MSCI Inc. MSCI Moat

Key data

The moat

An asset owner does not buy an index. It writes a mandate, and the mandate names a benchmark. From that moment the benchmark sits in the investment policy statement, the manager's contract, the consultant's evaluation and a track record that only exists relative to that one series. For an exchange-traded fund it is harder still, because the benchmark is named in the prospectus and changing it means regulatory filings, disclosure to holders, and a stretch of deliberate tracking error while the portfolio is rebuilt. Nobody does that to save a basis point.

That switching cost rests on something older. MSCI became the standard because enough people already used it that choosing anything else required an explanation, and the two reinforce each other: the standard writes the mandate language, and the mandate language locks the standard in.

What the moat produces is pricing power on a subscription that costs almost nothing to deliver. Retention is the number that shows it. Of every hundred dollars of index revenue on the book a year ago, ninety-seven and a half are still there.

Widening or narrowing

Retention moved the right way, from 96.0% to 97.5% in the index business and from 94.4% to 95.3% across the company. Two dates is thin and the read on that metric is provisional, but both moved together and the index line moved most.

The longer series says something different about what is actually growing.

*Assets under management in exchange-traded funds benchmarked to MSCI equity indexes, company-reported at each quarter end.*

Fifty-eight percent in six quarters, no inflection, no quarter down. Against that, the two revenue lines inside the index business moved very differently: the fee charged on those assets rose 25.2% and the subscription line rose 11.4%. The subscription line is the moat. The fee line is a percentage of an asset base that markets set.

The overrated case. Asset-based fees are now 27% of index run rate and they are not a moat at all. MSCI earns roughly 3.4 basis points on $2.82T, and that arithmetic runs in reverse just as smoothly. A quarter of the index business is a levered position in global equity levels, and a reader shown "run rate up 12%" without that split has been shown the wrong number.

MSCI holds a thin slice of a wide profit pool, three and a half basis points on assets where the fund sponsor keeps the larger share. It is also the slice with no marginal cost and no negotiation, which is why it is worth more per dollar than the sponsor's. Outside the index business nothing is compounding: analytics grew 5.8%, sustainability 1.9%, private assets 8.0%.

The index moat is widening. The company around it is not.