Research

MSCI completes factor indices research study for world’s largest pension fund

MSCI has completed a research mandate for Japan’s Government Pension Investment Fund (GPIF) that examines uses of factor-based indices in large institutional portfolios and evaluates passive implementation of factor strategies alongside traditional passive and active mandates.

“We are happy to have been recognised by some of the world’s largest asset owners, including GPIF and Norway’s Ministry of Finance, for our expertise in factor indexes,” says Baer Pettit, managing director and global head of MSCI’s index business. “The study commissioned by GPIF reveals that passive factor strategies, which are made possible through newly developed factor indexes, and active management are not mutually exclusive. As a result, sophisticated institutional investors may increasingly make an independent allocation to passive factor investments, in parallel to their existing active and passive mandates.”
 
Chin Ping Chia, head of index applied research for MSCI in Asia Pacific, says: “As factor-based investing becomes more common among institutional investors, there is a growing need to understand how it can be best integrated into the existing investment process. In this research we studied the historical performance of investable factor indexes and observed that passive factor strategies can be implemented as a potential ‘third bucket’ alongside the traditional active and passive allocations.”
 
For the purposes of the research, MSCI created a series of factor indices designed for large-scale asset owners and managers, for whom investability is a critical consideration. These indices reweighted all the constituents of a market cap index based on six systematic factors – value, low size, low volatility, high yield, quality and momentum. MSCI also analysed various multi-factor indices to show the different historical performance characteristics of different combinations.
 
In April, GPIF announced that it had selected the MSCI Japan Index for a core Japanese equity passive fund. The MSCI Japan Small Cap Index was also selected for one of the index-based strategies in GPIF’s domestic equity programme. Additionally, GPIF has announced that it intends to introduce a factor allocation in addition to its existing active and passive mandates.
 
Equity factor investing was pioneered in the 1970s based on research, data and analytics created by Barra – today an MSCI company. 

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