MSCI Update

October 01, 2004

Data From FactSet Research

MSCI added another important data vendor for its US Equity Indices, with leading provider FactSet Research agreeing to carry both index-level and constituent data for the broad suite of indexes. The indexes, introduced in early 2003, already have more than $40 billion in assets benchmarked to them. "This represents an important step in our process of ensuring that MSCI's new US Equity Indices are available through the data vendors relied upon by institutional and retail investors," says Ken O'Keeffe, MSCI's executive director.

The new indexes are designed to allow investors to look at and invest in the U.S. equity market from multiple perspectives, including market capitalization, investment style and sectors, and in any combination thereof. The quarterly-rebalanced indexes use eight different variables to define the growth/value component of a security, and use buffer zones between market capitalizations and growth/value assignments to reduce portfolio turnover.

"Many of our clients already use FactSet to access MSCI's international indices," says Robert Magri, Director of FactSet Content and Strategic Partnerships. "We are pleased to now offer the MSCI US Equity Indices." In addition to FactSet, constituent and index data is available directly from MSCI. Index level data is currently available through Bloomberg, Datastream, Ibbotson, Micropal, Morningstar, PerTrac, Reuters, Russell Mellon and Zephyr.

Taiwan Set For Full MSCI Inclusion

In a move that is expected to see billions of dollars move across Asian markets, and may bode well for shortterm Taiwan market returns, MSCI (Morgan Stanley Capital International) says it will give full weight to Taiwan's stocks in its indexes. A Bloomberg News feature estimated that investors will need to buy about $4 billion of Taiwan equities just to track the benchmarks, with the possibility of even more cash moving as speculators step in to try to benefit from the shift.

Taiwanese stocks will see their weighting move from about 55% of their market value in the MSCI indexes up to 100%. Taiwan currently is Asia's No. 5 stock market by value. MSCI has announced that the changes will will be implemented in two stages, with the weighting moving to 75% at the close of trading on November 30, and to 100% on May 31, 2005. MSCI set the standard for such large index transitions with the shifting of its global indexes to free float in recent years. S&P is following suit this year with a one-year transition of its U.S. indexes to free float. Anticipating the MSCI announcement, Goldman Sachs on June 7 advised clients to buy more Taiwan equities, and forecast that a weighting increase would help the benchmark Taiex index rise as much as 30% in a year.

Similar to the free float moves, the increase in the Taiwan weighting results from the country's scrapping last July of restrictions on the amount of stock that overseas investors can hold. With the full market now available to overseas investors, more of the market entered the global float. Accordingly, in April MSCI started a consultation on whether to grant Taiwan greater representation . The staggered index shifts that MSCI announced are meant to dull the effect of the index transition and make it very difficult to game the index changes, as myriad market factors are in play over the transition period. Still, all things being equal, investors are best served by trying to get on the right side of such a large move, either by hedging the transition or by attempting to benefit from the market movement.

With 100% inclusion, Taiwan would surpass South Korea as the largest market represented in the MSCI Emerging Markets Index at 20%. The island would also account for 27% of the MSCI All Country Asia-Pacific excluding Japan Index, exceeding both South Korea and Hong Kong, says MSCI in a statement on its Web site. While the move is clearly a positive one for the Taiwan market, both South Korean and Hong Kong markets should be expected to suffer on net because of the index and speculative money that will move. For investors who either would like to benefit from these moves or to hedge them, there is a very easy way to access all three of the markets in a very targeted way: The iShares MSCI Taiwan (EWT) and iShares MSCI Hong Kong ETFs both trade on the American Stock Exchange.

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