MSCI boosts flexibility with analytics enhancements

Asset managers have been using MSCI risk models for years—the vendor has been in this game for four decades—and according to the most recent P&I rankings, 97 of the top 100 largest money managers are MSCI clients.

In something of a cultural change, though, MSCI is looking past simply offering its models for consumption. The vendor is now opening the hood and providing the underlying data to clients. It’s all part of a move to be more flexible to the customer’s needs, though offering the underlying data running the models is a gamble, as it will expose the quality of that data.

It’s a challenge that MSCI feels it’s ready to tackle, Brian Schmid, managing director of analytics product management, tells WatersTechnology.

“If you looked back five years ago, I don’t know that we’d be so willing to do this; why let the clients build the models themselves when we build the model and we’d like to sell the model?” he says. “Now it’s more that we’re highly confident that we build the best models, but in addition to that, if you want to use the underlying data you’ll be impressed with the quality of the data.”

Jorge Mina, managing director of analytics for MSCI, says asset managers are becoming more complex in their investment structures and as a result they need to be more flexible in order to adjust strategies while keeping costs down. He says some will just want the models and not care for the data, while others want to build the model while shipping out the processes of purchasing, normalizing, and cleansing the data.

“It’s all about working with the infrastructure and investment process that the client has,” Mina says. “Their legacy infrastructure might be different, their investment process might change, so we try to be flexible. Since everything we build is pretty modular, it’s been a natural evolution; we don’t have to do a lot of work to offer that level of flexibility.”

Adds Schmid: “Not only are we doing this for the purpose of verifying the models, but also if clients want to do this on their own, or they disagree, or have preferences in terms of their methodologies, they can build it themselves.”

Connecting Macro to Portfolio

MSCI has also recently bolstered its scenario analysis and stress-testing capabilities.

In 2010, MSCI bought RiskMetrics Group, and has built a fleet of risk analytics and stress testing tools. Most recently, though, MSCI has added a macroeconomic model that ties into the stress-testing product in order to provide users with a view on inflation and gross domestic product (GDP) calculations.

“We’ve developed a macroeconomic model where we are creating GDP and inflation forecasts,” Schmid says. “A macroeconomic model on its own isn’t the novel thing; linking those macroeconomic factors—GDP and inflation, with coverage across 23 countries—to the asset-level factors that our applications know—credit spreads, interest rates, equities, market-risk factors—is the differentiator.”

Mina says that by tying a GDP and inflation model to asset-level factors, users can better connect high-level macro views to their portfolios—e.g., if GDP and inflation move this way in Japan, then this is what would happen to equity prices, interest rates and spreads in these countries.

“With that, you can then shock your portfolio. So you go from a macroeconomic view of the world to what would happen to a specific portfolio of financial instruments that you happen to hold,” he says. “We can come up with forecasts of GDP and inflation and we think we’re good at that, but lots of people do that. The key problem that we solved is that connection between the macro shocks and the financial variables.”

Mina adds that MSCI is also in a bit of a tutorial phase with the product’s evolution as it has been showing clients how to construct a Brexit analysis, should the UK leave the European Union, for example, or a scenario test for a China hard landing should a recession grip the country.

“Chief investment officers look at inflation; risk officers look at the day-to-day analytics, credit spreads and interest rates,” Schmid says. “This solves both use-cases in a research-driven way.”

At both the Risk Awards 2016 and the Sell-Side Technology Awards 2016, MSCI won best market risk product awards.

Anthony Malakian, Waters Technology Magazine.