MSCI has introduced its first sole-branded fixed income indices with the launch of two suites providing factor-based and environmental, social and governance (ESG)-screened exposures.

Peter Zangari, Global Head of Research and Product Development at MSCI.

The MSCI Fixed Income Factor and MSCI Fixed Income ESG indices are built around a universe of investment-grade, US dollar-denominated corporate bonds and derived from the parent MSCI USD Investment Grade Corporate Bond Index – also a newly created index.

The parent index includes bullet, callable, and puttable fixed-rate coupon bonds with at least $750 million outstanding and more than one year remaining until maturity.

The new indices are likely to be well-received given MSCI’s pedigree in the indexing space.

Within the ETF industry, the firm is a leading provider of both factor and ESG equity indices and has previously collaborated with Bloomberg, providing ESG ratings for a suite of co-branded fixed income indices.

The new indices seek to cater to a growing demand for fixed income exposures with the asset class attracting the highest share of European ETF flows during 2019.

Research from fixed income ETF issuer Tabula Investment Management found that professional investors are not only expecting to increase their fixed income ETF allocations over the next three years but are also demonstrating a significant appetite for innovation – such as factor and ESG plays – within the asset class.

Jana Haines, Head of Index Products for the Americas at MSCI, commented, “Investors are increasingly demanding ESG integration across all asset classes and looking to factors – such as carry, quality, value, size, and risk – to more precisely define how they can better identify, measure, and manage risk and return in their portfolios.”

Peter Zangari, Global Head of Research and Product Development at MSCI, added, “Investors are facing market conditions driven by macroeconomic and geopolitical events, industry dynamics, and the increased role of data and technology. Our fixed income solutions help investors assess and manage opportunity and risk while responding to demand for improved transparency and operational efficiency. Building on our four decades of experience, this next generation of indices brings increased clarity to the traditionally opaque fixed income asset class to support ESG and factor-based fixed income strategies.”

Factors

MSCI has introduced twelve factor-based indices built off six distinct strategies. The six strategies target returns attributable to carry, low risk, quality, value, and low size factors, and also includes a multi-factor strategy that combines the carry, value, low risk, and low size factors.

Factor exposures are determined using z-score analysis for relevant metrics: the carry factor is determined by option-adjusted spread; the low risk factor by duration; the quality factor by credit rating; the value factor by a combination of option-adjusted spread, duration, credit rating, and issuer size; and the low size factor by amount of debt outstanding.

Each of the six strategies is available in either a factor-tilted index, which includes all securities of the parent index but assigns a greater weight to those with higher factor scores, or a “High Exposure” index which selects only those constituents with the highest factor exposures while maintaining suitable index diversification.

The indices are rebalanced on a quarterly basis and include buffer rules in a bid to limit unnecessary turnover.

The indices are as follows:

MSCI USD IG Carry Corporate Bond Index
MSCI USD IG Low Risk Corporate Bond Index
MSCI USD IG Quality Corporate Bond Index
MSCI USD IG Value Corporate Bond Index
MSCI USD IG Size Corporate Bond Index
MSCI USD IG Multi-Factor Corporate Bond Index

MSCI USD IG Carry High Exposure Corporate Bond Index
MSCI USD IG Low Risk High Exposure Corporate Bond Index
MSCI USD IG Quality High Exposure Corporate Bond Index
MSCI USD IG Value High Exposure Corporate Bond Index
MSCI USD IG Size High Exposure Corporate Bond Index
MSCI USD IG Multi-Factor High Exposure Corporate Bond Index

ESG

MSCI has initially launched two ESG fixed income indices – the MSCI USD IG ESG Universal Corporate Bond Index and MSCI USD IG ESG Leaders Corporate Bond Index.

The ESG Universal index screens the parent universe to exclude bonds from issuers involved in controversial weapons, while the ESG Leaders index goes further by also excluding issuers with business activities related to alcohol, gambling, tobacco, nuclear power, and civilian weapons. Both indices also remove issuers embroiled in severe ESG-related controversies.

Remaining issuers are assigned ESG ratings using in-house analytics from MSCI, with the index provider using a seven-point scale from ‘AAA’ to ‘CCC’ based on how the company manages key issues relative to industry peers.

The ‘Universal’ index includes all issuers, weighting constituents by market value while increasing exposure to issuers with robust ESG profiles as well as a positive trend in improving that profile. Issuer weights are capped at 5%.

The ‘Leaders’ index selects a subset of constituents which makes up 50% of the market value of each sector of the parent universe. The methodology favours issuers with greater market value, robust ESG profiles, and positive trends in improving that profile. Constituents are weighted by market value outstanding.