The MSCI Provisional Index Series has been created to assist investors in understanding the changes that would occur if the Enhanced Methodology were immediately implemented in the MSCI Standard Index Series SM . As previously announced on December 10, 2000, the Enhanced Methodology will be implemented in the MSCI Standard Index Series in two phases, as of the close of November 30, 2001 and May 31, 2002, respectively. The MSCI Provisional Index Series provides increased flexibility for investors wishing to transition to the Enhanced Methodology on their own schedule. In addition, the MSCI Provisional Index Series is an official index series and, as such, may be used for new investment mandates and for a variety of investment vehicles such as passive mutual funds, exchange traded funds and derivative contracts.
A description of MSCI's Enhanced Methodology has also been posted on MSCI's web site. It provides details regarding the free float adjustment of constituents' market capitalizations and the application of the 85% target market representation guideline. It also provides details of other methodology rules and guidelines that have been applied in the construction of the MSCI Provisional Index Series, including, but not limited to, guidelines regarding minimum constituent size for index inclusion. In addition, it provides information relating to the implementation of the first phase of the transition of the MSCI Standard Index Series to the Enhanced Methodology, scheduled for November 30, 2001, and other transition issues.
Below is a brief pro forma analysis comparing the MSCI Provisional Index Series with the MSCI Standard Index Series for some of the more frequently used global and regional composite indices, using data as of May 11, 2001.
All Country World Index (ACWI) Free
The MSCI ACWI Free Index SM represents 49 of the world's developed and emerging equity markets. On a pro forma basis, the overall free float-adjusted market capitalization of the MSCI Provisional ACWI Free Index (USD 18,171 billion) will be lower than the total market capitalization of the MSCI Standard ACWI Free Index (USD 18,764 billion). This is the net result of the decrease in market capitalization due to the free float adjustment of the constituents in the Provisional ACWI Free Index which are also in the Standard ACWI Free Index, and the increase in market capitalization resulting from securities that will be included in the Provisional ACWI Free Index but are not in the Standard ACWI Free Index. The Provisional ACWI Free Index will contain 2,258 securities vs. 2,066 in the Standard ACWI Free Index.
On a pro forma basis, the USA and the United Kingdom Indices will have the largest increases in country weights. In the Provisional ACWI Free Index, the weight of the USA Index will be 55.3% as compared with 49.1% in the Standard ACWI Free Index, while the weight of the United Kingdom Index will be 10.4% as compared with 9.3%. Conversely, the largest decreases in country weights will occur in the Japan, France and Germany Indices (-1.3, -1.2 and -1.0 percentage points, respectively).
The industry groups with the greatest weight differences on a pro forma basis are Technology Hardware & Equipment and Telecommunication Services, which will have weights of 11.5% and 7.2% in the Provisional ACWI Free Index as compared with 10.0% and 8.2% in the Standard ACWI Free Index, respectively. The higher weight of the Technology Hardware & Equipment industry group is mainly due to securities that will be included in the Provisional ACWI Free Index, but are not in the Standard ACWI Free Index. The lower weight of the Telecommunication Services industry group in the Provisional ACWI Free Index is primarily due to several large telecommunication companies in developed markets having lower average free float than companies in other industry groups.
On a pro forma basis, the weight of developed markets in the Provisional ACWI Free Index will be 96.9% as compared with 95.0% in the Standard ACWI Free Index. The weight of emerging markets in the Provisional ACWI Free Index will be 3.1% as compared with 5.0% in the Standard ACWI Free Index. The greater relative weight of developed markets in the Provisional ACWI Free Index is primarily due to the higher average free float, less restrictive foreign ownership limits and a greater availability of sizeable and liquid securities in developed markets vs. emerging markets.
EAFE (Europe, Australasia, Far East) Index
The MSCI EAFE ® Index represents 21 developed equity markets outside of North America. On a pro forma basis, the overall free float-adjusted market capitalization of the MSCI Provisional EAFE Index (USD 7,195 billion) will be lower than the total market capitalization of the MSCI Standard EAFE Index (USD 8,230 billion). This is due primarily to free float-adjusting the market capitalization of the constituents in the MSCI Provisional EAFE Index.
The United Kingdom Index will have the largest increase in country weight on a pro forma basis, increasing to 26.2% in the Provisional EAFE Index as compared with 21.2% in the Standard EAFE Index. The largest decreases in country weights in the Provisional EAFE Index as compared with the Standard EAFE Index will occur in the France, Germany and Italy Indices. The weight of the France Index will be 9.5% as compared with 11.2%, the weight of the Germany Index will be 7.0% as compared with 8.5%, and the weight of the Italy Index will be 3.7% as compared with 4.6%.
Emerging Markets Free (EMF) Index
The MSCI EMF Index SM represents 26 of the world's emerging equity markets. On a pro forma basis, the overall free float-adjusted market capitalization of the MSCI Provisional EMF Index (USD 562 billion) will be lower than the total market capitalization of the MSCI Standard EMF Index (USD 947 billion) primarily due to free float-adjusting the constituents in the MSCI Provisional EMF Index.
The South Africa and Korea Indices will have the largest increases in country weights on a pro forma basis. The weight of the South Africa Index will be 15.3% in the Provisional EMF Index as compared with 11.0% in the Standard EMF Index. The weight of the Korea Index will be 14.8% in the Provisional EMF Index as compared with 11.5% in the Standard EMF Index. The largest decreases in weights in the Provisional EMF Index will be in the India, Mexico and Malaysia Indices. See the attachment for further details. After the application of a Limited Investability Factor, which accounts for restrictions on foreign equity investment other than those imposed by free float and foreign ownership limits, the Taiwan Index will have approximately the same weight in the Provisional EMF Index as it does in the Standard EMF Index.
Index Turnover
If the Enhanced Methodology were immediately implemented in the MSCI Standard Indices listed below, the following one-way index turnover would result, based on pro forma data as of May 11, 2001:
- MSCI ACWI Free Index: 14%
- MSCI World Index: 13%
- MSCI EAFE Index: 15%
- MSCI EMF Index: 23%
