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

Summary

Chit Chat Stocks Podcast – Episode Summary

Episode Title: MSCI: An Asset-Light Compounder At a Reasonable Price (Ticker: MSCI)
Date: May 20, 2026
Hosts: Brett Schaefer and Ryan Henderson

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Episode Overview

In this research-focused episode of Chit Chat Stocks, Brett Schaefer interviews co-host Ryan Henderson about MSCI Inc., a leading provider of indices and capital markets data. They take a deep dive into MSCI’s history, business model, competitive advantages, performance drivers, and valuation. The discussion aims to determine whether MSCI is a worthwhile long-term investment today, exploring its growth potential, AI implications, and quality as an asset-light, high-margin business.

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Key Discussion Points and Insights

1. MSCI’s Origins and Market Role

[02:22] Ryan: Explains MSCI’s formation as a collaboration between Morgan Stanley and Capital International in the 1960s, intended to address increasing demand for international benchmarks among U.S. investors.

• The EAFE index (Europe, Australasia, Far East) became a global standard for measuring international stock performance.
• Quote:
  “Imagine if a fund manager says, ‘My European investments are up 50% this year...’ you would have no way of knowing if that was exceptional or common without a standardized benchmark.” ([04:33] Ryan)

2. What Does MSCI Actually Do? The Complexity Beneath Indexes

[08:24] Ryan: Debunks the idea that building an index is as simple as listing the largest companies in a country.

• Data Engineering:
  MSCI’s core business is ingesting, cleaning, and structuring global financial data—often across markets lacking reliable reporting standards.
• Continuous Monitoring:
  Tracking share floats, foreign ownership limits, corporate actions (splits, mergers, dividends), and more. Indices are rebalanced quarterly or as needed.
• Role in Asset Management Ecosystem:
  Clients are primarily fund managers, ETFs, insurers, and other financial institutions who need accurate, investable benchmarks.
• Quote:
  “There is so much more complexity under the hood. Especially in emerging markets, it’s a data engineering firm at heart.” ([10:51] Ryan)

3. Defensibility & Competitive Landscape

[07:11, 35:01] Ryan & Brett: Benchmarks like the S&P 500, FTSE, and MSCI portfolios are discussed as industry linchpins.

• Switching Costs:
  Managers and funds often have mandates tied to specific MSCI indexes, making switching complex and risky.
• Reputational Moat:
  “Once you become the de facto index… switching costs are huge. Even the Dow still matters 130 years on, despite being way outdated.” ([35:56] Ryan)
• Network Effects:
  As funds use MSCI indexes, derivatives and options markets naturally build around them, amplifying their central role in global finance.

4. Potential Impact of AI

[17:14] Ryan: Sees AI as a tailwind for MSCI, not a risk.

• LLMs and modern data tools could automate data parsing, cleaning, and enrichment, reducing costs and enabling more index products.
• Quote:
  “They are very much an AI winner. You can teach large language models to do a lot of the work that’s now manual.” ([17:14] Ryan)
• Management appears to be acknowledging AI’s impact, noting increased data processing capacity without headcount increases. ([52:16])

5. Business Model and Financial Profile

[19:59, 25:30, 26:06] MSCI’s business model is highly attractive from a profitability perspective:

• Revenue Streams:
  • 57% of revenue from “index” licensing (multi-year, recurring subscriptions and asset-based fees from benchmarked ETFs/funds)
  • Analytics (e.g., Barra platform—sticky, 94% retention, ~50% margins)
  • Sustainability/ESG ratings and private asset data (growing fast, but still smaller contributors)
• Asset-based revenue comes from a tiny fee on AUM (currently 2.4 basis points, down from 3.4bps a decade ago).
• Operating margins have grown from 25% (2005) to 55% (today), with potential for more as automation and AI lower costs.
• Quote:
  “Once you’ve built an index, the incremental cost to add a new client is virtually zero. That’s why margins are so high.” ([25:30] Ryan)

6. Growth Drivers & Industry Tailwinds

[29:09, 32:42] The business’s growth comes from three main vectors:

• Increasing Globalization:
  More cross-border investment means more demand for new indices.
• ETF/Index Fund AUM Growth:
  AUM linked to MSCI indices grew from $433B (2016) to $2.4T (2026), half from new inflows, half from asset appreciation.
• Product Innovation:
  Ability to launch new indices quickly, leveraging existing infrastructure and data aggregation.
• Quote:
  “They benefit as ETFs do the marketing to attract assets—MSCI just collects the fees.” ([31:47] Brett)

7. Risks and Potential Weaknesses

• Potential slowing of ESG product demand ("may not be as exciting as three to four years ago" – Brett, [24:18])
• Dependence on asset growth and bull markets—flat/declining assets mean limited (or negative) fee growth.
• Multiple compression risk if valuation remains elevated relative to near-term growth.

8. Valuation and Investment Decision

[45:53–55:26] Ryan shares his back-of-the-envelope DCF/owner earnings analysis:

• Assumptions: 10% annual revenue growth, modest margin expansion, continued buybacks (~3%/yr share count reduction)
• In 10 years, could earn ~$100/share in OE, trading today at $588/share (6× 10Y-out earnings; ~27× current EBIT).
• Five-year total return could be strong, but upside depends on multiples not compressing further.
• Compared to other asset-light financials (Visa, Moody’s, S&P Global), MSCI looks as durable, but its returns may be more muted from today’s price unless growth/valuation surprises to the upside.
• Quote:
  “I would be fine owning shares here. In fact I’d be fine buying shares here. I really think this is an exceptionally high-quality business.” ([48:44] Ryan)
• Decision: Watchlist—Ryan leans toward a starter position but is cautious due to recent record inflows and possible cyclical effects.

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Notable Quotes and Memorable Moments

• On competitive moats:
  “The Dow Jones is still relevant after 130 years, even though it shouldn’t be. Once you’re the de facto benchmark, switching costs are enormous.” ([35:56] Ryan)
• On AI and disruption:
  “There isn’t really any AI risk ... refreshing to look at a company like that.” ([55:26] Ryan)
• On what actually makes an index tough to build:
  “It isn’t just an Excel list of the top companies. It’s corporate actions, regulatory filings, liquidity, float, and doing it for 200,000 indices around the world.” ([16:30] Ryan)
• On valuation risk:
  “Multiple compression has been quite painful ... last five years, the stock’s up just 36% versus 760% over the prior 10.” ([52:56] Brett)
• Podcast humor:
  “Ask Claude if he’s going to disrupt MSCI.” ([52:21] Brett)

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Timestamps for Key Segments

• [02:22] – MSCI history, partnership origins, and index evolution
• [08:24] – Deep dive: What it takes to build and maintain an index
• [17:14] – AI as an opportunity, not a threat
• [19:59] – Revenue breakdown and business model analysis
• [26:06] – Profitability, pricing power, and AUM-based fees
• [32:42] – Core growth drivers and ETF tailwind
• [35:01] – Competitive advantages and the “moat discussion”
• [43:08] – Network effects, switching costs, and liquidity flywheel
• [45:53] – Valuation analysis and investment decision
• [52:56] – Caution: multiple compression, bear/bull market context
• [55:36] – Concluding thoughts on durable capital markets businesses

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Tone and Style

Laid-back, analytical, and conversational, with plenty of student-of-business banter, occasional humor, humility about what can be known, and a clear passion for understanding what makes financial infrastructure “tick.” Brett and Ryan regularly check one another’s assumptions, riff on broader themes (AI, globalization, network effects), and use real-world examples to bring dry financial concepts to life.

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Summary Takeaway

MSCI is a high-quality, asset-light business with recurring revenue, significant competitive advantages, and exposure to global investment growth. Its long-term tailwinds and operational leverage look sustainable, though investors should be aware of recent cyclical runups, valuation risks, and slower near-term returns. The business is well-placed to benefit from ongoing AI/data automation, and could be a classic "coffee can" (long-hold) stock if purchased at a reasonable price. Ryan and Brett ultimately place MSCI on the watchlist, with admiration for its structure and durability, and openness to buying if valuation becomes more attractive.

Transcript

[A]

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 predictions last trading day June 17. Welcome to Chit Chat Stocks. On this show, hosts Ryan Henderson and Brett Schaefer analyze businesses and riff on the world. As a quick reminder, Chitchat Stocks is

[B]

a CCM Media Group podcast.

[A]

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 Rich 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. 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 by 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, listening. Give us a review and follow our newsletter Emerging Moats 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?

[B]

Yeah, so MSCI is primarily an an index operator and I frame the question here or you frame 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 at around around that time, it had been sort of a rough few decades. So from its peak in 1929, the Dow Jones industri 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 time frame. 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 cross 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 you don't know Capital Group, I believe it's, I think it's a investment 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 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.

[A]

Now this is, I guess, for people that know the s and P500, we've covered that company, S and P Global a few times. They would be more or less a direct or indirect competitor to the S and P Global business, Correct?

[B]

Correct. Yeah. And S&P's more focused in the States and developed markets. The two real big ones like comps are S and P, Not S&P's indices division because they have ratings and stuff that's different. And then the ftse, which I think is a part of the Financial Times, which maybe was acquired by someone. So it's. I can't remember, there's been a London one.

[A]

This is the London one, correct? Yeah. Okay.

[B]

I think they might have some other ones as well. But the foot, most people know them for the FTSE, I think 100.

[A]

All right, well, we have MSCI. They've gotten to, you know, much notoriety today. It's kind of 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?

[B]

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 weight it and 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 and P500 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 America or South Korean market is up 30% 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.

[A]

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.

[B]

Yeah, yeah, yeah. So fund providers, yes. And there's other ones too. There's, I guess insurance companies use this. There's a, there's a number. Those are the big ones, the buy side firms that 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 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's 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 spin offs, 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 bill 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 U.S. maybe there's a standard for reporting a spin off 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 of 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 reevaluate their entire investable universe against their specific rules and parameters. Because it's triggers multiple billions of dollars off often flowing into those names, into or out of those names. So 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. Like, you know, think about why SpaceX wants to be a part of the s and P500 so bad right away.

[A]

I'd say for listeners you should actually want managers that want the opposite so they can buy back stock, then 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.

[B]

But you 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 company's in that universe. You have to like remitly 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 entrants 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.

[A]

There we go.

[B]

Yeah, it does more than 300 million a year in revenue. But you can, you can imagine the complexity hidden behind even just one operating one index. That's, you know, it'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.

[A]

The listeners are going to correct you on the indices. Indices is indices.

[B]

I see it. So it was interchanged a lot online. So.

[A]

Well, okay, Motley Fool Grammar School says indices. That is what you know, they could also be wrong. But maybe, maybe it's competing. Competing graver. But for the listeners, we are, we're not trying to, we're not trying to sound stupid here.

[B]

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.

[A]

All right, here's one follow up based on data ingestion. All the stuff you talked about does that make them depends on management obviously how sharp they are central a winner, a loser. Could this be more replicable through AI or not?

[B]

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 file parsing that you can do with LLMs like using sort of modern detection models, reasoning. You can teach LMS to do probably a lot of the work that's being done manually at MSCI to give you, 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.

[A]

Okay, so you get wider birth 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 their brand moat.

[B]

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[A]

Well, yeah, I'm sure there's lip service. Like usual. Like usual. All right, well so 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 through the listeners, which I think from an investor perspective a lot of people will be able to understand since almost everyone listening already operates at least somewhat in this world.

[B]

Yeah, it's a blend of the two. The two that you mentioned, they have technically four categories for their revenue. So four buckets. There's index, operating revenue, analytics, sustainability and basically other, which includes 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 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.

[A]

So

[B]

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. I think they can probably continue to raise prices at a decent rate. A lot of these asset managers have to use Barra 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 borrow 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 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. 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. 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.

[A]

Yeah, and it looks like from and this is a good time to mention at least one time our friends at Fiscal AI use our link Fiscal AI slash Chitchat to get 15% off any paid plan. One of the KPI datas 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 that's not going to 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.

[B]

Yeah, yeah, it's not going to drive the business ultimately, 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 of 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

[A]

the

[B]

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%. It's.

[A]

Have you picked up anything on pricing power? Yeah, I assume they do, but that's like the thesis for Moody's SMB 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 aum. Well actually remember reading your notes, we may, I may be skipping ahead to the next section here.

[B]

Yeah, there is probably some pricing power on the subscription agreements but they've actually been able to lower their prices. But so the average basis for on the asset based fee side, so they were charging I think 3.4 basis points like a decade ago. Today they're charging 2.4 basis points on average.

[A]

Let's do the math. Let's try to do the math. That's point zero two.

[B]

They've cut prices by a third about.

[A]

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 stat is you have here, it's not going to move the needle. It's not like they go, we're really nervous about your costs and how it's killing our business. If you're vanguard or something like that.

[B]

Right. Like if you're charging a half a percentage point expense ratio and you're an asset manager, this is a small chunk of that. I, I always, I don't use basis points enough. So it always kind of puts my.

[A]

It's small. Yeah. Something like 2% of that. Yeah. We're talking to 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, or whatever it is ETF revenue. But it's more of the adding new products and increasing just the size of this market.

[B]

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. 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.

[A]

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? Just growing index funds, more ETFs. What are your thoughts?

[B]

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 SaaS 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 in ETF assets linked to their equity indices. Ten 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 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 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 look 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. IShare 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

[A]

that doesn't know iShares is BlackRock. So biggest one out there with them and Vanguard. Right.

[B]

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 cost to go out and get them. So.

[A]

And there's just an economic growth and inflation out there as well. They should be one of these businesses along with the visas, Mastercards S&P Global, Moody's adjunct one I like under the radar one. Any payment processor or anything tied to lending capital markets. And of course in a bear market over a five year period you could see contractions. But. 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.

[B]

Yeah. I mean you think about those trends. Globalization, MSCI being able to add new products quickly and ETFs spending marketing dollars to go get 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 guess that's kind of a broad term, But I think 10% annual revenue growth is achievable from the 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.

[A]

Yeah. And another indicator is the AOM linked indexes. Fiscal AI uses indexes. Maybe we need to find some. 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. That is an indicator of them, I guess, writing just that tailwind of ETF providers and I see no reason why that doesn't continue. I've been looking at our friends at Fiscal AI here. CAGR of 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 chitchat, get 15 of any paid plan. The link is in the show notes here. Let's move on to the concluding stuff. More of the your stock analysis, let's 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?

[B]

Yeah, as I was starting my research, the one sort of mode 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. It shouldn't be referenced. But it still is because it's.

[A]

That's fair point. Yeah. The dao, the dogs of the dao. There's all, there's plenty. I don't know why I said that, but there's so many things tied to that phrases. People see it. You put it on CNBC headlines. Yeah. Your uncle understands it. Everyone out there understands it. Like your grandpa in 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.

[B]

Not in America. But you know, in these other economies where they operate, it's like it is the index operator to choose from. And there's a couple 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 you're benchmarking against it's A massive red flag. And then for passive or ETF managers it's a logistical nightmare. 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.

[A]

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 wanted to find 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.

[B]

Yeah. And you think about like a tracker fund, let's say you're setting something up. There's even some marketing like benefits if you're trying to sell a fund to other asset managers or other clients. Maybe like if you're Black, was it BlackRock 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, you know, some, there's some name notoriety there, there's some trust that they probably built up over, you know, investing in other ETFs with MSCI's index underpinning it. So there are some advantages in actually selling the funds as well. And you the switching costs are evident in the retention rate. So MSCI reports their index retention rate and it's average 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 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, 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 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?

[A]

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 Japanese one's good, that has a long standing record. But if we go to index providers, maybe MSCI would be wider than S and P Global. If again, I do not know that index part of that business too well. But if it's just the s and P500, 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. 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

[B]

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. If you don't have the ability to hedge, you might not hedge that same index list or whatever, you're probably not going to go with that index provider. Does that make sense? I know it's a bit circular there.

[A]

Sure, sure, yeah. 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 disruption to that part of this. But is it going to kill msci?

[B]

No.

[A]

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 I did look up. It is 1792, which they claim. I think that was just for jabronis at the Buttonwood Tree, but we'll give it to them 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 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 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 indices. It wouldn't work.

[B]

It's such an uphill battle, A to establish credibility, B, to even just to build out a successful product that is secure and well maintained. But yeah, I think getting the buy in from asset managers when MSCI is charging 2 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 that they want. It's more than worth paying up for msci.

[A]

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 trade at today? How are you modeling things again for any new listeners? And it's a podcast. 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.

[B]

Yeah, and I will say 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 pistol AI and it pulls from the fiscal mcp, which is nice. So little ad 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. I didn't know the market cap, didn't know the enterprise value, 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 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 reduced 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, shares, they have a share price of $588. So it's about 6 times 10 year out earnings and about 11 times 5 year out earnings. I typically look for less than 10 times 5 year out but.

[A]

And what are the assumptions? 10% plus little buyback which they've been doing.

[B]

10% revenue growth, little margin expansion.

[A]

Fine, that's, that's nothing. That seems quite reasonable. We're in a little bit of a bear market or a 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.

[B]

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 5 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 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. 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. Like they tend to prioritize shareholders because that's the world they're in. And it's not like, like you're not, 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.

[A]

Yeah, it's fair. And if you look at a different way you could go, well, you have your earnings per share, then there's the, your operating income per share and you add a little dividend, you're at 11x 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. If you're, I just get concerned hoping for that. 27 times multiple is kind of what you need for the stock to work out for the next five years. I'd rather maybe wait for it than the multiples looking 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 gonna say, well, Buffett's at a fair price is 10 times earnings.

[B]

Yeah.

[A]

Sometimes things deserve to trade at slightly higher than that. Does Berkshire Hathaway own MSCI or they're Moody's only, I believe.

[B]

I don't think they own msci, but I can check the.

[A]

They waited for Moody's to get to 10 times, so maybe that's what Buffett would do.

[B]

Yeah. The other benefit here is even though this is an American company, it's basically international exposure point. Yeah, I guess it's a lot of US investors too, so it's kind of hard to say, but it's more international exposure than other American companies.

[A]

So

[B]

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, I threw in the latest transcript. I said, did they talk at all about how AI is impacting data aggregation? And they said, yes, the AI is dramatically. The management team said, AI is dramatically increasing. Dramatically.

[A]

Wow.

[B]

Data gathering capacity without adding headcount. Which is kind of what we talked about, basically.

[A]

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 to keep it light.

[B]

That would be fun.

[A]

More on More Power hours. But I'm nervous that he would beat us. All right, well, Ryan, anything else before we get out of here? What was your decision? Watch list. Buy, Sell. What are you going to do? That sounds like watch list. The silence says watch list.

[B]

Yeah, I'd probably, probably say watch list, but I really do like the business. 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 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. To answer your question you asked before the show, multiple compression has been quite painful for them.

[A]

Yeah, that's probably what investors are worrying about going forward. There's no reason, if it got down to 15 times 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 Runway 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 I think listeners should consider that today. All right. Anything else, Ryan?

[B]

No, I think that's going to do it. It's kind of refreshing to look at a company where there isn't really any AI risk.

[A]

You just jinxed them, I guess.

[B]

Yeah, I guess. Google I o's event was today so maybe they are launching in the index industry. But yeah, I like capital markets businesses especially. There's just really good durability with some of these established providers in the capital markets industry.

[A]

I think if you add in the brokerages as well, 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 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 gonna 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 MSCI today, 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, some other ones in the brokerage space. I mean Robinhood. Solid business. The ones we also mentioned during this episode. Let's see.

[B]

Asset Light.

[A]

Very asset light. You know, you're not just taking on a bunch of banking, balance sheet risk, all that good stuff. But that's an 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 guest may help. 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. Foreign.

[B]

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 [e-mail]. that's stock w r I t e u p dot com.