MSCI Similarity Score

The MSCI Similarity Score offers wealth management firms a streamlined way to assess portfolio alignment using a single, common score to compare outputs from investment teams to client portfolios. This proprietary scoring model focuses on portfolio risk and return through a factor-based approach rather than exact holdings.

Below is a summary of the MSCI Similarity Score’s methodology as presented in a recent thought leadership paper published by the MSCI research team.

Key points

• Balancing personalization and efficiency: The MSCI Similarity Score helps wealth managers balance client customization with model portfolio efficiency by aligning portfolio behavior rather than exact holdings.
• Scalable alignment tool: Scored from 0 to 100, this tool provides a simple, standardized measure for overseeing multiple portfolios, to help enable consistency at scale.
• Enhanced transparency and confidence: By focusing on behavioral alignment, the MSCI Similarity Score gives clients clearer insights into portfolio alignment, fostering confidence.

With rising demand for personalized solutions, clients expect portfolios that reflect their unique goals. Wealth managers must balance these expectations with the efficiency of model portfolios. The MSCI Similarity Score bridges this gap by enabling firms to align diverse client portfolios with model strategies – without focusing on exact holdings replication.

How it works: Behavioral alignment

The shift towards greater personalization is putting pressure on traditional model-driven approaches. While model portfolios help wealth managers streamline operations, a one-size-fits-all model doesn’t always satisfy individual client requirements. Every client has unique goals and risk appetites, which means that some level of misalignment between client portfolios and models is inevitable. But instead of focusing on exact asset replication, what if we shifted the focus to how similarly these portfolios might behave?

Enter the MSCI Similarity Score: A scalable alignment tool

Using a factor-based framework, the MSCI Similarity Score provides wealth managers with a consistent, easy-to-read metric that evaluates the behavioral alignment between a client’s portfolio and its corresponding model. Scored from 0 to 100, it delivers an intuitive gauge: the closer to 100, the stronger the alignment. And unlike traditional measures, this metric emphasizes factors over precise holdings, meaning wealth managers can assess portfolio alignment without needing to dive into every individual asset.

Practical example: Realigning for optimal similarity

Consider a hypothetical client portfolio invested in a selection of ETFs. The portfolio differs from the firm’s model allocation – a high-quality global equity model – yet still achieves a strong alignment score of 87.9. Here’s why: rather than evaluating holdings side by side, the MSCI Similarity Score assesses how the portfolio behaves in terms of factor risks, like market movements and economic conditions. By using factor exposures, returns and covariances, MSCI’s metric accounts for portfolios that behave similarly in the market even when holdings don’t match exactly.

The starting point: Client vs. model portfolio allocations

Specific funds and ETFs are for illustration only and do not constitute recommendations.

The hypothetical U.S.-based wealth-management firm uses the MSCI Similarity Score for a client portfolio that includes the Vanguard Total Stock Market ETF (VTI). In contrast, the firm’s model emphasizes ETFs like the iShares MSCI USA Quality Factor ETF (QUAL). The portfolios differ significantly in composition.

MSCI Similarity Score breakdown example

The global-equity factor represents the global-equity market portfolio. The U.S. equity factor represents additional risk and return arising from exposure to the U.S. equity market, net of global-equity risk. The equity-beta factor represents common variations in returns due to the market that are not captured by the global-equity factor.

The MSCI Similarity Score starts at 100, representing full alignment. Differences in risk contributions from various factors then reduce this score. For instance, as shown in the chart below, the global-equity factor has the largest impact, reducing the score by 10.7%. Meanwhile, other factors like equity beta contribute minor reductions. These factor-specific contributions collectively drive the final score. Even with different holdings, an alignment score of 87.9 indicates strong behavioral alignment with the model.

Why the MSCI Similarity Score matters

The MSCI Similarity Score enables wealth managers to deliver personalized solutions at scale. It minimizes the need for asset-specific comparisons and provides a clear metric for how closely a portfolio tracks a model strategy. The score offers:

• Scalability: Applies across multiple portfolios, helping firms manage thousands of client portfolios efficiently.
• Transparency: Clients gain insights into how their portfolios align with their goals, building their confidence in their investments.
• Consistency without compromise: With a focus on factors, wealth managers can customize solutions without sacrificing model alignment.

A new perspective: Behavioral alignment over exact replication

The MSCI Similarity Score enables wealth managers to prioritize behavioral alignment, targeting for portfolios to behave similarly even when holdings differ. As wealth management continues evolving, tools like the MSCI Similarity Score provide an efficient pathway to deliver personalized investment solutions at scale.

For an in-depth look at how the MSCI Similarity Score can redefine portfolio alignment at your firm, download the full report, Redefining Portfolio Alignment for Wealth Managers.