths of MSCI’s Index business become even more salient. We offer indexes spanning different asset classes, exposures, styles and investment themes. This is now helping us meet investor demand for more specialized portfolio-construction tools.
Last year, for example, we launched Institutional Client-Designed Indexes, which will make it easier for asset owners and asset managers to build customized indexes that reflect their investment strategy. We also established a new partnership that will allow MSCI’s fixed-income indexes and portfolio analytics to integrate the advanced pricing models developed by MarketAxess Holdings, including their tradability and liquidity scores.
As our 2022 results confirm, MSCI has maintained strong momentum in the index space. For the full year, our Index segment posted a record retention rate, a record level of non-recurring sales, and a record level of revenue from futures-and-options licenses. We also completed our 36th consecutive quarter of double-digit Index subscription run-rate growth.
The Shift to Outcome-Oriented Investing
The expansion of indexing highlights a broader trend: More and more investors favor outcome-oriented investment strategies. This explains the growth of indexes that support particular investment objectives.
Factor indexes, for example, might target stocks that have demonstrated high growth, value, yield or momentum, or low volatility. Whereas thematic indexes target stocks associated with certain economic, technological and geopolitical megatrends that are transforming the way people live and work, such as digital innovation, robotics, renewable energy, biotechnology and cybersecurity.
Any discussion of outcome-oriented strategies must include environmental, social and governance (ESG) investing. For all the debate over ESG, it remains widely misunderstood.
Markets have always adapted to meet the changing needs and expectations of investors. Incorporating ESG criteria into the investment process helps investors address previously neglected risks and opportunities, and thus make more informed decisions.
In other words, ESG is not about politics or ideology. It is about building better portfolios. That is why investors continue to make ESG integration a priority.
A 2022 PwC report found that more than 80% of institutional investors in the U.S. and Europe “plan to increase their allocations to ESG products over the next two years.” Similarly, when the Index Industry Association surveyed investment-fund companies across the U.S., U.K., Germany and France, an “overwhelming majority” said that ESG had become more important to their investment strategy between 2021 and 2022.
These findings are reinforced by client demand for MSCI’s ESG solutions, which has stayed relatively strong. In 2022, we delivered particularly impressive ESG growth with banks, wealth managers and corporates.
To expand our ESG offerings, we introduced the Bloomberg MSCI China ESG Index Suite, which consists of nine separate ESG indexes. Collectively, they represent the first-ever Bloomberg MSCI index suite to track both the RMB-denominated bond market and the U.S.-dollar-denominated Chinese bond market.
We also launched MSCI Corporate Sustainability Insights, a solution that allows companies to measure and compare their ESG and climate data against their peers.
The Increased Focus on Climate Change
Of all sustainability factors, climate risks have received the most public attention. It is easy to see why: The destructive consequences of rising global temperatures have become more visible than ever before.
In 2022 alone, we witnessed record heat waves, record drought conditions, and record flooding across the planet. The United Nations Environment Program has projected that the current mix of global climate policies will lead to a temperature increase of 2.8 degrees Celsius by the end of this century. That is far above the 1.5-degree limit scientists believe is necessary to avoid the worst climate impacts.
What is true of sustainability risks in general is true of climate risks in particular: They can be material investment risks. In a recent Deutsche Bank investor survey, more than three-quarters of respondents said that climate change “either is already having a severe negative impact on the global economy, or will have it in the next 10 years if left unchallenged.”
As a result of these concerns, companies from all industries face growing pressure to reduce their carbon emissions, including their supply-chain emissions. For perspective, clean-energy investments must increase to more than $4 trillion per year by 2030 to achieve net-zero emissions by 2050, according to the International Energy Agency. This will require nothing less than a global economic transformation — which means it will also require a huge increase in both the quantity and the quality of climate-related data, models and analytics.
At MSCI, we are developing the high-quality solutions investors need to accelerate the decarbonization of their portfolios. In 2022, we introduced several new products that can help clarify climate-related risks and opportunities.
For example, our Total Portfolio Footprinting (TPF) tool provides carbon-emissions data on more than 4 million financial securities. TPF has already played an essential role in helping us close strategic deals with asset managers, asset owners, banks, insurance companies and others.
Another new MSCI solution can help financial firms align with the European Banking Authority’s ESG Pillar 3 prudential framework, which requires them to disclose climate risks. Meanwhile, MSCI Climate Action Indexes pinpoint companies across industries that are taking concrete steps to reduce their emissions and reimagine their operations for a net-zero world.
Powered by such wide-ranging solutions, Climate remains our fastest-growing segment. For the full year, we delivered 80% Climate run-rate growth across our product lines, including 94% growth in the Americas, while posting a 97.8% Climate retention rate.
Climate-focused investors depend on analytics to identify key drivers of risk and return. So it is not surprising that climate products have become an important source of growth for MSCI’s Analytics segment. In 2022, both our climate and reporting sales in Analytics hit new full-year highs. We also achieved record levels of full-year recurring sales and recurring net-new sales in equity portfolio analytics.
Looking Ahead: Opportunities and Enablers
We see considerable opportunities in many other areas, such as private assets. Investors have been steadily increasing allocations to private equity, private credit, real estate and infrastructure, and MSCI is well positioned to meet their needs. A State Street survey conducted in late 2022 found that “68 percent of investors will continue to grow private markets allocations in line with current targets, despite rate rises reducing the attractiveness of leveraged strategies.”
MSCI aims to become the leading facilitator of transparent markets for private assets, which have historically been somewhat opaque. That is what motivated our 2021 acquisition of Real Capital Analytics. Last year, we officially brought together our real-estate and infrastructure product lines under a combined segment known as MSCI Real Assets. As of June 2022, it provided fund and property data for more than $31 trillion worth of assets around the world.
We have also developed innovative climate tools for private assets through our collaboration with Burgiss. As of early 2022, one of these tools offered climate data on around 50,000 private companies and more than 6,000 private-equity and private-debt funds.
Our most vital enablers remain data and technology. With that in mind, MSCI is undergoing a tech-driven data transformation to help improve our products and services.
In December 2022, we expanded our strategic partnership with Microsoft to support our new MSCI ONE technology platform, which is built on Microsoft Azure. A month later, we announced another strategic partnership, with Google Cloud, to build an investment data-acquisition and data-development platform. The new platform will make it easier for our clients to translate raw data into actionable insights.
Of course, the foundation of MSCI’s success has always been our culture — the values and behaviors that define who we are and how we work together while serving our clients. We have instilled a culture of diversity, inclusion, empowerment, collaboration, trust and accountability across our operations. These principles and character traits are inseparable from our performance as a company.
Peter Drucker famously said that culture eats strategy for breakfast. At MSCI, we recognize that culture makes strategy possible. Our own culture has helped us attract, develop and retain exceptional talent, which in turn has helped us identify and capitalize on new opportunities for growth. Even as our strategy evolves, our culture will continue to underpin everything we do.
Looking ahead, we cannot know when inflation will subside, how high interest rates will rise, when the war in Ukraine will end, or whether the world economy will fall into recession. But we do believe that MSCI’s unique competitive advantages will continue to set us apart.
Sincerely yours,
Henry A. Fernandez
Chairman, Chief Executive Officer and Shareholder
Read the original letter here.
