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MSCI, a leading global index provider, has launched the MSCI Quality Mix Indices, an equal weighted combination of the provider’s value weighted, minimum volatility and quality indices in a single composite index.
The indices aim to represent the performance of quality, value and low volatility risk premia strategies across global equity markets.
Baer Pettit, Managing Director and Global Head of the MSCI Index Business, said: “We are delighted to bring to the market a set of new indices designed to reflect the beta represented by combining quality with value and low volatility strategies.”
He added: “The new MSCI Quality Mix Indices are another example of our ability to deliver innovative index tools to meet the increasingly sophisticated needs of our clients.”
Many active strategies emphasise quality, value and low volatility as important factors in their security selection and portfolio construction. Whilst these active strategies typically go beyond passive exposure to quality, value and low volatility securities to include active stock selection and the use of leverage, their beta component could be represented by the quality, value and low volatility risk premia.
Recent empirical academic research has shown that stocks with high quality, value and low volatility characteristics – characteristics mirrored in the new indices – have historically provided higher long-term risk-adjusted return (for example, see the analysis between 1976-2011 in a study by Frazzini, Kabiller and Pedersen, published in 2012, titled ‘Buffett’s Alpha’).
Indeed, the indices’ simulated performance is strong. For example, between 1988 and 2013 the MSCI World Quality Mix Index delivered an annualised total return of 9.8% versus 7.3% for the conventional MSCI World Index, with a total risk of 13.2% versus 15.4% for the MSCI World Index, resulting in a better long-term risk-adjusted return for the MSCI World Quality Mix Index during this time period.
There are currently nine indices in the new series, they are:
MSCI ACWI Quality Mix Index
MSCI World ex USA Quality Mix Index
MSCI Emerging Markets Quality Mix Index
MSCI Europe Quality Mix Index
MSCI World Quality Mix Index
MSCI USA Quality Mix Index
MSCI AC Asia ex Japan Quality Mix Index
MSCI UK Quality Mix Index
MSCI Japan Quality Mix Index
The indices have been designed for use as benchmarks or as the basis for index-linked financial products such as exchange-traded funds (ETFs) and structured products.
A number of the MSCI’s individual risk premia indices are already investable in ETF format. These include the MSCI USA Value Weighted and the MSCI USA Quality indices, which are tracked by the iShares MSCI USA Value Factor ETF (VLUE) and iShares MSCI USA Quality Factor ETF (QUAL), respectively, both of which are listed on the NYSE Arca.