Morgan Stanley Capital International Indexes MSCI

Morgan Stanley Capital International (MSCI) U.S. equity indexes are relatively new, but very important. They were created in 2003 with the help of index fund giant Vanguard. At the time, Vanguard was seeking an alternative to S&P indexes, and they ultimately chose MSCI.

MSCI's investable market is composed of three market capitalization segments: large cap, mid cap, and small cap. The company defines Large Cap Index as the 300 largest companies by full market capitalization in the investable market segment. The Mid Cap Index comprises the next 450 companies and the Small Cap Index consists of the remaining 1,750 companies. The large cap and the mid cap indexes are also combined to create a separate index of the 750 largest companies in the investable market segment, as ranked by full market capitalization.

MSCI uses buffer zones to manage the migration of companies from one market capitalization index to another. The purpose is to strike a balance between ensuring that the various indexes continue to accurately reflect the different investment styles and at the same time minimize stock turnover. The process also helps eliminate losses due to front runners. Those are rogue traders that try to anticipate changes in an index and jump in front of large trades before the price of the stock moves. Front running can cost index investors several million per year in lost profits.

The style characteristics for MSCI index construction are defined by using the three value variables and five growth variables. The objective of the value and growth indexes is to divide constituents of an underlying market capitalization index into a value index and a growth index, each targeting 50 percent of the free-float adjusted market capitalization of the underlying market capitalization index. Securities may be partially allocated to both value and growth indexes, depending on their score. The market capitalization of each size index will be fully represented in the combination of the value index and the growth index and will not be double counted.

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