Equity Index Methodology

Equity Index Overview

MSCI Index Methodology

Aspects of MSCI's index methodology that are common to all index families are described in the following documents:

MSCI Index Calculation Methodology (May 2006)

MSCI Corporate Events Methodology (September 2005)

MSCI Index Level Ratios Methodology (May 2006)

See individual product pages for product-specific methodology documentation.

Definition of Terms for MSCI Indices

Country Indices
To construct an MSCI Country Index, every listed security in the market is identified. Securities are free float adjusted, classified in accordance with the Global Industry Classification Standard (GICS ® ), and screened by size and liquidity. MSCI then constructs its indices by targeting for index inclusion 85% of the free float adjusted market capitalization in each industry group, within each country. By targeting 85% of each industry group, the MSCI Country Index captures 85% of the total country market capitalization while it accurately reflects the economic diversity of the market.

Regional and Composite Indices
MSCI maintains a consistent index construction and maintenance methodology for all of its international equity indices enabling MSCI to aggregate the MSCI Country Indices into regional and global indices. Maintaining a consistent policy in both the developed and emerging markets is crucial in the calculation of combined emerging and developed market indices like the All Country series.

MSCI also offers small cap, value/growth indices, indices calculated on GDP weights, indices hedged to the various currencies, custom indices, as well as sector and industry indices.

All Country (AC)
MSCI All Country Indices represent both the developed and the emerging markets for a particular region. For example, the MSCI All Country Far East Index includes both developed markets such as Hong Kong and Singapore and emerging markets such as Indonesia and Thailand. The MSCI All Country World Index includes 48 markets.

Developed Markets (DM) & Emerging Markets (EM)
MSCI covers 23 developed and 33 emerging market country indices. If there is no designation (such as "EM" or "AC") before a regional or composite index, the index consists of developed markets only.

Free
On May 31, 2002, the second and final phase of the implementation of the Enhanced Methodology in the MSCI Standard Index Series was completed. Therefore, all MSCI International Equity Indices are fully adjusted for free float as defined in the Enhanced Methodology Book and, all MSCI International Equity Indices, regardless of 'Free' branding are constructed and managed with a view to being fully investable from the perspective of international institutional investors.

In order to more clearly brand the MSCI regional Emerging Market and All Country Indices, MSCI implemented the following index naming convention as of the close of January 29, 2004:

MSCI renamed all regional Emerging Market and All Country Indices that have the suffix Free by deleting the word "Free". Therefore, for example, the following indices were renamed:

  FROM                                       TO
  Emerging Markets Free (EMF)                Emerging Markets (EM)
  EMF Latin America                          EM Latin America
  All Country World Index Free               All Country World Index
  All Country Far East Free ex Japan         All Country Far East ex Japan

For an exhaustive list of MSCI indices to be renamed, please contact MSCI Global Client Service. MSCI intends to maintain the current branding of all Developed Market Indices including: Singapore Free, EAFE Free, World Free, Pacific Free, Pacific Free ex Japan, and Far East Free.

The continued "Free" branding for certain Developed Market Indices recognizes that these indices have histories different from the similar index that does not have the suffix "Free". Otherwise, these indices have the same current constituents and current performance. For example, the MSCI EAFE and EAFE Free Indices now have exactly the same constituents and performance. However, due to investment restrictions on foreign investors in the past, in Singapore, Switzerland, Sweden, Norway and Finland, which were recognized in EAFE Free, but not in EAFE, the history of the two indices is different.

Historically, the MSCI Free indices reflected investable opportunities for global investors by taking into account local market restrictions on share ownership by foreigners. These restrictions may have assumed several forms: (1) specific classes of shares excluded from foreign investment; (2) specific securities or classes of shares for an individual company may have had limits for foreign investors; (3) the combination of regulations governing qualifications for investment, repatriation of capital and income, and low foreign ownership limits may have created a difficult investment environment for the foreign investor; and (4) specific industries, or classes of shares within a specific industry, may have been restricted to foreign investors.

Euro and Pan-Euro
The narrow MSCI Euro and Pan-Euro Indices are subsets of the Standard broad benchmarks for Europe, comprising the largest and most liquid securities. The MSCI Pan-Euro Index is the narrower version of the MSCI Europe Index while the MSCI Euro Index is the narrower version of the MSCI EMU Index. These narrow indices capture 90% of their broad benchmark counterparts' market cap, with significantly less constituents. Country and industry weights in the narrow Euro indices are respected relative to the broad benchmarks. This allows the MSCI Pan-Euro and Euro Indices to track the broad benchmarks accurately with significantly fewer securities, making them ideal for derivative trading.

Small Cap
The objective of the MSCI Small Cap Indices is to represent the business activities of small cap companies across developed markets. MSCI selects the most liquid securities relative to their market capitalization, and targets for index inclusion 40% of the full market capitalization of the eligible small cap universe within each industry group, within each country. Effective after the close of trading on September 28, 2001, MSCI broadened the eligible companies' full market capitalization range from USD 200 ~ 800 million to USD 200 ~1,500 million and free float adjusted the market capitalization of the index constituents.

The broadened full market capitalization range will enable the index to reflect a more diverse and liquid set of small cap opportunities for global investors. After the securities are selected, their market capitalization is free float-adjusted to improve the investability of the index by including only those shares that are freely available to foreign investors.

MSCI Small Cap Methodology and Pro Forma Constituent list section of the web site

Value & Growth
The MSCI Global Value and Growth Indices cover the full range of developed, emerging and All Country MSCI Equity Indices. As of the close of May 30, 2003, MSCI implemented an enhanced methodology for the MSCI Global Value and Growth Indices featuring a number of innovations, including:

A two-dimensional framework for style segmentation in which value and growth securities are specified using different attributes
The use of eight different variables (three for value and five for growth) to more accurately reflect value and growth styles
A partial attribution of index market capitalization for securities depicting either both value and growth characteristics or neither of these characteristics, to each of the value and growth indices, unless one of the style characteristics clearly dominates
Buffer zones that reduce index turnover caused by the temporary migration of securities from one style index to the other

The objective of the index design is to divide constituents of an underlying MSCI Standard Country Index into a value index and a growth index, each targeting 50% of the free float adjusted market capitalization of the underlying country index. Country Value/Growth indices are then aggregated into regional Value/Growth indices. Prior to May 30, 2003, the indices used Price/Book Value (P/BV) ratios to divide the standard MSCI country indices into value and growth indices. All securities were classified as either "value" securities (low P/BV securities) or "growth" securities (high P/BV securities), relative to each MSCI country index.

Global Industry Classification Standard (GICS ®)
As the world's leading provider of global indices and benchmark-related products and services, MSCI, in collaboration with Standard & Poor's, developed the Global Industry Classification Standard (GICS). GICS consists of 10 Sectors, 24 Industry Groups, 67 Industries (As of April 28, 2006) and 147 Sub-Industries.

MSCI 10/40 Equity Indices^SM
The MSCI 10/40 Equity Indices are derived from MSCI Standard, Value/Growth and Small Cap Equity Indices.

MSCI's proprietary 10/40 Equity Index Methodology is based on extensive simulations and client consultations. Key features and benefits of MSCI's 10/40 Index Methodology include:

Index Stability
Minimized tracking error versus the Parent index
Minimized turnover

For more information, please click here for a product fact sheet, or contact MSCI Client Service for a copy of the MSCI 10/40 Index Methodology.

All Country Sectors (ACS)
MSCI All Country Sectors (ACS) is a product that offers Sector, Industry Group and Industry level market capitalization and performance for all major global, regional and country indices covered by MSCI.

Information
MSCI is a leading provider of global indices and benchmark-related products and services to investors worldwide. Morgan Stanley, a global financial services firm and a market leader in securities, asset management and credit services, is the majority shareholder of MSCI, and The Capital Group Companies Inc., a global investment management group, is the minority shareholder.