U.S. Markets

If you can't beat 'em: Stockpickers targeting index-provider MSCI

NEW YORK (Reuters) - Stockpickers are jumping into the boom in passive investing by loading up on shares of index-provider MSCI Inc, whose products are the basis for dozens of popular exchange traded funds.

The MSCI logo is seen in this June 20, 2017 illustration photo. REUTERS/Thomas White/Illustration

Funds that increased their position in the company during the last quarter included the $116 billion Fidelity Contrafund, the $4.7 billion T Rowe Price Small Cap Growth Equity fund and the $1.5 billion Buffalo Discovery fund, Lipper data shows.

Overall, 71 funds added a stake in the company to their portfolios in the last quarter, a 97 percent jump from the previous quarter, according to Morningstar data.

The increased interest from institutional investors has helped send shares of MSCI up 43 percent for the year to date, to a record high of $115.37 on Aug. 28th. The shares rose 0.7 percent in early trading on Thursday.

“Active managers have not done a good job of diffusing the argument that you would be better off in a passive fund, and MSCI is one of the clear beneficiaries of that,” said Keith Hosum, an analyst at Cleveland-based Northcoast Research.

MSCI makes its money chiefly by licensing its indexes to fund providers such as BlackRock Inc, which pay the company a percentage of the assets invested in their products.

Approximately 33 percent of assets invested in exchange-traded funds worldwide are based on indexes belonging to larger rival S&P Global Inc, compared with about 20 percent based on MSCI indexes, according to Hamzah Mazari, an analyst at New York-based Macquarie Capital.

MSCI has a greater presence internationally, with about 80 percent of its revenues coming from international indices, compared with less than half for S&P. That overseas presence should continue to boost its shares as fund companies create more internationally focused ETFs, Mazari said, and investors shift away from U.S. stocks at a time when the market is widely seen as expensive.

“The U.S.-based ETF market is becoming oversaturated, and there’s a greater opportunity set in international markets,” Mazari said, noting that shares of MSCI trade at a premium due to market rumors that S&P Global could acquire the company.

Investors have tried other ways to play the ETF boom, including buying shares of currency-focused ETF provider WisdomTree Investments Inc, said Todd Rosenbluth, director of ETF research at New York-based CFRA.

While MSCI remains the best “pure play” in the industry, it faces the risk that fund companies such as BlackRock may expand the relatively small number of funds that are based on indices it creates in-house, Rosenbluth said.

Reporting by David Randall; Editing by Lauren Young and Dan Grebler