Chit Chat Stocks - MSCI: An Asset-Light Compounder At a Reasonable Price (Ticker: MSCI)

Episode Date: May 20, 2026

On this episode of Chit Chat Stocks, we go through another Ryan Research Episode covering MSCI Inc. We discuss: (00:00) Introduction (03:15) The Importance of Indexes and Benchmarking (06:12) Challenges in Building and Maintaining Indexes (09:25) Revenue Generation and Business Model of MSCI (12:19) The Role of AI in Index Management (15:22) Future Growth and Market Trends for MSCI (31:33) The Role of MSCI in the ETF Market (33:43) Growth Potential and Market Trends (35:01) Competitive Advantages of MSCI (40:44) Comparing Moats: Stock Exchanges vs. Index Providers (45:50) Valuation Insights and Future Projections (51:52) Investment Decisions and Market Considerations ***************************************************** Subscribe to our newsletter, Emerging Moats: emergingmoats.com  ********************************************************************* Chit Chat Stocks is presented by Interactive Brokers. Get professional pricing, global access, and premier technology with the best brokerage for investors today:  https://www.interactivebrokers.com/  Interactive Brokers is a member of SIPC.  ********************************************************************* Check out Value Spotlight: Stockwriteup.com  ********************************************************************* Fiscal.ai is building the future of financial data. With custom charts, AI-generated research reports, and endless analytical tools, you can get up to speed on any stock around the globe. All for a reasonable price.  Use our LINK and get 15% off any premium plan: ⁠https://fiscal.ai/chitchat  ********************************************************************* Disclosure: Chit Chat Stocks hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Learn more about your ad choices. Visit megaphone.fm/adchoices

Will the Fed raise rates 25 basis points in June 2026? IBKR prediction markets let you trade the outcome alongside your stocks and options. Earn interest, get it right, and earn $1 per contract at ibkr.com slash predictions. Last trading day, June 17th. Welcome to Chit Chat Stocks. On this show, hosts Ryan Henderson and Brett Schaefer analyze businesses and riff on the world of investing. As a quick reminder, Chitchat Stocks is a CCM Media Group podcast. Anything discussed on Chitchat Stocks by Ryan, Brett, or any other podcast guest is not formal advice

or recommendation. Now, please enjoy this episode. welcome into the chit chat stocks podcast a podcast to help you find your next great investment i'm your host brett schaefer and today we are going through another research episode from my co-host ryan henderson on msci incorporated a collection of capital markets and index businesses among others you might know msci from hearing things such as msci world index that's kind of what i hear from from time to time among other things uh but before we get started going through this research episode which i guess for anyone that's new to the show these research episodes ryan does them maybe once a month maybe a little bit maybe once every six weeks depending on our cadence of

types of episodes we go through what the business does we go through how the business model works Is the business model attractive? Are there competitive advantages? The valuation today, why Ryan found it interesting, and concluding on any sort of investment decisions, buy, sell, hold. Is it making it to Ryan's personal portfolio? But before we get started on MSCI, a couple housekeeping items. If you are listening to the show right now, follow it wherever you are listening. Give us a review and follow our newsletter, Emerging Motes on Substack. The link for that is in the show notes. That's where I do more written analysis for subscribers. All right. Let's get into the episode. Ryan, what is MSCI, not group incorporated,

I might call it group, but MSCI and how was it formed? Yeah. So MSCI is primarily an index operator. And I framed the question here, or you framed the question as how was MSCI formed and specifically formed, not how was MSCI founded because there wasn't really one individual that started MSCI. Instead, it was a partnership formed by two capital markets giants at the time, Morgan Stanley and Capital International, which was a subsidiary of Capital Group, thus the acronym MSCI. I also find it kind of funny. It Seems like a lot of the big financial or capital markets giants were just formed out of other capital markets giants or like leaders that like took a certain division and spun it off. Anyways, the roots of this partnership date back to the late 1960s.

If you think about where markets were around that time, it had been sort of a rough few decades. So from its peak in 1929, the Dow Jones Industrial Average was flat until 1954. actually. So that means there's 25 years of negative returns, which are, it's kind of insane to think about whenever we go back to the Great Depression and think about that timeframe. It's amazing how long that bear market lasted. Also, keep in mind how I mentioned the Dow index as sort of the barometer for returns, because we'll talk more about that and why benchmarks matter in a bit. But the 50s and 60s were largely a period of renewed strength in capital markets and globalization was becoming a common theme. International trade was heating up, more money

was beginning to move across borders. So by the 1960s, there was a real appetite among US investors to get some exposure to international markets. So in 1968, a division of Capital Group, which if If you don't know Capital Group, I believe it's, I think it's a popular investment bank today. They're pretty well known, but the subsidiary was called Capital International, and they launched a series of global equity indexes with the goal of creating a list of businesses that would give investors a way to actually benchmark international performance. Over the following years, Capital International added more and more indexes that covered Europe, Asia, and Australia. The most notable of these was the EAFE index, which was short for Europe, Australasia, so Australia and

Asia and the Far East. The EAFE became at that time sort of the de facto method for many investors to benchmark the performance of their international holdings. So if you think about it at that time, If there's a fund that reports that some fund manager says, my European investments are up 50% this year, if you're just a US investor and the EAFE index didn't exist or there were no European indexes whatsoever, you would kind of have no way of knowing whether or not that was just him being an exceptional investor or just Europe had a phenomenal year. But if someone said the EAFE was up 10% and that manager was up 50%, suddenly there's a different takeaway. So thus the value of benchmarking. Anyways, EAFE became the industry standard for measuring returns outside of US equities. One of the big clients that was using EAFE to benchmark was Morgan Stanley. By 1986, Morgan Stanley had decided they wanted to become more than a large client and chose to acquire a large stake in the business. From the outside

looking in, it seems like Morgan Stanley was just bullish international markets, especially emerging markets, and wanted to build their own indices. But they realized the best way to do this was to partner or go with the established index provider, which was CI at the time for the name notoriety. And we're going to get into all the reasons why there's sort of competitive advantages for some of the leading index providers. But they decided to go through CI to build out their index business. So they renamed it MSCI. They immediately launched a brand new product called the MSCI Emerging Markets Index, which covered, I think, 10 different developing markets. And then from there, they just kept going and kept finding new markets to launch indices in. And by the 1990s,

they had really become the go-to name for emerging markets. Now, this is, I guess, for people that know the S&P 500, we've covered that company, S&P Global, a few times, they would be more or less a direct or indirect competitor to the S&P global business, correct? Correct. Yeah. And S&P is more focused in the states and developed markets. The two real like big ones, like comps are S&P, not S&P's indices division because they have ratings and stuff that's different and then the footsie which i think is a part of the financial times which maybe was acquired by someone so it's uh i can't remember there's been a london one this is the london one correct yeah okay i think they might have some other ones as well but the foot most

people know them for the footsie i think 100 all right well we have msci they've gotten to you know much notoriety today it's a common standard for all these international markets what do they actually have to do to maintain a stock index why does it matter like okay we are

individuals you and I there's a lot of individuals listening to this episode but why for us or any other professional investor why does it matter that MSCI is doing a good job and what does it take to get to that point

Yeah, this is, as I was researching this episode, this is really the question I wanted to answer. What does it actually take to build a stock index? Because in my mind, you just look up 25 largest companies in South Korea or whatever, equal way to sell it on some Excel spreadsheet, sell that list. But there is so much more complexity, obviously, that goes on under the hood. So there really does seem to be a misconception about how an index is built, especially I think a lot of people focus on the developed markets and they think, you know, why is the S&P 500 so special? You can just build out a list of rules or whatever and manage it that way. But for a company like MSCI, working in developed markets, or sorry, emerging markets, developing markets, I should say, at least that's where they got their start, they have to filter through a ton of really messy data to build a list of companies that's actually actionable for their clients. So that's important to remember. This isn't a list just so that people can be like, oh, look, South or South Korean market is up 30 percent this month. It's so buy side firms like ETFs or mutual fund managers can actually use the data, track it and sell it to their clients. So let's for the listeners, catch everyone up.

The clients, the people paying MSCI would be these ETF managers, mutual fund managers, index fund providers, things like that. yeah yeah so fund providers yes and there's other ones too there's i guess insurance companies use this um there's a there's a number those are the big ones the buy side firms they put buy side in air quotes for anyone who doesn't know buy side is just people allocating money on behalf of investors maybe sell side uses it too but yes primarily it's going to be a lot of fund managers that's where they're going to generate most of their revenue. Let's talk a little bit about the challenges of building an index. So here's one thing they have to consider. First of all, it's free float and liquidity. So they cannot just go on to Yahoo Finance and look up the top biggest

companies or whatever, especially at the time when they were first building out these lists, they couldn't do that. They have to go oftentimes to the actual stock exchanges, which in certain markets are not run very well. They don't have like standards of reporting that the United States has, and they have to ingest a whole bunch of raw data. So some of the data they have to look at, for example, is how many shares are actually available to the public. It's on MSCI to go out and find those numbers, which sometimes requires hunting down ownership data from founders or hunting down ownership data from certain parties. There's also liquidity concerns. So how many people are actually buying or selling the shares? How many shares are trading hands?

What percentage of the float is a foreign investor allowed to own? Because if they don't have that data or the data is wrong, an ETF provider, for example, iShares MSCI South Korea ETF, might not be able to replicate the actual index that's being provided. For example, if there isn't many shares available, they're going to move the stock when they try to replicate or track that index. So they have to be cognizant of all of that. They have to pull in all that data. They have to make that data available to their clients. There's other things. And basically, this is a data engineering firm, essentially. Here's another challenge, corporate actions. Companies are constantly changing. Companies do stock splits. They do

reverse stock splits, companies merge, they get acquired, they do spinoffs, they issue special dividends, you name it. The index provider has to track all of that to adjust the formulas before the next day's opening bell so that billions of dollars in tracking funds don't experience a tracking error. You can imagine sort of the complexity that's involved there, especially as you think about in the US, maybe there's a standard for reporting a spinoff or a special dividend. But in Indonesia, they might not have that regulatory repository where a company reports their documents. So maybe it's different by different companies. So they have to track all these different companies, the different places where they're putting these filings, and basically

do a lot of it manually. And you build it up one by one. That's why when they launch an index, it sounds so simple like oh we launched a new market or we launched 10 new markets whatever it is they brag about it because there is a lot of complexity and work that goes into building one the last thing i'll mention is rebalancing so typically indexes rebalance on a quarterly basis so they'll have to re-evaluate their entire investable universe against their specific rules and parameters because it triggers multiple billions of dollars of often flowing into those names into or out of those names. That's why so many companies want to be a part of an index or of an important index because all of a sudden they've got a whole bunch of ETF tracker funds

indiscriminately buying their stock. Think about why SpaceX wants to be a part of the S&P 500 so bad right away. I'd say for listeners, you should actually want managers that want the opposite so they can buy back stock and have the liquidity flowing in the opposite direction. I think a true capital allocator would want that, but I agree there are a lot of incentives out there for executive teams to want to be a part of these index funds, even if I think those incentives are misguided for many of them. But you should think about that for a second. You're not just managing, I'm using the S&P 500 as the example, but you're not just monitoring the companies in that universe, you have to like remotely just joined the S&P 600, I think. You have to be

monitoring all the companies outside of it in that investable universe that could potentially be entrance based on the criteria or parameters that you have for your specific index. So there's a lot of monitoring that goes into that outside of just your list of 25 companies or whatever it is. So, going into this, I thought maybe this is just – I'll just look at a list of highest market cap companies in South Korea. I'll equal weight them and I'll sell that to clients. It's way more complicated than that. MSCI employs a ton of data engineers. So, they're having to find the best ways to ingest the data.

They have to clean it. They have to structure it. And then that way they can appropriately adjust the weightings to reflect reality as closely as possible. Now, that's just on the geographies. You also have to think about the factors, so small cap, mid cap, large cap, stuff like that, the sectors, South Korean semiconductor index or whatever. They even do things like measuring sustainability scores, which some people might— There we go. Yeah, that it does more than $300 million a year in revenue.

But you can imagine the complexity hidden behind even just operating one index that's changing all the time, and they're doing it for more than 200,000 indexes. So it does require a lot of human capital. The listeners are going to correct you on it. Indices. Indices. It's indices. I see it so – it was interchanged a lot online, so indices. Well, okay. Motley Fool Grammar School says indices. That is what, you know, they could also be wrong. But maybe it's competing grammar. But for the listeners, we're not trying to sound stupid here.

There are more than 200,000 indices that they are maintaining. Well, I believe still maintaining. That number might have been cumulative indices issued at some point. But they have a ton of indices that they're operating at the same time. And they have to make sure that it's 100% accurate for their clients because these can lead to multi-billion dollar mistakes. All right. Here's one follow-up. So based on data ingestion, all the stuff you talked about, does that make them, and it depends on management, obviously, how sharp they are, potential AI winner, AI loser.

Could this be more replicable through AI or not? Yeah, this is something I actually had for the sort of the growth opportunity for them. I think they are an AI winner would be my take because there's a lot more ingestion methods and like file parsing that you can do with LLMs, like using sort of modern detection models, reasoning. You can teach LLMs to do probably a lot of the work that's being done manually at MSCI to give you the data you need and hopefully kind of reduce costs in the process. I think they'd be pretty much a big beneficiary of that, really. Okay, so you get wider berth of potential different indices formed or data or whatever these funds, ETFs, index funds want. And you can maybe save costs, raise that operating margin by automating everything. From what you've picked up, I guess maybe we're going to get to the management section.

Are they talking about this or are they someone that could be asleep at the wheel and a disruptor could come in and try to chip away at their brand note? Will the Fed raise rates 25 basis points in June 2026? 2026? At IBKR Prediction Markets, the yes recently traded at 5 cents, while the no traded at 90 cents. But the markets can change quickly. Trade prediction markets on political, climate, and economic events with simple yes or no prediction style contracts where prices reflect probability. Explore trending data, spot the trends, and if you get your prediction right, you earn $1 per contract at settlement. Plus, you'll earn a 3.14% APY on your investment with an interest-like incentive coupon, and you'll get $3 for signing up with IBKR Prediction Markets,

which you can use for any purpose or to start trading. Prediction contracts are not suitable for all investors. Go to IBKR.com slash predictions and turn your views into IBKR Prediction Contracts today. Last trading day for this contract is June 17th. I didn't spend too much time on management, unfortunately. um my i i don't know how much they've spoken about it but i suspect they're going as as with a lot of these companies i suspect they're saying that they're benefiting from a well yeah i'm sure there's lip service like usual like usual all right well let's go through the business model how do they generate revenue why are they so profitable i mean what what is the business

model? Are they taking a fee percentage? Is it just raising with the amount of AUM under management? How does it work? Take it through to the listeners, which I think from an investor perspective, a lot of people would be able to understand since almost everyone listening already operates at least somewhat in this world. Yeah, it's a blend of the two that you mentioned. So they have technically four categories for their revenue. So four buckets. There's index operating revenue, analytics, sustainability, and basically other, which includes like real estate and private asset data sets. But the largest by far is indexes or indices. And it accounts for 57% of overall revenue. So there's pretty much two different mechanisms here for

generating revenue. There's one, annual or multi-year subscription license fees paid by virtually every major financial institution, that's asset managers, hedge funds, banks, insurers, you name it, to use MSCI index data in portfolio construction, benchmarking, or compliance. The second one is asset-based fees, where MSCI charges a few basis points. Currently, I believe it's at like 2.4 basis points on every dollar of AUM sitting in ETFs and passive funds benchmarked to the MSCI index. The second revenue generator, which maybe I can check this on fiscal really quick, I believe it accounts for about a quarter of revenue, is analytics. And this is entirely subscription-based. So the analytics arm has been built out through

various acquisitions over the last two decades, but the biggest piece of their analytics business is Bara, which they acquired in 2004. Bara, it may have been rebranded now to MSCI, but it's a portfolio analytics platform that lets asset managers basically build out multi-factor risk models. So I don't interface with this product at all, but from the looks of it, It's very sticky. It has a 94% annual retention rate and nearly 50% operating margins. And I think they can probably continue to raise prices at a decent rate. I mean, a lot of these asset managers have to use BARA in order to produce whatever their product or their fund is going to be because they have to, there's probably something saying, show us the BARA risk models

on different drawdowns or what can happen. So that's the bulk of the analytics business. Again, these tend to grow in tandem with MSCI. It's grown a little bit slower, but index is going to be the bulk of the business. And then sustainability and private slash other assets are sort of still in the index bucket. They've just broken them out for whatever reason. It's an extension of the index business, essentially. So the only part that's different here is they actually give companies ESG ratings, and then they compile these into certain ESG indices, which asset managers can subscribe to. So I personally think it's a little weird that you have to have someone tell you whether or not a company is ESG friendly. And the scoring system,

I imagine, is a little bit flawed, but it generates $361 million in annual revenue. at a 38 operating margin so again just if there's appetite for this data it seems like msci will serve it to asset managers yeah and it looks like from and it's a good time to mention at least one time our friends at fiscal.ai use our link fiscal.ai slash chitchat you get 15 of any paid plan one of the kpi data is here is that sustainability and climate operating revenue and from what i see 2019 through the last 12 months it's grown at a 25 annual rate so pretty good demand there maybe there's a thesis that this could slow in the years to come uh that's not gonna kill the business because it's only a small part of it today but we'll see i think there's probably

still a tailwind for this but maybe not as excitable as three to four years ago yeah yeah it's i it's not going to drive the business ultimately um but if investors want it there's no reason for msci not to provide it the last bucket here is just private and other assets sort of just more the same it's indexes or indices and analytics tools purpose built for private markets i'm not sure what all data sets that includes and then real estate they've acquired a couple businesses to build this out, but follows the same sort of revenue generation model. So some asset-based fees and then some recurring revenue, multi-year subscriptions as well. Ultimately, it seems their strategy is just to amass or aggregate as much proprietary data as they can, then sell it to

managers. So now they've got, at this point, they've got a massive base of existing clients where they can upsell new indices, new analytics tools, and say, check these out. Maybe we can partner and build an ETF or a tracker fund around this new index we just offered. And the maintenance of it is a lot easier than the setup process, or it's a lot less costly, which the incremental cost to add a new client, once you have an index, it's virtually zero, I assume. I mean, maybe you build a contract or whatever, shoot it over to them. Maybe there's a little legal fee in the process, but- It's high margin. Yeah. Very high margin, which is what's allowed their operating margin to really balloon over the last

20 years. So 2005, they were doing 25% operating margins. Today, 55%. percent it's have you figured up anything on pricing power yeah i assume they do but that's like the thesis for moody's as a big global which for the bond rating part of that business i would assume it's still a very small percentage of these etf providers today but i'm curious if you have any data on that as a percentage a you went well actually i remember reading your notes we may i may be skipping ahead to uh the next section here yeah there is probably some pricing power on the um subscription agreements but they've actually been able to lower their prices um but so the average basis for on the asset-based fee side so they were charging i think 3.4 basis

points uh like a decade ago today they're charging 2.4 basis points on average let's try to do the that's 0.02 basically they've cut prices by a third about yeah but it still makes up a tiny portion of whatever this business that is on the other end of things so it's not something that if they came aside and said we're not going to keep lowering prices for you or however it fills through to whatever the status you have here it's not going to move the needle it's not like they go uh We're really nervous about your cost and how it's killing our business if you're Vanguard or something like that. Right. Like if you're charging half a percentage point expense ratio and you're an asset manager, this is a small chunk of that.

I always – I don't use basis points enough, so it always kind of puts my – It's small, yeah. It's like 2% of that. Yeah, we're talking about basis points and percentages of basis points. But either way, it's not the pricing power for them on, what would this be, total for AUM or something like that or whatever it is, the ETF revenue. But it's more of the adding new products and increasing just the size of this market. Yeah. Ultimately, if a fund, let's take the Blackstone iShares South Korea ETF, I keep using that example.

if it keeps growing they don't need to charge more you know they're going to if the assets in that fund keep growing msci doesn't need to keep raising subscription or raising prices they're just going to keep accruing that small asset-based fee which will grow basically with their clients okay so i guess i'm coming into the next section here but let's add on some any sort of examples you have, I have the historical data here, index operating revenue growing at a steady 12% a year. I kind of see jumps during big bull markets, which maybe is to be expected, but why does the revenue grow outside of what we just talked about? And where does this come from in the future? Is this growing index funds, more ETFs? What are your thoughts? So the reason that they've grown is

there's so i'm speaking specifically to the index business here because analytics kind of a traditional sas model i assume there's just some price increases there but the reason index revenue has grown is demand for their products has grown so msci now has 2.4 trillion dollars in at etf assets linked to their equity indices. 10 years ago, that was at 433 billion. So they've basically 5X'd assets linked to their indices in 10 years. Part of that appreciation is these markets have done well. The ETFs have aggregated more assets and pulled in more investor money. But the other part is like, so there's cash inflows and just appreciation. And it's been about half and half, if I'm not mistaken. So about half is new cash inflows and half is just the funds,

assets appreciating because good performance from those index or indices. So kind of a combination there. There's a few moving parts, but I think this has happened for a couple of reasons. One, the first one here, and this seems to be a trend that's benefited MSCI for 50 years, is globalization. More and more global economies are becoming intertwined, global commerce becoming more and more common. I think this will continue, especially in a digital first remote world where you can employ people on the other side of the other hemisphere a little easier. The other part is MSCI has built a blueprint for adding and maintaining new products quicker so that they're able to add new indices easier because they've learned, okay, in this

market, here's how I go get those filings. Here's the filings I'm looking for. Here's the data I need for a free float or liquidity. And they've kind of built that process around data aggregation. So it allows them to repackage it, basically, and go sell it in a new form through a new index or whatever it is. And then the last one, I guess, and this is really a big one, is the ETFs are marketing these products. iShares spends a lot of money to go out and get investors. MSCI just benefits. They're not spending the marketing dollars. They've already got the relationship.

For anyone that doesn't know, iShares is BlackRock. So biggest one out there. That and the Dakar. Right. So the ETF world spends a lot of money trying to get investors. MSCI just collects the fee through that. They just benefit without having to spend the variable costs to go out and get them. So there's just an economic growth and inflation out there as well. They should be one of these businesses along with the visas, MasterCard, SB Global, Moody's, Adyen, the one I like under the radar one, any payment processor or anything tied to lending capital markets. the and of course in a bear market over a five-year period you could see contractions but over the long term i think you should see growth within that and msci should be able to ride that tailwind if they can remain the dominant player or one of the dominant players yeah i mean you

think about those trends, globalization, MSCI being able to add new products quickly, and ETFs spending marketing dollars to investors, I think all those will probably persist over the next 10 years. In fact, I'm pretty optimistic about international equity markets specifically. so i mean i guess that's kind of a broad term but uh but i think 10 annual revenue growth is achievable from the same same tailwinds they saw the last 10 years i think they could see them again the next 10 i'll pull up the revenue growth over the last 10 just so i have a reference point here. Since 2015, it's been basically 11.5% annual revenue growth across MSCI in overall. Yeah. And another indicator is the AOM linked to indexes. Fiscal AI uses indexes. Maybe we

need to find. So someone needs to determine what the actual word is here, because I feel like half the people listening think we're saying it wrong. The other half think we're saying it correct. But that's besides the point uh that is an indicator of them i guess riding just that tailwind of etf providers and i see no reason why that doesn't continue i've been looking at our friends of fiscal ai here kager 14 and a half percent under that kpi again that's a good reminder of our sponsor you can't find this kpi data really anywhere else especially as an individual investor. So go to fiscal.ai slash chitchat, get 15% off any paid plan. The link is in the show notes here. Let's move on to the concluding stuff, more of your stock analysis. I want to say if

anything else before that, let's talk about the competitive advantage. Remember, we talk a lot about really on a research episode, competitive advantage and valuation that would close things out with Ryan's investment decision. So the moat, MSCI, what are your thoughts? What did you learn? What changed your opinion going into the research and then coming out the other side? Yeah, as I was starting my research, the one sort of moat I was thinking about, or the competitive advantage that I think about for indexes is reputation. But as I've done some of this research, I think there's a lot more to it. So let's focus on the reputation side for a second. I think people underestimate how powerful this part is. So here's an example,

the Dow Jones Industrial Average. Once you are the de facto index for measuring performance of whatever the specific group is, there are really big switching costs. The Dow Jones Industrial Average has been around for 130 years, and it's still somehow relevant despite being a completely outdated way of measuring the american economy i mean 30 companies is ridiculous and it's it shouldn't be referenced but it still is because it's it's fair point yeah the dad the dogs of the dow there's all there's plenty i'm just i don't know why i said that but there there's so many things tied to that phrases people see you put it on cnbc headlines yeah your uncle understands it everyone out there understands it like your grandpa and your

retirement home can understand it like oh i know what the dow jones is it's the stock market is that msc is not that strong though uh not in america but fair fair fair you know in in these other economies where they operate it it's like it is the index operator to choose from so and there's a couple of reasons why that is. So for one, there are, sometimes there's literal investor mandates. So if a pension fund in Japan is going to give an asset manager $10 billion, for example, to manage their money, there's usually explicit language in the contract that says this fund will be judged against whatever, an MSCI world index or whatever that index is. So switching to another index for an asset manager in that case would be a contractual violation, or even if it's not a

contractual violation, it's pretty tough. Because for active managers, if you switch the index, your benchmark, I guess, it's a massive red flag. And then for passive or ETF managers, it's a logistical nightmare. So not to mention you're usually in multi-year contracts, but if you've set up your entire fund on the msci south korea index or whatever switching to another one it's going to require a lot of trading in and out of stuff um yeah and then stuff becomes the standard and you have like all right well i'm tracking the index and the whole point is to track the index and if you're using a different index for a different country and it's wildly off of what the msci one is yeah i can understand why how there's some switching costs for everyone

or however you want to define it. Maybe it's more of a unique, it doesn't fit one of the four more categories that we talk about very clearly. But you understand how there would be a pain and maybe incentive not to switch off of this. You'd be afraid of not tracking versus your competitors. Yeah.

And you think about like a tracker fund. Let's say you're setting something up. There's even some marketing benefits If you're trying to sell a fund to other asset managers or other clients, maybe like if you're Black Rock and you're trying to sell the iShares South Korea ETF, it helps for other asset managers if they know they're using like an MSCI index because they have some – there's some name notoriety there. There's some trust that they probably built up over investing in other ETFs with MSCI's index underpinning it. So there are some advantages in actually selling the funds as well. And the switching costs are evident in the retention rate.

So MSCI reports their index retention rate, and it's averaged 96% for the last seven years. If you flip that, that means the average client has an implied lifetime of 25 years for MSCI, which is a long time. And I would guess that most of the churn just comes from asset managers closing up shop, not them switching. I think it's really, really rare that you end up having to switch an index and it goes off without a hitch. And then the third element here that's something I didn't really expect is there's sort of a competency barrier here. So MSCI has now built up so many different global indices that starting the next one is a little easier. They know where to source the data from specific geographies, how to parse or filings or reports from those countries. They know that they have existing relationships with the stock exchanges.

All that stuff is pretty hard to do. so if someone came in and said i'll give you a different south korean index at half the price you're less likely to take it and not to mention that there's a reason that there aren't that many other popular index providers because this stuff it does require some competency it requires a lot more uh data engineering behind the scenes than people understand and there's the reputational advantage. So yes, I actually think there's really high competitive advantages in the index business or indices business. My discussion question for you, and I think I know which way you're going to lean, which business has a wider moat, stock exchanges or index providers?

What stock exchanges and what index providers? I guess there's not very many index providers, but I think New York Stock Exchange has to be number one. NASDAQ is also solid. Obviously, the uh the japanese one's good that has a long-standing record but if we go to index providers maybe msci would be wider than s&p global if again i do not know that index part of that business too well but if it's just the s&p 500 yeah that's the number one index in the world but that's a much easier business to run and potentially replicate compared to msci i would think in general i think stock exchanges are slightly higher because it's a winner-take-all kind of a pure monopoly play sometimes a lot of times in countries in the united states we've

seen many many different competitors try to pop up new york stock exchange has been around for what 200 years according to them if you go back to the oh what is it the tree in lower manhattan Do you remember the story that they always try to tell? I mean, in legit nature, it's probably 150 years, but they talk about the Buttonwood tree, right? The Buttonwood Agreement, 1792. Slightly longer than the Dow Jones Industrial Average. The takeaway here, okay, one more competitive advantage real quick, and this is something

I didn't know existed until I looked into this. There is sort of a network effect when it comes to liquidity. So massive ETF providers like BlackRock through iShares, they construct their largest international funds directly on MSCI indexes, indices, whatever, and because the ETFs are highly liquid, futures and options exchanges then create derivative contracts based on those exact same MSCI indexes so institutional investors can hedge their risks. so if if you don't have the ability to hedge you might not hedge that same index list or whatever you you're probably not going to go with that index provider does that kind of make sense i know it's a bit circular there yeah yeah that's you want it to be tied together you could argue maybe prediction markets is a potential disruptor there as that's supposed to be targeting that but i mean for all the hype and talk around prediction markets which i think is a fascinating new avenue

of the financial markets it's tiny so maybe maybe in the future that could be a disruptor to that part of this but is it going to kill msci no uh in general though i think both stock exchanges and index providers and bond rating agencies are wide mode businesses if they're run well they have a good brand and msci doesn't have as long of a standing brand as new york stock exchange which did look up it is 1792 which they claim i think that was just for jabronis that the button would treat but we'll give it to them uh or the dow jones or something like that but hey what are we going on here now 50 60 years that's pretty long and i think it's going to be would be very hard for what if for example i don't know you're this would be very strange for them to do but

your employer fiscal ai if they said we're going to start getting into this i mean you're a data a provider in a different field of finances maybe they would say let's try this that would be very very difficult for someone to go all right well why would we choose you over msci it's a reasonable price they haven't screwed with us and people trust their brand no one knows about fiscal uh indices yeah it wouldn't work it's i mean it's such an uphill battle a to establish credibility be to even just to build out a successful product that is like secure and and well maintained but yeah i i think getting the buy-in from asset managers when msci is charging two and a half basis points and let's say i came in i said well i'm going to charge you one and a half

they're charging 60 basis points for the expense ratio they would rather have the best possible index not shave off a little bit of cost like they want there it's more than worth paying up for msci yeah because their potential customers go well what's this and again this isn't a real thing pure hypothetical was this fiscal index i've never heard of it before and then you won't get any AUM. All right, let's go through valuation as we wrap things up. Where's the stock traded today? How are you modeling things? Again, for any new listeners, and it's a podcast, so we won't be able to do this in general, but we're not in-depth modelers. We're more of discussing a lot of qualitative factors about the business. And then as Buffett likes to say, the valuation should be

obvious if it's a buy. Yeah. And I will say it's been, I've probably been using quote models a little more actively now with Claude because I just type in literally my guesses and say, put this in a model. And it pulls from the fiscal MCP, which is nice. So a little add there. But I was actually very happy to get to this point. As I was researching, I got to the valuation work and I had no idea what the price was. Like I didn't know, I didn't know the market cap. I didn't know the enterprise value. I didn't even know what the shares traded at. So I'd done all the work, which is always very nice because then there's no like hidden biases where you have to, where I know I got to assume a higher growth rate or something like that. So here's my inputs.

As I talked briefly about earlier, I think the combination of globalization, MSCI building more products and more money just accruing to these ETF asset managers will drive at least 10% annual revenue growth for MSCI over the next 10 years. Their incremental costs are extremely low. So this growth should drive natural margin expansion. But on top of that, I think being a beneficiary of AI will reduce data aggregation costs. So I think it's very possible for that. And it's always hard to guess how much margin expansion there will be. But I think they could get to 65% operating margins in 10 years. Today, they're at 55%. If that happens, they would be generating $8.1 billion in revenue, $5.3 billion in annual operating income. They also use

pretty much all of their free cash flow to buy back stock. So over the last 10 years, they've reduce shares by about 4% annually. I assume in my little Claude model here that they'll reduce shares by 3% annually. I know that's a lot of numbers, but here's the final one. If they do everything I just said, they would be generating just under $100 in operating income per share in 2035. That's 10 years out from now. Today, they have a share price of $588. So it's about six times 10 year out earnings and about 11 times five year out earnings i typically look for less than 10 times five year out but and what are the assumptions 10 plus little buyback which they've been doing 10 revenue growth little margin expansion fine that's that's nothing that

seems quite reasonable we're in a little bit of a bear mark or bull market as people may or may not have heard so maybe there should be some averaging on that would be my only pushback but it makes sense yeah and they've had record cash inflows to their the etfs linked to their indexes lately so it kind of it's possible that they are sort of benefiting here in the recent short term. But I think usually my hurdle for a growing business is less than 10 times five year out earnings. This is kind of right on the cusp. Again, if you're slightly more aggressive, you get to under 10 times. If you're slightly more conservative, you're kind of right around there. I would be fine owning shares here. In fact, I'd probably be fine buying shares here.

I think this works out pretty well. And I really think this is an exceptionally high quality business. For reference, the current EV to EBIT is about 27 times. So it's still fairly expensive. The one thing I like about these capital markets companies is they're in capital markets. So they tend to be more shareholder friendly. They tend to prioritize shareholders because that's the world they're in. And it's not big stock-based comp issuers. You're not dealing with that. they they know the name of the game and they're trying to drive shareholder value yeah that's fair and if you look at a different way you could go well you have your earnings per share then there's the uh your operating income per share and you add a little dividend you're

at 11x um like five years out compared to today's share price 27 is about 2.5 times it's a pretty acceptable return but i feel like it's just not maybe i just get too greedy on what i want from my upside over five years again if you're i just get concerned hoping for that 27 times multiple is kind of what you need for the the stock to work out for the next five years i'd rather maybe wait for it than the multiples that can press further but again then you can also be playing that game of getting too greedy when a high quality business seems to be trading at a pretty fair price here i know the value guys in the comments are going to say well buffett's at a fair price is 10 times earnings yeah sometimes things deserve to trade at slightly

higher than that does uh berkshire hathaway own msci or they're moody's only i believe i don't think they own msci but i can check the they waited for moody's to get to 10 times so maybe that's what buffett would do yeah the other benefit here is even though this is an american company it's basically international exposure point yeah yes sort of it's a lot of u.s investors too so it's it's kind of hard to say but it's more international exposure than like other american companies so i i do think it's high quality i like it here if you're in the just sort of coffee can portfolio style this i think is one probably to consider and i asked claude uh i threw in the latest transcript i said did they did they talk at all about

a how ai is impacting data aggregation and they said yes uh the ai is dramatically the management team said ai is dramatically increasing wow data gathering capacity without adding head count which is kind of what we talked about basically it makes it makes sense it makes sense ask claude if he's going to disrupt msci see what he says but no don't actually do that we could have a recurring theme basically on these type of episodes ask claude whether he would buy the stock or not uh to keep it light uh we're gonna be fun more on more power hours but uh i'm nervous that he would beat us uh all right well ryan anything else before we get out of here well what was your decision watch list buy sell what are you gonna do this that sounds like watch list the

silence says watch yeah i'd probably probably say watch list but i i really do like the business and i could see myself just going starter position and waiting see if i get a better price my biggest concern would be that the record cash inflows is sort of a temporary thing and maybe the bull market's helping them a little bit. You were also, you mentioned before we got on the call, stock returns over the last five years have been kind of weak. You are right.

I'm looking at the shares now. So last 10 years, and this is kind of crazy, Last 10 years, total return is 760%. Last five years, total return is 36%. When you go to the valuation, it seems things got a little crazy in 2021. I guess this was kind of with every company out there. But they hit an EV to EBIT of 57 in 2021, and its valuation multiple has been cut in half despite pretty good performance across the board in terms of revenue and earnings. So, yeah, to answer your question you asked before the show, multiple compression has been quite painful for them.

yeah that's probably what investors are worrying about going forward i mean there's no reason like if it got down to 15 times i i would be way more interested obviously but there's no reason that can happen given the fact and what i mean by that is it can't happen and really hurt your returns given the fact that this is a durable grower and not something like for an example this is just a top of mind because I've been looking at them recently Mercado Libre where yeah they traded a decently high multiple but the fact that they're growing so quickly and seems to have a huge growth runaway ahead of them the multiple compression risk is a little bit less burdensome than something like MSCI where you could hold this for another five years and just get really frustrated going

nowhere and maybe you could look at it and say all right I'll just keep adding a little bit every quarter or what have you but still you should i think listeners should consider that today uh all right anything else ryan no i think that's gonna do it it's it's kind of refreshing to look at a company where there doesn't there isn't really any ai risk like uh you just jinxed them there i guess yeah i guess google ios event was today so maybe they have are launching in the index industry but yeah it's a cap i like capital markets businesses especially like there's just really good durability with some of these established providers in the capital markets industry i think if you add in the brokerages as well uh you know our sponsor interactive brokers

i my way to look at it is when stock the capital markets are crumbling or there's a huge bear market or panic that's when you buy these high quality uh capital markets business there's also the bond trading ones market access and trade web you can add those into the mix i feel like the best time to buy those is when blood is in the streets because one they don't have the lending they're not going to blow up usually i wouldn't think and they're just kind of a take rate on trading volumes which is going to collapse in a bear market but coming out the other side they'll probably be training at a very cheap price that's why i look at it but i know a lot of people like mci today uh they're the really great inflation protected businesses and it seems

like you know there's a lot of high quality ones again interactive brokers charles schwab uh some other ones in the brokerage space i mean robin it's solid business uh the ones we also mentioned during this episode let's see asset light very asset light you know you're not just uh taking on a bunch of banking balance sheet risk all that good stuff but that's a episode for another day i think that's enough and we can close out this episode thank you to our sponsors interactive brokers fiscal ai use our link in the show notes tell them we sent you they will be happy that you did. Let's see. We are not financial advisors. Anything we say on the show is not formal advice or recommendation. Ryan, I, or any podcast guests may hold securities discussed in this podcast,

may have held them in the past, and may buy, sell, or hold them in the future. Thank you everyone for tuning in. We'll see you next time. I finally had a light bulb moment about a stock we've all heard about growing at 18% a year and a 15 PE. I shared this insight in a special deep dive report to subscribers of my research service value spotlight. The report is called a generational moment reigniting human connections through a tangible network of intangible assets. Chit chat listeners can get a discount to my research at StockWriteUp.com. That's StockWriteUp.com.