MSCI CEO on Private Assets, Climate Change, and More | At Barron's
Summary
MSCI (MSCI): Detailed discussion of MSCI's subscription-driven model, revenue mix, headwinds in ESG and active management clients, and growth vectors in indexes, risk, private assets, and climate.
ETFs: Strong emphasis on ETFs as a superior wrapper with tax advantages, expanding beyond market-cap exposure into thematic and strategy indices, and a key revenue driver.
Active ETFs: Highlighted as a major growth avenue, enabling traditional mutual fund strategies in ETF format and a core initiative to support active managers' resurgence.
Index Investing: Framed as long-term, liquid, and efficient, freeing managers to focus on asset allocation which drives most portfolio returns.
Private Assets: Presented as a significant opportunity via transparency, data, and valuation tools for private equity, credit, and real estate to facilitate benchmarking and portfolio integration.
Climate Investing & ESG: Positioned as transformational for portfolios with winners and losers; MSCI offers emissions data, valuation models, and risk analytics, noting shifting demand from transition to physical risk.
Market Outlook: AI and climate cited as the two biggest long-term capital market shifts, with MSCI leveraging AI in climate analytics.
Risks and Mitigants: ESG growth decelerated due to U.S. politics and EU re-regulation, while expansion in non-market-cap ETFs, active ETFs, risk tools, and private assets aims to offset.
Transcript
Hello everyone and welcome to At Barons. I'm Andy Serwarter 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, um I uh I I thought that that I thought about you know the these indices because they were a joint venture between the Morgan Stanley and the Capital Group uh set up around 88 89 something like that and um 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 late night mid to late 90s. [snorts] I was trying to figure out whether [clears throat] I should leave Morgan Stanley to set up a venture, which I had already done once, an entrepreneurial venture, uh, 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 um so I thought about the idea of uh creating an investment tools company, investment infrastructure, investment tools and uh and wrote some papers around it, you know, uh that we went to talk to the uh management committee of Morgan Stanley and uh and 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 uh so I took it over. It was largely a cost center with some revenues to to the freight cost. 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 um so I took it over as a night job. I was trading equity derivatives at the time in the equity division and uh and I said let's see what 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 uh when it came time to uh to decide what we wanted to do with this and more formally I raised my hand that I was going to go run it full-time. Right. Right. >> So I restructure the relationship between Morgan Stell and the capital group and all that in order to achieve that. So it was 98. >> So therefore this became the basis of what is MSE what is now MSEI as very diversified investment tools company >> and fortunately for me the first product that we started with which 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. >> And one of the reasons, by the way, we say indexes is because there was somebody at Dow Jones >> who uh who wrote a piece, >> our parent company, >> your parent company, who wrote a piece that the the right word was indexes, not indices. So, we embrace 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 index? Explain that to us. >> Well, it's about 250,000. >> 250,000 index precise. Yeah, we calculate 250,000 uh indices daily. >> Uh most of them as are end of day calculations but quite a number of them maybe 10 15,000 are realtime calculations. You know you know every 15 seconds we calculate the the value of the index. [clears throat] And the reason is that uh is you know there are maybe 10,000 equity securities in the world that are investable 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 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's >> stocks are like the primary colors and all the shades are like the indexes. Yeah. In which you say it's all the permutations. Okay. Give me the mining companies in Brazil. >> All right. So give me the full companies in Japan, you know, give me the crossover of all the uh telecom companies in emerging market. So when you begin to look at all the permutations, this thing multiplies. >> Okay. So how does the business model work Henry? What it is is a subscriptionbased model. Uh 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 you give a subscription to a magazine and somebody is going to pay you for the regular delivery of the news, right? So we get paid for the regular delivery of the value of the indices in that case or it could be a risk model could be other things could be ESG ratings but we get paid for that. So that is one element of the pricing which is is 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 is variable. It varies to the assets of the organization. It's an asset management fee. So the assets go up, you know, the percentage is the same, but the the fees go up, right? The fe the total amount go up. And the third one, which is the smallest one, is transactionbased. 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 78,000 uh institutional investment clients in about a 100 different countries in the world is basically the who is who. you know, the blest of the bluest, you know, chip of uh of the investment industry because they not only uh want to get our indices, market cap indices, fixed income indices, non-market cap indices, etc., which is about 55 60% of our revenues, but we're the one of the largest provider of risk management tools. So, they want to get our risk management, that's about 30 or so percent of our revenues. They want to 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 the data that come from private assets, the models, the uh the service of performance, the service of risk analysis and all of that. >> I want to explore all those different points that you just made. Um, 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, well, the whole world will turn to indexing and we don't know what that's going to look like, but it's scary. Is there anything scary about this, you think? >> Not at all. >> Not at all. And 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 longterm 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 you're managing against the index, you are going to be invested in that company for a very long time to come. So that is a good benefit. You know it it does the opposite of a short-term investor that it has to come in and out like a hedge fun. 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 necess necess you know they free you up from the daytoday 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. Um, I want to 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 more recent performance where you have not done as well. >> Great. Yep. So in the last five years or so our uh the stock has has done well about 60 plus percent you know return uh 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 in the end of the day you know sideway it hasn't gone uh quite a lot. There are two reasons for that. The first reason is when go back and we describe our subs our uh 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 bare cycles bull cycles when the bulls when the bare cycle goes down they go down but when the bull market comes back they recover maybe not to 100% but to like 80 90% and the next cycle they recovered to 80 90%. this last cycle over the last three or four years they have not recovered significantly because 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 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. Uh so that's what been one headwind. The second headwind was we did exceedingly well for a number of years on ESG or sustainability uh data ratings screening tools and all of that we were growing significantly. There was a period in which we're growing 50% or so you know four or five years ago because of the political climate in the US and because of the reeregulation of ESG ratings and ESG you know criteria and all of that in Europe that came down drastically and therefore uh you know it's going to come back but right now is is down and that has been a headwind in our stock but we're compensating for that with uh with more index investing uh especially especially in this 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 the growth that we were doing, but we're hoping that that's going to 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 the first thing Andy to to uh discuss is uh an ETF is an investment wrapper. It's an investment vehicle. The mutual fund investment vehicle has 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 is almost largely like a mutual fund but it trades in an exchange and it has better tax advantages. Right? So that investment vehicle is started with index investing and that has been phenomenal to us and now it's going into active investing. is going into obviously uh you know digital currencies and it's going into uh 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 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 the 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 got to be a tremendous opportunity for you because so much money is flooding in into the wealth channels and because there's a posity 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 want to grow 89%. 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 or they lack liquidity. So we at MSEI are in the process of changing that. What we want to do is create total transparency for an investor in 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, etc. So, transparency. And the second thing is we're not going to provide liquidity because we're not a market maker. But what we can provide is the next best thing, which is a a 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 is in private entities not in listed entities. So that would open up a dramatic amount of assets for uh 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 is not indices yet. What we do is data. The first thing is there's 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? Um you know in the case of uh you know let's say you know private equity is when is the my capital gonna get called? When is my capital gonna get distributed? So models to to help people do that. How do I blend a 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 a 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 the if I'm invested in private equities in the middle market in in consumer goods in America, what is my total universe and how do I 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 um is that the case? Are you able to have clients overseas using these climate products? >> First of all, if you uh think about strategically and little longer term, the two most significant changes to the global capital markets and obviously to our lives going to 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. Uh now it's going to have a transformational change in everything we do, but we're talking about capital markets. We're talking about portfolios. So climate change is going to 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 you going to start discerning and gradually weeding off getting out of the ones that are going to be losers and overweighting the ones that are going to 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 as a proxy or as a surrogate of of climate change. We're offering valuation models, you know, what is the present value of this asset according to certain degrees of uh of change of of the weather, right? What is the u what is the risk associated with this portfolio uh and all of that. So, it's uh it was growing very fast for us. Three years ago, we're 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, uh targets on net zero and progression to net zero and all of that to physical risk because we're seeing all the effects of of the of the change of climate in direct effect on on physical risk that is taking place for banks, for insurance companies. So uh 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. Uh quite a very large and uh and extensive uh set of products and I'm banking a lot of the future of the company on on on climate change. >> And final question, Henry, I want to 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 uh I was the son of a military man uh in Nicarawa 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 going to become an economist. And I did that in 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 quarter. 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. Uh, and I said, business school? Let me 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 today. But um it's been it's has not been a straight line. I it was not my intent to live in America. You know when I was growing up I was I wanted to help develop my country. Uh but that was uh negated you know by communist revolution at the time. And uh but I'm now fortunate. I tell people that even though it was the transition was not easy, that I was extremely fortunate that uh that I was thrown out of my country, so to speak, you know, uh because I was a capitalist and not a communist and that I ended up in this great country that is uh the envy of the world. >> Henry Fernandez, CEO of MSCI, thank you so much for joining us. >> Thank you. >> This is at Barren. I'm Andy Sir. We'll catch you next time.
MSCI CEO on Private Assets, Climate Change, and More | At Barron's
Summary
Transcript
Hello everyone and welcome to At Barons. I'm Andy Serwarter 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, um I uh I I thought that that I thought about you know the these indices because they were a joint venture between the Morgan Stanley and the Capital Group uh set up around 88 89 something like that and um 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 late night mid to late 90s. [snorts] I was trying to figure out whether [clears throat] I should leave Morgan Stanley to set up a venture, which I had already done once, an entrepreneurial venture, uh, 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 um so I thought about the idea of uh creating an investment tools company, investment infrastructure, investment tools and uh and wrote some papers around it, you know, uh that we went to talk to the uh management committee of Morgan Stanley and uh and 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 uh so I took it over. It was largely a cost center with some revenues to to the freight cost. 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 um so I took it over as a night job. I was trading equity derivatives at the time in the equity division and uh and I said let's see what 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 uh when it came time to uh to decide what we wanted to do with this and more formally I raised my hand that I was going to go run it full-time. Right. Right. >> So I restructure the relationship between Morgan Stell and the capital group and all that in order to achieve that. So it was 98. >> So therefore this became the basis of what is MSE what is now MSEI as very diversified investment tools company >> and fortunately for me the first product that we started with which 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. >> And one of the reasons, by the way, we say indexes is because there was somebody at Dow Jones >> who uh who wrote a piece, >> our parent company, >> your parent company, who wrote a piece that the the right word was indexes, not indices. So, we embrace 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 index? Explain that to us. >> Well, it's about 250,000. >> 250,000 index precise. Yeah, we calculate 250,000 uh indices daily. >> Uh most of them as are end of day calculations but quite a number of them maybe 10 15,000 are realtime calculations. You know you know every 15 seconds we calculate the the value of the index. [clears throat] And the reason is that uh is you know there are maybe 10,000 equity securities in the world that are investable 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 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's >> stocks are like the primary colors and all the shades are like the indexes. Yeah. In which you say it's all the permutations. Okay. Give me the mining companies in Brazil. >> All right. So give me the full companies in Japan, you know, give me the crossover of all the uh telecom companies in emerging market. So when you begin to look at all the permutations, this thing multiplies. >> Okay. So how does the business model work Henry? What it is is a subscriptionbased model. Uh 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 you give a subscription to a magazine and somebody is going to pay you for the regular delivery of the news, right? So we get paid for the regular delivery of the value of the indices in that case or it could be a risk model could be other things could be ESG ratings but we get paid for that. So that is one element of the pricing which is is 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 is variable. It varies to the assets of the organization. It's an asset management fee. So the assets go up, you know, the percentage is the same, but the the fees go up, right? The fe the total amount go up. And the third one, which is the smallest one, is transactionbased. 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 78,000 uh institutional investment clients in about a 100 different countries in the world is basically the who is who. you know, the blest of the bluest, you know, chip of uh of the investment industry because they not only uh want to get our indices, market cap indices, fixed income indices, non-market cap indices, etc., which is about 55 60% of our revenues, but we're the one of the largest provider of risk management tools. So, they want to get our risk management, that's about 30 or so percent of our revenues. They want to 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 the data that come from private assets, the models, the uh the service of performance, the service of risk analysis and all of that. >> I want to explore all those different points that you just made. Um, 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, well, the whole world will turn to indexing and we don't know what that's going to look like, but it's scary. Is there anything scary about this, you think? >> Not at all. >> Not at all. And 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 longterm 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 you're managing against the index, you are going to be invested in that company for a very long time to come. So that is a good benefit. You know it it does the opposite of a short-term investor that it has to come in and out like a hedge fun. 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 necess necess you know they free you up from the daytoday 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. Um, I want to 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 more recent performance where you have not done as well. >> Great. Yep. So in the last five years or so our uh the stock has has done well about 60 plus percent you know return uh 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 in the end of the day you know sideway it hasn't gone uh quite a lot. There are two reasons for that. The first reason is when go back and we describe our subs our uh 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 bare cycles bull cycles when the bulls when the bare cycle goes down they go down but when the bull market comes back they recover maybe not to 100% but to like 80 90% and the next cycle they recovered to 80 90%. this last cycle over the last three or four years they have not recovered significantly because 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 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. Uh so that's what been one headwind. The second headwind was we did exceedingly well for a number of years on ESG or sustainability uh data ratings screening tools and all of that we were growing significantly. There was a period in which we're growing 50% or so you know four or five years ago because of the political climate in the US and because of the reeregulation of ESG ratings and ESG you know criteria and all of that in Europe that came down drastically and therefore uh you know it's going to come back but right now is is down and that has been a headwind in our stock but we're compensating for that with uh with more index investing uh especially especially in this 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 the growth that we were doing, but we're hoping that that's going to 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 the first thing Andy to to uh discuss is uh an ETF is an investment wrapper. It's an investment vehicle. The mutual fund investment vehicle has 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 is almost largely like a mutual fund but it trades in an exchange and it has better tax advantages. Right? So that investment vehicle is started with index investing and that has been phenomenal to us and now it's going into active investing. is going into obviously uh you know digital currencies and it's going into uh 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 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 the 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 got to be a tremendous opportunity for you because so much money is flooding in into the wealth channels and because there's a posity 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 want to grow 89%. 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 or they lack liquidity. So we at MSEI are in the process of changing that. What we want to do is create total transparency for an investor in 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, etc. So, transparency. And the second thing is we're not going to provide liquidity because we're not a market maker. But what we can provide is the next best thing, which is a a 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 is in private entities not in listed entities. So that would open up a dramatic amount of assets for uh 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 is not indices yet. What we do is data. The first thing is there's 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? Um you know in the case of uh you know let's say you know private equity is when is the my capital gonna get called? When is my capital gonna get distributed? So models to to help people do that. How do I blend a 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 a 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 the if I'm invested in private equities in the middle market in in consumer goods in America, what is my total universe and how do I 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 um is that the case? Are you able to have clients overseas using these climate products? >> First of all, if you uh think about strategically and little longer term, the two most significant changes to the global capital markets and obviously to our lives going to 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. Uh now it's going to have a transformational change in everything we do, but we're talking about capital markets. We're talking about portfolios. So climate change is going to 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 you going to start discerning and gradually weeding off getting out of the ones that are going to be losers and overweighting the ones that are going to 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 as a proxy or as a surrogate of of climate change. We're offering valuation models, you know, what is the present value of this asset according to certain degrees of uh of change of of the weather, right? What is the u what is the risk associated with this portfolio uh and all of that. So, it's uh it was growing very fast for us. Three years ago, we're 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, uh targets on net zero and progression to net zero and all of that to physical risk because we're seeing all the effects of of the of the change of climate in direct effect on on physical risk that is taking place for banks, for insurance companies. So uh 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. Uh quite a very large and uh and extensive uh set of products and I'm banking a lot of the future of the company on on on climate change. >> And final question, Henry, I want to 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 uh I was the son of a military man uh in Nicarawa 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 going to become an economist. And I did that in 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 quarter. 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. Uh, and I said, business school? Let me 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 today. But um it's been it's has not been a straight line. I it was not my intent to live in America. You know when I was growing up I was I wanted to help develop my country. Uh but that was uh negated you know by communist revolution at the time. And uh but I'm now fortunate. I tell people that even though it was the transition was not easy, that I was extremely fortunate that uh that I was thrown out of my country, so to speak, you know, uh because I was a capitalist and not a communist and that I ended up in this great country that is uh the envy of the world. >> Henry Fernandez, CEO of MSCI, thank you so much for joining us. >> Thank you. >> This is at Barren. I'm Andy Sir. We'll catch you next time.