In a bid to shine a light on factor investing, MSCI has unveiled two new investor tools: the ‘MSCI FaCS’, a new factor classification standard; and ‘MSCI Factor Box’, an updated style box designed to reflect a modern approach to investing.
MSCI’s new factor classification standard can also be aggregated at the fund level to analyze and compare factor exposures between ETFs.
The indexing firm, which is a leading provider of smart beta indices to the ETF industry, says the new tools may assist investors in implementing and measuring factor investing strategies.
Commenting on the launch, Peter Zangari, global head of research and product development at MSCI, said: “We consulted with a wide base of clients across institutional and wealth who are increasingly turning to factor-based strategies. Our latest innovation is the first standard classification that allows a broader investment audience to interpret factor investing through a common language.
“We are leveraging our history and deep expertise in research-driven factor innovation, along with cutting-edge technology, to bring a standard measurement of factors to a broader range of investors.”
MSCI FaCS is a framework for evaluating, implementing and reporting factor allocations, based on commonly considered factors that have historically driven performance. It includes an extensive global equity factor structure – eight factor groups and 16 factors for more than 70,000 global securities.
The factor classification can be viewed at the security level for stock selection, but can also be aggregated at the fund level to analyze and compare factor exposures. In this way, investors will be granted deeper insight into relative factor exposures of various ETFs.
The eight factor groups (and the factors within them) are as follows: value (book-to-price, earnings yield, and long-term reversal); size (mid-cap, and size); momentum (momentum); quality (leverage, investment quality, earnings variability, earnings quality, and profitability); yield (dividend yield); volatility (beta, residual volatility); growth (growth); liquidity (liquidity).
The MSCI Factor Box is powered by MSCI FaCS and provides a visualization designed to easily compare factor exposures between funds and benchmarks. It includes six factors (value, low size, momentum, quality, yield, and low volatility) which have historically demonstrated excess market returns over the long run.
According to MSCI, the Factor Box may help investors to make better-informed decisions on their fund selection, fund monitoring and holistic portfolio analysis based on their fund exposures and investment objectives.
“We believe standardization of factor definitions and measurement will allow a wider array of investors to take advantage of factor based approaches as part of a balanced and diversified portfolio,” added Zangari. “With the launch of MSCI FaCS and MSCI Factor Box, we are bringing much needed transparency as the demand for factor investing continues to grow.”