🗞 The Most Underrated Moat in Capital Markets?

Happy Sunday! 👋 

Today, we’re taking a look at perhaps one of the most underrated moats in capital markets — MSCI.

Let’s dive in!

Featured Story

The Most Underrated Moat in Capital Markets?

A New Index Provider

In the early 1960s, enthusiasm for international investing was rising.

Capital markets had finally recovered from a 25 year slump following the crash of 1929, and international trade was heating up. With each passing year, more and more money was moving across borders and US investors, in particular, were trying to get exposure.

Recognizing this trend, one burgeoning asset management firm called Capital Group, led by Jonathan Bell Lovelace, decided to expand their footprint in 1962 and open their first international office in Geneva, Switzerland. This served as the foundation for what would eventually become Capital International.

At the time, statistical information on international markets was scarce. Back in the United States, very few investors had access to data on companies across the Atlantic. So to capitalize on this information barrier, in 1968, Capital International leveraged the data they had on companies abroad by creating a first-of-its-kind global equity benchmark called the EAFE Index (Europe, Australasia, and the Far East).

This quickly caught the attention of asset managers back in the US, and before they knew it, Capital International had clients begging for even more global indices. Over the following two decades, they launched more and more regional and industry-specific indices, and by the mid 1970s, they had become the de-facto method for measuring the performance of international markets.

One of Capital International’s early clients was the giant investment bank Morgan Stanley. By 1986, Morgan Stanley had become so impressed with Capital International’s leadership position in international indices, that they made an offer to acquire their commercial rights. Thus, MSCI (Morgan Stanley Capital International) was born.

After a little over two decades operating under Morgan Stanley, ~15% of MSCI’s shares were sold to the public in a 2007 IPO. By 2009, Morgan Stanley had relinquished the remainder of their stake in the business and MSCI was officially an independent public company.

The Engine Behind the Index

Today, the industry for market indices is run largely by three companies: S&P Global (also owns Dow Jones Indices), London Stock Exchange Group (owner of the FTSE Russell Indices), and MSCI.

Of those, MSCI is the undisputed leader for international and emerging market equity benchmarks.

You might be wondering, why is such a large industry dominated by only a few companies? After all, how hard can it be to come up with a list of companies?

This is perhaps one of the most under-appreciated aspects of MSCI’s business. Building and maintaining an index isn’t as simple as it might seem on the surface. You can’t just Google the largest companies in a country, throw them into a spreadsheet, and sell it. If you actually take a look under the hood at MSCI’s operations, you’ll see that this is more of a data engineering company than anything else.

MSCI operates close to 300,000 equity and fixed-income indices. To properly maintain those, it requires ingesting and processing massive volumes of public, private, and messy unstructured data every day. The challenge for MSCI is filtering through that data to build a specific list of securities that are actionable for their clients.

For example, here are a few of the data challenges MSCI faces:

• Free-float and liquidity: MSCI can’t find all the data they need with a simple Google search. Oftentimes, they have to work directly with the local stock exchanges to get access to certain data feeds. For example some of the considerations for MSCI (especially in emerging markets) are how many shares are actually available to the public? How many shares are actively trading hands? What percentage of the float is a foreign investor allowed to own? If they don’t have that data or the data is inaccurate, MSCI’s clients might not be able to replicate the index.

• Tracking Corporate Actions: Companies are constantly changing. They perform stock splits, reverse stock splits, mergers, spinoffs, special dividends, etc. MSCI is responsible for tracking these in order to adjust their indices appropriately before the next day’s opening bell so that billions of dollars in funds don't experience a tracking error.

• Rebalancing: Typically indices rebalance on a quarterly basis, so MSCI has to re-evaluate their entire investable universe against the specific rules and parameters for each index. That doesn’t just mean assessing the companies in the existing index, that means scanning every company that could qualify for inclusion. This rebalancing then triggers a multi-billion-dollar game of musical chairs as tracking funds buy or sell based on the refreshed list.

While some of these data endpoints can be pulled in through automated pipelines, many still require manual aggregation and cleaning. This requires MSCI to employ thousands of data analysts who collect, verify, and standardize data so that they can deliver it to their customers.

A Tollbooth on Capital Markets

If you ever see the name “MSCI” mentioned by a fund, chances are they’re paying for it.

Whether it’s an ETF issuer, a mutual fund operator, a pension fund, an endowment, a hedge fund, or any other type of asset manager, they’re likely paying MSCI in some way. Sometimes that’s a commercial display license to benchmark against their indices, sometimes it’s a simple data subscription fee for internal analysis, or for tracking funds, it’s typically asset-based fees with built-in AUM hurdles.

In any case, each of these methods creates high-margin index revenue for MSCI. In total, the index business accounts for 57% of MSCI’s overall sales.

Over the years, MSCI has acquired dozens of ancillary businesses that have helped them push beyond indices and into other revenue streams.

Analytics:

The deal that sparked this push was MSCI’s 2004 acquisition of Barra for $816 million. Barra was the gold standard for quantitative risk modeling and is what really led MSCI into the analytics and risk modeling industry that they now dominate. MSCI followed that acquisition up with a $1.55 billion acquisition of RiskMetrics in 2010. Combined, Barra and RiskMetrics make up the vast majority of MSCI’s “Analytics Revenue”.

While analytics might sound like an entirely separate business from building and maintaining market indices, the two actually go hand-in-hand for clients. The index business helps clients properly define what the actual market/benchmark is, while the analytics segment allows asset managers to model out how their strategies might compare or deviate from those benchmarks.

ESG & Private Assets:

MSCI’s sustainability and private asset segments are basically extensions of their core index and analytics businesses, just geared towards different asset classes.

On the sustainability side, MSCI collects thousands of granular ESG-focused data points (like carbon emissions, employee turnover, board diversity, etc.) to give ratings and build indices for companies that fit into certain buckets. MSCI developed this dataset in response to customer demand. With more and more investors looking to invest in ESG-friendly companies over the last decade, MSCI saw the opportunity to apply their expertise in data aggregation and processing to a new asset class.

The same applies for private markets. Whether it’s venture capital, private equity, private credit, or even real estate, asset managers are clamoring to get their hands on as much data as possible about private assets. To meet this demand, MSCI has been active on the M&A front including two notable acquisitions so far in 2026 alone with Vantager and PM Insights.

One massive benefit when it comes to MSCI’s private market business is that this data is harder to come by since private companies don’t have the same reporting requirements as public companies. To collect data on private assets MSCI often employs a “give-to-get” model where participants exchange their private deal data in exchange for access to others. This makes it very difficult for competitors to replicate MSCI’s dataset.

With most of MSCI’s costs being in data collection, the business ends up being exceptionally profitable at scale.

Once an index is up and running, MSCI has essentially zero incremental costs to add a new customer. Let’s take the iShares MSCI South Korea ETF for example, which is up 241% over the last 12 months. Every time someone buys shares of that ETF, BlackRock (the owner of iShares) pays a small portion of that to MSCI. That costs nothing to MSCI, as BlackRock is the one marketing the fund to their clients.

That’s one of the primary reasons why MSCI has been able to expand their profit margins by so much as the business has scaled.

That’s all for this week. 

If you have any questions about Fiscal.ai or any feedback for the newsletter, feel free to reply to this email!