Profit from MSCI, the foundation of the financial industry

MSCI plays an important role in the global financial system as an index provider

Its stock appears to be cheap.

In 1884, Charles Dow established the Dow Jones Transportation Average, the first stock market index in history. There were only 11 companies in total. Although Dow was unaware of it at the time, he had laid the foundation for the international investment market.

Indexes now rule the investment world, thanks to the efforts of Dow and other index pioneers who sought to make the chaotic movements of Wall Street and the City of London understandable to the general public. Tens of trillions of dollars are benchmarked to important indexes, and investment managers worldwide release their quarterly results and assess their own performance in relation to these crucial financial metrics.

The firms that compute and manage the most significant indexes have consequently taken on the role of gatekeepers for the international financial markets.

One of the three major index providers is MSCI.

MSCI, FTSE Russell, and SandP Dow Jones are the three primary index providers. Each index has unique advantages and disadvantages, and some are more well-known in important markets than others. For instance, the majority of investors in the UK are aware of the FTSE 100, which is owned and managed by FTSE Russell, which is in turn owned by LSEG, the company that owns the London Stock Exchange. The S&P 500 and Dow Jones Industrial Average are the two primary US market indexes that are managed by S&P Dow Jones. The global stock benchmarks are managed by MSCI.

Fund managers receive benchmarking data from these companies. When Vanguard or BlackRock (iShares) introduce a fund, they enter into a licensing contract with the index provider. The index provider then provides up-to-date information on index changes and keeps track of every dollar that enters that fund to determine the "licensing fee" they are due. Although the fund managers could handle this themselves, a third party eliminates any conflicts of interest and enables investors to evaluate the performance of various fund providers.

The MSCI World index, which encompasses the 23 largest and most significant developed equity markets worldwide, is the company's flagship offering (NYSE: MSCI). Approximately 85% of the global equity market capitalization is made up of the 1,320 constituents. Because of the index's size and scope, the company is now among the world's most significant index providers, if not the most significant. The most recent results from MSCI show that the total assets benchmarked to its equity indexes were approximately £18.3 trillion. Of that, £6 trillion is allocated to actively managed strategies, and £12 trillion is allocated to indexed (passive) products. Additionally, it mentioned a record £2 trillion in ETFs that are connected to their indexes.

Because of the scope of the company's influence, gaining its approval can make or break businesses and nations. At the end of January, MSCI issued a warning that declining liquidity might result in Indonesia being kicked out of its top developing-markets index, which caused shares on the Jakarta Composite index to plummet 8% in a single day.

MSCI generates profits.

There are four primary business segments for MSCI. Its flagship division is its index business. ETFs and open-ended unit trusts are two examples of products that generate revenue through asset-based fees and recurring subscriptions. Additionally, it has an analytics company that offers tools for risk and portfolio management. There is some overlap between the index division and the sustainability division since the latter can assist managers in benchmarking against environmental indexes. The sustainability division offers data and ratings to assist investors in addressing new environmental and social risks. Last but not least is the company's private asset division, which gives managers of real estate and private equity performance information.

Subscriptions, either fixed-fee or asset-based, account for almost all of the company's revenue. Asset managers must essentially pay these subscriptions in order to continue having access to MSCI's data and using its indexes as benchmarks. This business model is ideal in many ways. There are three main players in the industry, revenue is consistent, and there are nearly no marginal costs associated with building and maintaining indexes.

The subscription run-rate for MSCI's index business increased by 9.4% in the fourth quarter of 2025, while the custom index division saw a 16 percent year-over-year increase in subscriptions. The growing demand for global passive trackers and the ongoing expansion of private markets, according to UBS analysts, could push the overall growth rate back to double digits in 2026. In the fourth quarter, revenue from private markets increased 7% year over year, while asset-based fees, which are primarily associated with ETFs, increased 21%.

In addition to cutting expenses, management is using AI to expedite procedures and take advantage of economies of scale. According to UBS's calculations, the company's EBITDA margin will increase by 170 basis points to 62.5% in fiscal 2026 and by an additional 60 basis points to 63.2% in the following year. Because the company is a data company with significant economies of scale, high customer switching costs, and long-term contracts, these high margins are indicative of that. In fact, the group and BlackRock extended their collaboration until 2035 last year.

In fiscal 2026, UBS anticipates net income of £1.05 billion, up from £1.03 billion in 2025. With continued growth, the global asset-management market may reach £2.04 billion by 2030. MSCI's shares are currently trading at just 26 times projected 2027 earnings, down from their five-year average of 40 times, despite this growth. Additionally, in comparison to the larger S&P 500, it is trading one standard deviation below its long-term valuation. Given the company's worldwide dominance, that seems inexpensive.

MSC.