Name: MSCI CEO on Private Assets, Climate Change, and More
Uploaded: 2025-11-06T16:00:00Z
Duration: 21 min 57 s
Description: Henry Fernandez's company oversees hundreds of thousands of indexes.

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Henry Fernandez's company oversees hundreds of thousands of indexes.

https://m.wsj.net/video/20251105/7d97b28f-f6a6-4b3b-bc5b-ffce8082a4b0/1/hls/manifest-hd-wifi.m3u8

MSCI CEO on Private Assets, Climate Change, and More

Hello everyone, and welcome to "At Barron's." I'm Andy Serwer, and welcome to our guest, Henry Fernandez, CEO of MSCI. Henry, great to see you.

Thanks for having me.

So MSCI, the old Morgan Stanley Capital Index. There's a long history there. Give us some of that backstory, please, Henry, to start us off.

So in those days, back in the mid '80s, mid-to-late '80s, I thought that, I thought about, you know, these indices because they were a joint venture between Morgan Stanley and the Capital Group set up around '88, '89, so something like that, and it was interesting to follow them because, you know, they had the name of Morgan Stanley, and it was performance of global markets and all of that, so anyhow, you roll the clock forward 10 years after in the kind of mid-to-late '90s. I was trying to figure out whether I should leave Morgan Stanley to set up a venture, which I had already done once, an entrepreneurial venture, or whether I should look at a part of Morgan Stanley and make it highly entrepreneurial and see if I could develop a third division of Morgan Stanley, so I thought about the idea of creating an investment tools company, investment infrastructure, investment tools, and wrote up some papers around it. You know, we went to talk to the management committee of Morgan Stanley, and then I looked at what parts of Morgan Stanley can help me get started so that I would not start from scratch, and I discovered this little area of Morgan Stanley called Morgan Stanley Capital International, which was a joint venture between the Capital Group of Los Angeles and Morgan Stanley, and so I took it over. It was largely a cost center with some revenues to the freight costs. It had about 60, 70 people. It had clients all over the world, and importantly, it had two parent companies that were willing to subsidize it, so I took it over as a night job. I was trading equity derivatives at the time in the equity division, and I said, "Let's see what we do with this. "Let's see where it goes," so I did that for a couple years. I became very interested in it, and then, when it came time to decide what we wanted to do with this and more formally, I raised my hand that I was gonna go run it full time, so I restructured the relationship between Morgan Stanley and the Capital Group and all that, so in order to achieve that, so it was '98, so therefore this became the basis of what is now MSCI as a very diversified investment tool company, and fortunately for me, the first product that we started with, which were market cap indices around the world, became one of the most important products.

Right, right, so you have all these indexes... By the way, do you say indexes or indices?

We used to say indices. We now say indexes.

Got it. Okay. Indexes. I like that better.

And one of the reasons, by the way, we say indexes is because there was somebody at Dow Jones who wrote a piece-

Our parent company.

Our parent company, who wrote a piece that the right word was indexes, not indices, so we embraced that, you know, from Dow Jones.

Great, great, so you have thousands of indexes, and some of them you track real time. Why are there so many? Thousands and thousands and thousands of indexes. Explain that to us.

Well, it's about 250,000-

250,000 indexes.

To be precise, yeah. We calculate 250,000 indices daily. Most of them are end-of-day calculations, but quite a number of them, maybe 10, 15,000, are real-time calculations, you know? You know, every 15 seconds we calculate the value of the index, and the reason is that is, you know, there are maybe 10,000 equity securities in the world that are investible by an international, you know, player, so the question is how do you mix and match all of that? So people say, "Why do you have 250,000 indices "for 10,000 companies?" And I normally tell them there are only a very limited number of colors in the world, but we have clothing that has an enormous variety of different shades of gray, shades of blue, shades of red, and all of that, in order to, because you mix and match all the colors so that-

The stocks are like the primary colors, and all the shades-

All the shades-

are like the indexes.

are the indexes, yeah, in which you say it's all the permutations. Okay, give me the mining companies in Brazil, right? So give me the full companies in Japan, you know? Give me the crossover of all the telecom companies in emerging markets, so when you begin to look at all the permutations, the thing multiplies.

Okay, so how does the business model work, Henry?

What it is is a subscription-based model because what we sell is not a product that you sell and you disappear. We sell a product that you need to maintain every day. You need to supply. It's almost like a newspaper. It's almost like a magazine, right? You give a subscription to a magazine, and somebody is gonna pay you for the regular delivery of the news, right? So we get paid for the regular delivery of the value of the indexes, in that case, or it could be a risk model. It could be other things. Could be ESG ratings, but we get paid for that, so that is one element of the pricing, which is it's a fixed fee. It's a subscription fee that goes up with inflation over time. The second way we get paid, that's the majority, 75% of our revenues come from that, some, like 22, 23% of our revenues come from a subscription fee, but it's variable. It varies to the assets of the organization. It's an asset management fee, so the assets go up, you know, percentage is the same, but the fees go up, right? The total amount go up, and the third one, which is the smallest one, is transaction-based. It's a subscription in which we get paid on the transactions that take place.

Got it, and who are your clients?

We have about 7,000, 8,000 institutional investment clients in about 100 different countries in the world is basically the who's who, you know, the bluest of the bluest, you know, chip of the investment industry because they not only wanna get our indices, market cap indices, fixed income indices, non-market cap indices, et cetera, which is about 55, 60% of our revenues, but we're one of the largest provider of risk management tools, so they wanna get our risk management that's about 30 or so percent of our revenues. They wanna get our sustainability data and sustainability models, our ESG ratings, and all of that, and importantly, we're gradually, you know, getting into more and more of private assets, so the data that come from private assets, the models, the service of performance, the service of risk analysis and all of that.

I wanna explore all those different points that you just made. Is there any sort of systemic risk to the point that there's more indexes than stocks? I mean, some people say, you know, "Well, the whole world will turn to indexing, "and we don't know what that's gonna look like, "but it's scary." Is there anything scary about this, you think?

Not at all. Not at all, and let me start with two, three important concepts. We complain a great deal that the markets are too short-term. Index investors are the ultimate long-term investors because as long as there is an index, and as long as it has companies in it, and as long as you have assets and you're managing against the index, you're gonna be invested in that company for a very long time to come, so that is a good benefit, you know? It does the opposite of a short-term investor that it has to come in and out like a hedge fund. The second component is the world is getting very large in number of equities, number of bonds, number of assets, you know, asset classes and all of that, so, you know well, Andy, that the value of an investment portfolio, 90-plus percent of the value of the investment portfolio is in the asset allocation, not on the stock or bond selection, so what indices do is they free you up. They free you up from the day-to-day process of just picking stocks and picking bonds in a way that you can then focus your time, your energy, and the resources of your firm in the asset allocation, so that's another benefit, and thirdly, gives you an incredible amount of liquidity in an investment vehicle that you know exactly what you're getting.

Right, right, right. I wanna talk about your stock, MSCI stock. I should have mentioned it's a publicly traded company, about a $42 billion market cap. It was a home run for a very long time, for many years after the IPO. Lately, though, past four years or so, it's been trading sideways, down, a little bit sideways. Why is that? Especially the recent performance where you have not done as well.

Right. Yep, so in the last five years or so, the stock has done well, about 60-plus percent, you know, return cumulatively during that period of time, but if you measure it in the last four years, we're down about 10% or so, and it has traded, you know, it's traded with a lot of volatility, but at the end of the day, you know, sideways. It hasn't gone quite a lot. There are two reasons for that. The first reason is when... Go back and we describe how we charge. 75% we charge subscriptions. Half of those subscriptions are to the active asset management industry, which is an industry that every cycle, every investment cycle, bear cycles, bull cycles, when the bear cycle goes down, they go down, but when the bull market comes back, they recover, maybe not to 100 percent, but to, like, 80, 90%, and the next cycle they recover to 80, 90%. This last cycle, over the last three or four years, they have not recovered significantly 'cause they're feeling the effects of, obviously, indexation on one hand and private asset investing on the other hand, and within the active asset management industry, also, the concentrated portfolio investing, right? So that has been one headwind, so the industry needs us more, so we're developing a lot of new products to help them deal with that, so they can do, for example, products for active ETFs that the active asset management industry is putting a lot of faith on that product to be able to grow, so that's been one headwind. The second headwind was we did exceedingly well for a number of years on ESG or sustainability, data, rating, screening tools, and all of that. We were growing significantly. There was a period in which we were growing 50% or so, you know, four or five years ago. Because of the political climate in the U.S. and because of the re-regulation of ESG ratings and ESG, you know, criteria and all of that in Europe, that came down drastically, and therefore, you know, it's gonna come back, but right now it's down, and that has been a headwind in our stock, but we're compensating for that with more index investing, especially index investing, but also we're compensating for that with risk management, with private assets and all of that, but it hasn't made up the growth that we were doing, but we're hoping that that's gonna come back soon.

Let me ask you to drill down a little bit, please, Henry, into the ETF business. How is that going for you? You're talking about that as something to mitigate, offset this decline that you had talked about.

So the first thing I need to discuss is an ETF is an investment wrapper. It's an investment vehicle. The mutual fund investment vehicle's been around in America for over 100 years, 101, actually, to be exact this year, and that has served us incredibly well, but there is a new investment vehicle that has come back in the last 20, 30 years, which is called the exchange traded fund, which is almost larger, like a mutual fund, but it trades in an exchange, and it has better tax advantages, right? So that investment vehicle started with index investing, and that has been phenomenal to us, and now it's going into active investing, it's going into, obviously, you know, digital currencies, and it's going into tokenization of private assets and a lot of different things to wrap it on that, so ETFs, therefore, have been a major driver of our clients and a major driver of our revenues on the passive investing, the index investing side, and that will continue. We're only getting started because the only thing that has been turned, the largest thing that has been turned into ETF is market cap exposures. What we're now doing, most of the incremental work is what I would call non-market cap exposure, meaning you have an investment thesis on the index, not just an exposure to a market, and you can put it into an ETF, and also now active ETF, in which you're taking a lot of what is traditionally been done in mutual funds, and you're putting them into an ETF format and make it available to people. That's another revolution that is taking place.

Right. You mentioned private markets. I have to think that's gotta be a tremendous opportunity for you because so much money's flooding in into the wealth channels and because there's a paucity of benchmarks, correct?

Absolutely, so the first thing to think about is if you're an asset allocator, particularly an institutional asset allocator, your job is to have a leverage play on global economic growth, and if the global economy is growing 3, 4% a year, you wanna grow 8, 9%, so the next question is what investment vehicles and investment strategies do you use to do that? So you invest in public assets or listed assets because they have two things. They have transparency, and they have liquidity, and the reason you don't invest in a lot of private assets is because they lack transparency of they lack liquidity, so we, at MSCI, are in the process of changing that. What we wanna do is create total transparency for an investor investing in a private credit fund. What is the credit rating of the credit fund? What is the market, you know, the market risk and all of that? What is the underlying, you know, holdings? What's the leverage and all of that, you know, in a private equity fund, in a private real estate fund, et cetera? So transparency, and the second thing is we're not gonna provide liquidity because we're not a market maker, but what we can provide is the next best thing, which is a sense of valuation, the valuation of the portfolio so that people can buy and sell the units of the fund, or NAV, on the basis of those valuations, so that is an incredible opportunity, and most of the global economy is in private hands. It's in private entities, not in listed entities, so that would open up a dramatic amount of assets for individual and institutional investors to invest in.

How's that going? I mean, how many products or indexes do you have that speak to that?

Yeah, so most of what we do today in private assets, it's not indices yet. What we do is data. The first thing it starts, tell me what is in the portfolio, you know, transparency. Tell me what's in it, so that's the first thing. Secondly is what's the performance? What is the risk of this portfolio? You know, in the case of, you know, let's say, you know, private equity is when is my capital gonna get called? When is my capital gonna get distributed? So models to help people do that. How do I blend a private equity, private debt, private real estate portfolio against my public equities to build a total portfolio? So we're doing a lot of that, and in the process of doing that, also, obviously, we're creating benchmarks so that you take an investment portfolio, and you compare it to the market. You know, a benchmark is really a comparison to a market, so what will they, if I'm investing in private equities in the middle market, in consumer goods in America, what is my total universe? And how do I compare my portfolio to the total market?

You mentioned climate change and that business being under pressure here in the United States. I can understand that, but A, it seems like climate, as an issue, is not going away, and B, it seems to be front and center still in other countries, so is that the case? Are you able to have clients overseas using these climate products?

First of all, if you think about strategically and little longer term, the two most significant changes to the global capital markets and obviously, to our lives, gonna be two: AI and climate change. AI is in the front right now because that's the transformation that is taking place, and climate is coming. Climate change is coming. Now, it's gonna have a transformational change in everything we do, but we're talking about capital markets. We're talking about portfolios, so climate change is gonna have a lot of winners and a lot of losers, and they're all in the portfolio of our clients today. The question is how are you gonna start discerning and gradually weaning off, getting out of the ones that are gonna be losers and overweighting the ones that are gonna be winners, so we are offering a wide range of products to do that. You know, we're offering the data, carbon emission data to understand, you know, as a proxy or as a surrogate of climate change. We're offering valuation models, you know, what is the present value of this asset according to certain degrees of change of the weather, right? What is the risk associated with this portfolio and all of that, so it was growing very fast. For us, three years ago, we were growing at 100% on this area. Then it went down to 50%, and we're now growing at 20%, so that tells you a little bit about the change in the demand. The demand has also changed from transition risk, you know, targets on net zero and progression to net zero and all of that to physical risk because we're seeing all the effects of the change of climate in direct effect on physical risk that is taking place for banks, for insurance companies, so we have the data. We have the models. We have the technology. We're using a lot of AI, actually, to do all of this, quite a very large and extensive set of products, and I'm banking a lot of the future of the company on climate change.

And final question, Henry, I wanna ask about you a little bit. You grew up in Nicaragua. Did you come here to work on Wall Street and to ultimately become the CEO of MSCI? Tell us a little about your story.

Not at all. I was the son of a military man in Nicaragua, which is basically a civil servant, and my entire upbringing was about how to become a civil servant. How do you become a... In my case, I wanted to be an economist at the central bank, and that's what I, you know, went through the first 21 years of my life. Then the revolution came, and I said, "I cannot do that, "so I'm gonna become an economist," and I did that, and I was in a PhD program to do that, and I started looking for jobs, and I was a political refugee, and most of the jobs in the big multilateral organizations are based on country quota, so I couldn't get a job, so I said, you know, a professor of mine recommended to me that I should go to business school, and I said, "Business school? "Well, lemme read about that," and so I went to business school. While I was there, I discovered Wall Street. I fell in love with Wall Street, so I came to Wall Street, and, you know, that's what eventually led me to what I do to today, but it has not been a straight line. It was not my intent to live in America, you know, when I was growing up. I wanted to help develop my country, but that was negated, you know, by communist revolution at the time, but I'm now fortunate. I tell people that even though the transition was not easy, that I was extremely fortunate that I was thrown out of my country, so to speak, you know, because I was a capitalist and not a communist, and that I ended up in this great country that is the envy of the world.

Henry Fernandez, CEO of MSCI, thank you so much for joining us.

Thank you.

This is "At Barron's." I'm Andy Serwer. We'll catch you next time.