“PAGING” FOR THE MSCI INDEX

Page Industries hit a new record high today on the BSE at Rs.32,750. And all because there was a small one-liner in Bloomberg that this stock is a potential addition to the MSCI Index.

On the other hand, the news is that Vakrangee might be removed from the MSCI Asia Index. Well, as such Vakrangee is known rouge stock, so this does not really take the market by surprise.

It is the quarterly addition and exclusion time for Morgan Stanley Capital International Index or MSCI Inc and that means, we could see some reclassifications happening; this does not just happen on a quarterly basis but also on an annual basis.  The date scheduled is 14^th August and here, we are not talking about just the MSCI India index but about their Asian index.

On the MSCI India Domestic Index, which was effective 31^st May’18, 4 stocks were added – Avenue Supermarkets, Biocon, HDFC Standard Life and Indigo. The deletions are three – IDFC Bank, Power Finance Corp and Vakrangee. This was a semi-annual exercise, done every year in May and November.

In the MSCI India Domestic Small Cap Index, some 30 stocks were added and 15 were deleted.

The MSCI India Index is designed to measure the performance of the large and mid cap segments of the Indian market. With 69 constituents, the index covers approximately 85% of the Indian equity universe, where maximum stocks are from the financials and least from telecom.

The MSCI India Small Cap Index likewise is designed to measure the performance of the small cap segment of the Indian market. With 146 constituents, the index represents approximately 14% of the free float-adjusted market capitalization of the India equity universe. Here too, maximum investment is in financials though least is in energy.

And it’s not like stocks are selected at random. The index is based on the MSCI Global Investable Indexes (GIMI) Methodology—a comprehensive and consistent approach to index construction that allows for meaningful global views and cross regional comparisons across all market capitalization size, sector and style segments and combinations. The main aim while choosing the stocks is index liquidity, investability and replicability. The index is reviewed quarterly—in February, May, August and November—with the objective of reflecting change in the underlying equity markets in a timely manner, while limiting undue index turnover. During the May and November semi-annual index reviews, the index is rebalanced and the large and mid capitalization cutoff points are recalculated.

It does not mean that from 1st June onwards, the stocks added will zoom and those deleted will always remain in the red. But what it does indicate is that a rebalancing will come in - other funds will also follow suit and say, in two-three weeks, the new index will get balanced. So in coming days, for short term these stocks could see some added volumes and volatile prices.

Based on all this that we read, one would feel that following the MSCI could probably be the best way to invest. It is to some extent but only if you know beforehand the name of a stock which is going to be added or deleted. And getting that insider information is impossible. So the same age old formula remains the best – track the fundamentals of a stock, you will never go wrong and you most certainly do not need a MSCI for tracking.

Just as exclusion of a stock from the MSCI does not mean that the company’s fundamentals have gone phut; addition also sometimes might be purely from a technical perspective. So do not go purely by what MSCI adds or deletes as your cues to buy and sell respectively. Use it only as information but act only on fundamentals and future prospects of the company. Use the MSCI Index to see which industries the FIIs are backing actively and which have the least weightage – now that is good information to make your choice of stocks based on fundamentals.

As Warren Buffet rightly says, “Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now. Over time, you will find only a few companies that meet these standards – so when you see one that qualifies, you should buy a meaningful amount of stock.”