An Expert View: MSCI’s Altaf Kassam On What To Consider When Investing In Smart Beta

December 22, 2014

Arnaud Llinas

Altaf Kassam
Head of Equity Applied Reasearch, MSCI

MSCI has been a market leader in indexes for 45 years, but it was the acquisition of Barra, seven years ago, that brought MSCI to the forefront of factor investing. Barra brought its analytical and pure factor modelling pedigree, which includes ways of isolating and analysing the drivers of stock risks and returns. This, combined with MSCI’s long history of creating equity indexes, has produced investible factor indexes, or what people increasingly term “smart beta”.

MSCI has since taken those factors that outperform over the long term, and through their factor indexes, given investors a transparent, systematic way of investing in them.

Altaf Kassam, Head of Equity Applied Research at MSCI, explains what differentiates MSCI in the “smart beta” field and what investors should look at when investing in these factor indexes.

Why does MSCI offer smart beta indexes?
It suits our strengths, as we are unique among index providers in being able to provide both risk modelling and index creation. Smart beta in an investible index form gives the market something that was previously only accessible through active managers. We have been doing it for several years now and some of our products—high dividend yield index and minimum volatility, launched in 2006 and 2008, respectively—are well known now and have several years of live track record, showing that they are more than just a backtest.

What does MSCI do that is unique in this sphere?
We have been creating and publishing indexes for over 45 years, and so could create 40 years of index factor history across our products, which certainly differentiates us from our competitors. We also put a lot of resources into our research, with a large team conceptualising, designing and testing new types of indexes. So, we are not just a research house, but a research house that has an industrial investible index creation process and a sophisticated risk model.

We cover many bases.

Has the market come up with a definition for ‘smart beta’ yet?
I don’t think that the market has agreed on what to call it, or even what’s in it. But I think that everyone agrees that it is not market cap.

Apart from non-market cap, MSCI’s view is that it is a way of weighting stocks differently than market cap, and it specifically takes into account their [stocks] characteristics. For some users, it can be based on different ways of weighting stocks, while for others, it is purely based on stock selection and other things.

The only thing people agree on is what sits outside the market-cap bucket.



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