Global Investable Markets Value and Growth Index Methodology

Transcription

1 Global Investable Markets Value and Index Methodology

2 Contents 1 MSCI Global Investable Market Value and Indexes Methodology Overvew General Introducton A Partton of the MSCI Global Investable Market Indexes Defnng the Value and Investment Styles and Indexes Mult-Factor Approach Two-Dmensonal Framework Index Desgn Unverse and Approach for Style Segmentaton Constructon of the MSCI Global Investable Market Value and Indexes... 8 Constructng the MSCI Global Investable Market Value and Indexes Varables Used to Specfy Value and Characterstcs Calculatng the Z-Scores Wnsorzng the Varable Calculatng the Z-Scores Aggregatng the Style Z-Scores Calculatng the Value Z-Score Calculatng the Z-Score Identfyng the Overall Style Characterstcs Assgnng Intal Style Incluson Factors Intal Style Incluson Factors for Securtes wth Both Value and or Non-Value and Non- Characterstcs Allocatng Securtes to the Value and Indexes Sortng Securtes by Dstance from the Orgn Applyng Buffer Rules Allocatng Securtes to Reach 50% Target of 30

3 3 Mantanng MSCI Global Investable Market Value and Indexes Sem-Annual Style Index Revew Securty Style Revew Outsde of the Sem-Annual Style Index Revews... 1 Appendx I: Varable Defntons and Computatons... 3 Varables Used to Defne Value Investment Style Characterstcs... 3 Book Value to Prce Rato (BV / P) month Forward Earnngs to Prce Rato (E fwd / P)... 3 Dvdend yeld (D / P)... 5 Varables Used to Defne Investment Style Characterstcs... 5 Long-term Forward Earnngs per Share Rate (LT fwd EPS G)... 5 Short-term Forward Earnngs per Share Rate (ST fwd EPS G)... 6 Current Internal Rate (g)... 7 Long-term Hstorcal EPS Trend (LT hs EPS G) and... 7 Long-term Hstorcal Sales per Share (SPS) Trend (LT hs SPS G)... 7 Appendx II: Calculaton of Market Mean and Standard Devaton... 9 Clent Servce Informaton s Avalable 4 Hours a Day Notce and Dsclamer About MSCI of 30

4 1 MSCI Global Investable Market Value and Indexes Methodology Overvew 1.1 General Ths verson of the MSCI Global Investable Market Value and Indexes Methodology Book s effectve as of the close of December 8, Introducton For over 30 years, MSCI has been constructng global equty benchmark ndexes that contrbute to the nternatonal nvestment management process. These ndexes serve as relevant and precse performance benchmarks, effectve research and asset allocaton tools, and are lcensed as the bass for varous nvestment vehcles desgned to gan and/or manage exposure to nternatonal markets. As such, the MSCI Equty Index Seres asssts the nvestment process of a wde varety of nternatonal nvestors. In constructng ts equty ndexes, MSCI consstently apples ts equty ndex constructon and mantenance methodology across developed and emergng markets. Ths consstency of approach makes t possble to aggregate ndvdual country and ndustry ndexes to create meanngful regonal and composte benchmark ndexes for nternatonal nvestors. Snce 1997, MSCI has been assstng the nvestment process of nternatonal style nvestors wth ts Global Value and Index Seres. From 1997 to May 003, the value and growth ndexes were constructed based on a sngle-dmensonal framework that allocated securtes n an MSCI Standard Country Index nto ether value or growth based on ther Prce to Book Value ratos (P/BV). As vews on style defnton and segmentaton contnued to develop, MSCI s methodology also evolved to ensure that ts value and growth ndexes reman reflectve of the phlosophy and state-of-the art thnkng n nternatonal style nvestng. Effectve as of the close of May 30, 003, MSCI began applyng a two-dmensonal framework for style segmentaton n whch value and growth securtes are categorzed usng dfferent attrbutes. In addton, multple factors are used to dentfy value and growth characterstcs. Ths enhanced methodology better reflects nvestors vews on style defnton and segmentaton and provdes a more precse representaton of the opportunty sets of global style managers A Partton of the MSCI Global Investable Market Indexes The MSCI Global Investable Market Value and Indexes s constructed from the consttuents of the MSCI Global Investable Market Indexes on a country-by-country bass for each of the countres ncluded n the MSCI All Country World Index (ACWI), except DM Europe where the style ndexes are constructed on a regonal bass. The MSCI Global Investable Market Value and Indexes s a subset of the MSCI Global Investable Market Indexes. Therefore, common ndex attrbutes such as free float estmaton, number of shares and ndustry classfcaton are dentcal for consttuents of the two ndex seres. Consequently, changes n the underlyng MSCI Global Investable Market Indexes wll have an mpact on the MSCI Global Investable Market Value and Indexes. The changes nclude 4 of 30

5 addtons, deletons, changes n Foregn Incluson Factors (FIFs), updates n number of shares and changes n ndustry classfcaton. 1. Defnng the Value and Investment Styles and Indexes In constructng the MSCI Global Investable Market Value and Indexes, MSCI has adopted a twodmensonal framework for style segmentaton n whch value and growth securtes are categorzed usng dfferent attrbutes. In addton, multple factors are used to dentfy value and growth characterstcs Mult-Factor Approach The value nvestment style characterstcs for ndex constructon are defned usng the followng three varables: Book value to prce rato (BV / P) 1-month forward earnngs to prce rato (E fwd / P) Dvdend yeld (D / P) The growth nvestment style characterstcs for ndex constructon are defned usng the followng fve varables: Long-term forward earnngs per share (EPS) growth rate (LT fwd EPS G) Short-term forward EPS growth rate (ST fwd EPS G) Current Internal Rate (g) Long-term hstorcal EPS growth trend (LT hs EPS G) Long-term hstorcal sales per share (SPS) growth trend (LT hs SPS G) 1.. Two-Dmensonal Framework Usng the varables mentoned above, value z-scores and growth z-scores are calculated and used to determne the overall style characterstcs of each securty n the MSCI value and growth style space, as depcted n Exhbt 1. In the two-dmensonal framework, non-value does not necessarly mean growth, and vce versa. Addtonally, some securtes can exhbt both value and growth characterstcs, whle others may exhbt nether. 5 of 30

6 Exhbt 1 MSCI Value and Style Space Value Value (and Non-) 1.0 Value and Non Non-Value and Non (and Non-Value) -4.0 Non-Value Note: The values on the axes are z-scores. The pont where the value and non-value axs ntersects the growth and non-growth axs,.e., the orgn, s located at a z- score of zero for each axs. Hence, under the two-dmensonal framework for style segmentaton, a securty can have the followng four style characterstcs: 1. A securty wth a postve value z-score and a negatve or zero growth z-score s stuated n the Value (and Non-) quadrant as t exhbts clear value characterstcs.. A securty wth a negatve or zero value z-score and a postve growth z-score s stuated n the (and Non-Value) quadrant as t exhbts clear growth characterstcs. 3. A securty wth a postve value z-score and a postve growth z-score s stuated n the Value and quadrant as t exhbts both value and growth characterstcs. 4. A securty wth a negatve or zero value z-score and a negatve or zero growth z-score s stuated n the Non-Value and Non- quadrant as t exhbts both non-value and non-growth characterstcs. 6 of 30

7 1..3 Index Desgn The objectve of the MSCI Value and Indexes desgn s to dvde consttuents of an underlyng market captalzaton ndex nto a value ndex and a growth ndex, each targetng 50% of the free floatadjusted market captalzaton of the underlyng ndex. The market captalzaton of each consttuent should be fully represented n the combnaton of the value ndex and the growth ndex, and, at the same tme, should not be double-counted. One securty may, however, be represented n both the value ndex and the growth ndex at a partal weght Unverse and Approach for Style Segmentaton The MSCI Global Investable Market Value and methodology s appled to the Standard and Small Cap Indexes on a market by market bass. In defnng markets, MSCI adopts a country approach n conductng the style segmentaton of the value and growth ndexes, except for DM Europe where a regon approach s adopted. The large Cap and Md Cap Value and Indexes are derved usng the Value and Incluson Factors from the Standard Value and Indexes. The Investable Market Value and Indexes are created by aggregatng the Value and segments of the Standard and Small Cap Indexes. Securtes n each MSCI Global Investable Market Index are allocated to the approprate value and growth ndexes. The same style segmentaton process s appled ndependently and consstently across all MSCI Global Investable Market Indexes. Standard Index Standard Value Standard Small Value Large Value Md Value Large Md Standard Value Standard Small Value Investable Market Index Value Investable Market Index Small Cap Index Small Small The consstent applcaton of ndex methodology to all countres also makes t possble to apply a buldng block approach n the constructon of regonal and composte style ndexes. Under ths approach, ndvdual value and growth ndexes can be aggregated to create varous meanngful and comparable regonal and composte benchmark style ndexes. Please note that the value and growth style classfcaton and allocaton s appled at the securty level rather than at the company level. 7 of 30

8 1..5 Constructon of the MSCI Global Investable Market Value and Indexes In order to acheve the above-mentoned ndex desgn objectve, MSCI constructs and mantans the value and growth ndexes by allocatng securtes and ther free float-adjusted market captalzatons to the approprate value and growth ndexes, durng the sem-annual style ndex revews that take place each May and November. MSCI s constructon of the value and growth ndexes for each country ndex nvolves the followng fve steps: Determnng the values of the varables used to specfy value and growth characterstcs for each securty. Calculatng the z-scores of each varable for each securty. Aggregatng the style z-scores for each securty to determne the securty s overall style characterstcs. Assgnng ntal style ncluson factors for each securty. Achevng the 50% free float-adjusted market captalzaton target by allocatng securtes to the value and growth ndexes after applyng buffer rules. In the next secton, we revew each of these steps n detal. Constructng the MSCI Global Investable Market Value and Indexes.1 Varables Used to Specfy Value and Characterstcs The value and growth ndexes constructon process begns by determnng the values of the varables used to specfy value and growth characterstcs. The value nvestment style characterstcs for ndex constructon are defned usng the followng three varables: Book value to prce rato (BV / P) 1-month forward earnngs to prce rato (E fwd / P ) Dvdend yeld (D / P) 8 of 30

9 For these varables, securtes of the same company may have dfferent values due to dfferent securty prces. In addton, the dvdend rate may dffer from one securty to another of the same company. As a result, n certan crcumstances, one securty of a company may be classfed as value and another as growth. In the above three varables, the prce s used n the denomnator n order to compute meanngful market means and standard devatons for these varables. The growth nvestment style characterstcs for ndex constructon are defned usng the followng fve varables: Long-term forward earnngs per share (EPS) growth rate (LT fwd EPS G) Short-term forward EPS growth rate (ST fwd EPS G) Current Internal Rate (g) Long-term hstorcal EPS growth trend (LT hs EPS G) Long-term hstorcal sales per share (SPS) growth trend (LT hs SPS G) For these varables, all securtes of the same company have the same varable values for each of the fve varables used to defne growth nvestment style characterstcs for ndex constructon unless there s a dfference n dvdend payout, whch wll result n a dfference n the Current Internal Rate (g). The long-term forward EPS growth rate s not taken nto account for the Small Cap Global Value and Indexes. No long-term hstorcal SPS growth trend s calculated for securtes classfed n the Banks (4010) and Dversfed Fnancals (400) ndustry groups, other than securtes classfed n the Mult-Sector Holdngs ( ) sub-ndustry, under the Global Industry Classfcaton Global Investable Market Index (GICS). For further detals on defntons and computatons of the varables, see Appendx I, enttled Varable Defntons and Computatons.. Calculatng the Z-Scores After computng the eght varable values for each securty, each of the eght varable values are standardzed wthn each ndvdual MSCI Market Standard and Small Cap Index and assgned a z-score. Standardzaton ensures that the varables are comparable to each other and that the combnaton of the varables s meanngful. 9 of 30

10 ..1 Wnsorzng the Varable As part of the standardzaton process, outler varable values are wnsorzed to ensure that the market average values used to standardze the varables are less affected by extreme values. To do ths, for a gven varable, the values for all securtes are frst ranked by ascendng order wthn each MSCI Market Index. Mssng values are excluded from the rankng. Then, for values that le n the bottom 5th percentle rank or n the top 95th percentle rank, ther value s set equal to the value of the 5th percentle ranked or 95th percentle ranked securty, as applcable. Ths process s repeated for each of the eght varables. Example: Wnsorzaton: Suppose there are 00 securtes ranked by ascendng order. For all securtes ranked from 1 through 9, ther values become equal to the value of the 10th ranked securty. Meanwhle, for all securtes ranked from 19 through 00, ther values become equal to the value of the 191st ranked securty... Calculatng the Z-Scores After wnsorzng all the eght varables wthn each MSCI Market Index, the z-score for each of the eght varables for each securty can be calculated usng the free float-adjusted market captalzaton weghted market mean and standard devaton of the relevant varable wthn each MSCI Market Index. Computng a z-score s a wdely used method of standardzng a varable n order to combne t wth other varables that may have a dfferent unt of measurement or a dfferent scale. Because t has a mean value of zero and a standard devaton of 1, the value of a z-score shows how many standard devatons a gven value les from the mean. The z-score s defned as follows: Z x mcap weghted mcap weghted Where: x s the wnsorzed varable value for a gven securty s the free float-adjusted market captalzaton weghted market mean usng wnsorzed varables n the MSCI Market Index s the free float-adjusted market captalzaton weghted market standard devaton usng wnsorzed varables n the MSCI Market Index For further detals on the calculaton of the market mean and the standard devaton, see Appendx II, enttled Calculaton of Market Mean and Standard Devaton. 10 of 30

11 Example: Calculatng Dvdend Yeld Z-Scores: Index Securty A Securty B Securty C Mean dvdend yeld for the country ndex.50 Standard devaton of dvdend yeld for the country ndex 1.38 Dvdend yeld Dvdend yeld z-score Securty A has a postve dvdend yeld z-score. Ths mples that based on dvdend yeld, Securty A exhbts clear value characterstcs, as ts dvdend yeld value of 3.5 s 0.7 standard devaton above the market dvdend yeld of.5. On the other hand, a dvdend yeld z-score of 1.16 for Securty B mples that ts dvdend yeld value of 0.9 s 1.16 standard devatons below the market dvdend yeld. In other words, Securty B exhbts clear non-value characterstcs, based on dvdend yeld. As for Securty C, a z- score of 0 mples that the securty has the same dvdend yeld value as the market mean..3 Aggregatng the Style Z-Scores After standardzng each of the eght varable values for each securty, MSCI calculates a value z-score and a growth z-score for each securty. Value z-scores are computed by averagng the three value varable z-scores whle growth z-scores are calculated by averagng the fve growth varable z-scores. The value z-score and the growth z-score of a securty defne ts overall style characterstcs and ts postonng wthn the value and growth style space..3.1 Calculatng the Value Z-Score To compute a value z-score, an equally weghted average of the three value varables z-scores s calculated. Only avalable varable z-scores are used and mssng varable z-scores are excluded from the calculaton. The value z-score s calculated as follows: 1 3 Value ZScore ZBV / P ZE fwd / P ZD / P For nstance, f the E fwd /P varable s mssng: 1 Value ZScore Z BV / P ZD / P 11 of 30

12 Example: Calculatng the Value Z-Score: Securty A Securty B Securty C Book value to prce z-score month forward earnngs to prce z-score Dvdend yeld z-score Value Z-Score Calculatng the Z-Score For the calculaton of the growth z-score, the z-score for long-term forward EPS growth rate s gven a double weght for the Standard Global Value and Indexes, as t s the most systematcally assocated wth the concept of growth and t captures growth style attrbutes relatvely more effectvely than other varables. As a remnder, the z-score for long-term forward EPS growth rate s not calculated and therefore s not taken nto account for the Small Cap Global Value and Indexes. When computng the growth z-score, mssng varable z-scores are excluded from the calculaton. The long-term hstorcal SPS growth trend s not used to specfy growth characterstcs for securtes classfed n the Banks (4010) and Dversfed Fnancals (400) ndustry groups, other than securtes classfed n the Mult-Sector Holdngs ( ) sub-ndustry, under the Global Industry Classfcaton Global Investable Market Index (GICS) SM. In ths case, only fve varables are averaged, rather than replacng the sales growth trend wth a zero value. The growth z-score s calculated as follows: 1 Z Score * Z 6 LT fwd EPS G Z STfwd EPS G Z g Z LT hs EPS G Z LT hssps G For nstance, f the long-term forward EPS growth rate varable s mssng: 1 ZScore 4 Z STfwd EPS G Z g Z LT hs EPS G Z LT hssps G For a fnancal company: 1 Z Score * Z 5 LT fwd EPS G Z STfwd EPS G Z g Z LT hs EPS G For the Small Cap Value and Indexes, the z-score for the long-term forward EPS growth rate s not taken nto account: 1 of 30

13 1 ZScore 4 Z STfwd EPS G Z g Z LT hs EPS G Z LT hssps G Example Calculatng the Z-Score: Securty A Securty B Securty C Long-term forward EPS growth rate z-score Not Avalable Short-term forward EPS growth rate z-score Current Internal Rate z-score Long-term hstorcal EPS growth trend z-score Long-term hstorcal SPS growth trend z-score 0.10 Not Relevant 0.50 (Fnancal Company) Z-Score Securty A has all 5 varables avalable. Its growth z-score s the sum of the 5 varables wth a double weght on the long-term forward EPS growth dvded by 6. Securty B s a fnancal company. Therefore, no long-term hstorcal SPS growth trend s used and ts growth z-score s computed usng a 5 as the denomnator. Fnally, the long-term forward EPS growth rate varable s mssng for Securty C and the denomnator wll be Identfyng the Overall Style Characterstcs After calculatng the value and growth z-scores for each securty, each securty s overall style characterstcs and poston wthn the value and growth style space can be determned based on the table below. Value Z-Score Z-Score Style Characterstcs Postve Negatve or Zero Value Negatve or Zero Postve Postve Postve Both Value and Negatve or Zero Negatve or Zero Nether Value nor.4 Assgnng Intal Style Incluson Factors Based on the overall style characterstcs, securtes are assgned ntal style ncluson factors. At ths tme, securtes that exhbt both value and growth or nether value nor growth characterstcs are also adjusted for domnant style. 13 of 30

14 Each securty has two style ncluson factors, one for value, defned as the Value Incluson Factor (VIF), and the other for growth, defned as the Incluson Factor (GIF), and they represent the proporton of a securty s free float-adjusted market captalzaton that should be allocated to the value and/or growth ndexes. The sum of the VIF and the GIF s always equal to one. There are fve possble values for the style ncluson factors: 1, 0.65, 0.5, 0.35 and 0. For nstance, a VIF of 1 mples that the securty s free float-adjusted market captalzaton s fully allocated to the value ndex, whle a VIF of 0.35 mples that only 35% of the securty s free floatadjusted market captalzaton s allocated to the value ndex. The sum of VIF and GIF s always equal to one. For example, a VIF of 0.35 wll result n a GIF of Exhbt on the next page shows the varous style ncluson factors wthn the value and growth style space, whch wll be descrbed n detal n the followng paragraphs..4.1 Intal Style Incluson Factors for Securtes wth Both Value and or Non-Value and Non- Characterstcs For securtes wth style characterstcs of both value and growth or nether value nor growth, ther ntal VIF and GIF can range between 0 and 1, dependng on the contrbuton of the value (or nongrowth, f the growth z-score s negatve) and growth (or non-value, f the value z-score s negatve) z- scores to the dstance of a securty from the orgn. The contrbuton of each style z-score to the dstance from the orgn s calculated as follows: value contrbut on value z-score dstance value value z-score z-score growth z-score growth z-score dstance growth value z-score z-score growth z-score growth contrbut on valuecontrbuton growth contrbut on 1 For securtes where a style contrbuton of a postve style z-score (a negatve style z-score) s at least 80% (less than 0%), that style s deemed to clearly domnate the other style. Such securtes are allocated wth an ntal VIF or GIF of 1, dependng on whether value (non-growth) or growth (non-value) contrbuted at least 80% (less than 0%) to the dstance respectvely. Ths s represented by the 80/0 lne (0/80) n Exhbt, whch corresponds to the value z-score (growth z-score) representng twce the growth z-score (value z-score),.e., representng a contrbuton of 80% of the total dstance from the orgn. Otherwse, f a style contrbuton ranges between more than 0% and less than 80%, the VIF and GIF are determned usng the table below. 14 of 30

15 Exhbt MSCI Value and Style Space, Allocatng Intal VIF & GIF Value /0 60/ a 3b Value and - Partal Allocaton 40/60 Value - Full Allocaton 3c 1.0 3d 0/ e Non a /0 60/40 4b 4c Non-Value and Non- - Partal Allocaton 4d 4e Full Allocaton 40/60 0/ Non-Value Note: The values on the axes are z-scores. The pont where the value and non-value axs ntersects the growth and non-growth axs,.e., the orgn, s located at a z-score of zero for each axs. Zone 1 3a 3b 3c 3d 3e 4a 4b 4c 4d 4e Style Characterstcs Value Growt h Value/ Growt h Value/ Growt h Value/ Value/ Value/ Non- Value/ Non- Non- Value/ Non- Non- Value/ Non- Non- Value/ Non- Non- Value/ Non- Style Bas Value Growt h Value Value- Bas No Bas -Bas Value Value- Bas No Bas -Bas Intal VIF Intal GIF of 30

16 Example: Calculatng the Dstance and the Style Contrbuton: Securty A Securty B Securty C Value z-score z-score Value z-score squared z-score squared Dstance from the orgn squared Value contrbuton to the dstance 94% 50% 85% contrbuton to the dstance 6% 50% 15% Intal VIF Intal GIF Securty A s value contrbutes 94% of ts overall style characterstcs. Hence, the value z-score clearly domnates the growth z-score and a VIF of 1 s allocated to Securty A. As for Securty B, no style clearly domnates, as the contrbuton of the two style z-scores s equal at 50%. Therefore, a VIF and GIF of 0.5 s allocated to securty B. For Securty C, ts value z-score and growth z-score are both negatve. Hence, the non-value z-score contrbutes 85% and the non-growth z-score contrbutes 15%. Ths means that the growth z-score clearly domnates the value z-score, and as a result, a GIF of 1 s assgned to Securty C..5 Allocatng Securtes to the Value and Indexes The value and growth ndexes target a 50% free float-adjusted market captalzaton representaton for each of the value and growth ndexes n each MSCI Market Index. In order to acheve the 50% target, the style allocaton process nvolves the followng three steps: Sortng securtes by dstance from the orgn n the style space. Applyng buffer rules and reassgnng ntal VIF and GIF, as approprate. Achevng the 50% free float-adjusted market captalzaton target by allocatng securtes to the value and growth ndexes..5.1 Sortng Securtes by Dstance from the Orgn In the allocaton process, frst all securtes are sorted by dstance from the orgn. The strength of the securty style characterstcs s measured by the dstance from the orgn. Therefore, the securty wth the strongest style characterstcs s the one wth the greatest dstance from the orgn. 16 of 30

17 The dstance from the orgn (d) s computed as follows: d value zscore growth zscore Calculatng the Dstance: Securty A Securty B Securty C Value z-score z-score Value z-score squared z-score squared Dstance from the orgn Securty C s the furthest away from the orgn among the three securtes. Therefore, t has the strongest style characterstcs and s allocated to ts approprate style ndex frst..5. Applyng Buffer Rules Next, the ntal style ncluson factors for all exstng consttuents are revewed based on buffer rules. Accordng to the buffer rules, all securtes that fall n the buffers wll not change ther current style ncluson factors and reman n ther current ndex or ndexes, unless they need to be reassgned, f requred, to meet the 50% target. Buffer rules help lmt the ndex turnover caused by temporary mgraton of securtes from one style ndex to the other and come nto effect only at the sem-annual style ndex revews. The buffers are represented by a cross resultng from the overlap of a horzontal rectangle around the growth axs and a vertcal rectangle around the value axs. The horzontal rectangle s defned by a value z-score between +/- 0. and a growth z-score between +/- 0.4 and the vertcal rectangle s defned by a value z-score between +/- 0.4 and a growth z-score between +/- 0., as shown n the shaded area n Exhbt. 17 of 30

18 Example: Reassgnng Style Incluson Factors Based on Buffer Rule Securty A Securty B Securty C Value z-score z-score Falls n the buffers no yes yes Current VIF Intal VIF Post buffer VIF Securty A s not mpacted by the buffer rules as ts pro forma value and growth z-scores do not fall wthn the buffers. Hence, ts ntal style ncluson factors reman unchanged. Securtes B and C are mpacted by the buffer rules and, therefore, ther style ncluson factors are reassgned to the current style ncluson factors..5.3 Allocatng Securtes to Reach 50% Target The allocaton process starts by assgnng to the approprate style ndex the securty that s the greatest dstance away from the orgn and hence possesses the strongest style characterstcs, based on ts ntal VIF and GIF modfed for buffers. Allocatng securtes startng wth those that are furthest away from the orgn ensures that securtes wth the strongest style characterstcs are allocated to ther approprate styles frst. Durng the style allocaton process, f two securtes have the same dstance, the securty wth a larger free float-adjusted market captalzaton s allocated to ts approprate style ndex frst. The allocaton process s stopped when addng a securty to a partcular style ndex results n the cumulatve weght of that ndex exceedng the 50% free float-adjusted market captalzaton representaton target. The securty that stopped the allocaton process s defned as the mddle securty. In ths step, the allocaton of the mddle securty s revewed to determne how to best approxmate the 50% target. If the mddle securty has a free float-adjusted market captalzaton weght of less than 5% n the MSCI Market Index, ts free float-adjusted market captalzaton s allocated to the value or growth ndex that comes closest to the 50% target. If the mddle securty has a free float-adjusted market captalzaton weght of more than 5% n the MSCI Market Index, ts free float-adjusted market captalzaton can be partally allocated to the value and growth ndexes n order to be closer to the 50% target. The VIF and GIF for a mddle securty can be ether 1, 0.65, 0.5, 0.35 or 0. Dependng on the outcome of the attrbuton of ths mddle securty, nether ndex may reach the 50% target and therefore the attrbuton process may contnue. 18 of 30

19 Once the 50% target s reached, all remanng securtes are allocated or reallocated to the ndex that has not yet reached the 50% target. Therefore, some securtes may be allocated to a style ndex that s dfferent from ther ntal style classfcaton. However, as the allocaton process starts wth securtes havng the strongest style characterstcs and the remanng securtes that are reassgned have relatvely less pronounced style characterstcs, the mpact on the style ndexes s expected to be modest. Example: Reallocatng Securtes wth a Weght of Less than 5% to Reach 50% Target: Dstance Securty Cumulatve Index Weght Post Buffer Fnal VIF Securtes Weghts Value VIF A % 0.1% 0.0% B.63 0.% 0.3% 0.0% C % 0.4% 0.0% X % 46.5% 50.% Y % 47.4% 50.% 0.00 Reallocated 1.00 Securty A s the frst securty to be allocated as t s the furthest away from the orgn and therefore has the strongest style characterstcs. Ths securty s assgned to the value ndex as ts post buffer VIF s 1. As a result, the cumulatve value ndex weght ncreases from 0% to 0.1%. The process contnues untl Securty X s allocated. Ths securty s allocated to the growth ndex accordng to ts post buffer VIF and as a result, the cumulatve growth ndex weght reaches 50.%, above the 50% target. Securty X s the mddle securty. Securtes startng from Securty Y are fully reallocated to the value ndex. Example: 19 of 30

20 Reallocatng Securtes wth a Weght of More than 5% to Reach 50% Target: Dstance Securty Cumulatve Index Weght Post Buffer Fnal VIF Securtes Weghts Value VIF A % 0.1% 0.0% B.63 0.% 0.3% 0.0% C % 0.4% 0.0% X % 48.5% 50.6% 0.00 Reallocated 0.35 Y % 49.4% 50.% 0.00 Reallocated 1.00 In ths example, Securty X s the mddle securty. It has a free float-adjusted market captalzaton weght of more than 5% n the MSCI Market Index. Accordng to ts post buffer VIF, t should have been allocated to the growth ndex, resultng n a weght of 5.5% representaton, above the 50% target. In ths case, the securty s partally allocated n order to most closely approxmate the 50% target. As a result, 35% of the securty s weght s reallocated from the growth ndex to the value ndex and ts fnal VIF s Mantanng MSCI Global Investable Market Value and Indexes The value and growth ndexes are mantaned wth the objectve of reflectng the evoluton of style segments wthn each country unverse on a tmely bass. In mantanng the ndexes, emphass s also placed on ther contnuty and on mnmzng unnecessary ndex turnover. Mantanng the MSCI Global Investable Market Value and Indexes nvolves two man dmensons. The frst s the style mantenance of consttuents resultng from the revew of the Global Investable Market Value and Indexes, whch takes place on a sem-annual bass. The second aspect nvolves changes drven by the underlyng MSCI Global Investable Market Country Indexes, whch nclude addtons to and deletons from the MSCI Global Investable Market Country Index, changes n Foregn Incluson Factors (FIFs), updates n number of shares and changes n ndustry classfcaton, as a result of quarterly ndex revews, annual full country ndex revews and ongong event-related changes. The style ndex mantenance for the value and growth ndexes can be descrbed by the followng two broad categores: Sem-annual style ndex revews. Style revew outsde of the sem-annual style ndex revews. 0 of 30

21 3.1 Sem-Annual Style Index Revew The style revew of the value and growth ndexes s conducted at the end of May and November, concdng wth the May annual full country ndex revew and the November quarterly ndex revew of the underlyng MSCI Global Investable Market Country Indexes. Durng the style revew, new value and growth z-scores are calculated for the pro forma MSCI Global Investable Market Country Index consttuents and, after applyng the buffer rules, securtes are allocated to the value and growth ndexes, targetng 50% of the free float-adjusted market captalzaton wthn each MSCI Market Index as outlned n Secton. Values of the fundamental data used to determne style characterstcs are mantaned on a monthly bass. For the May and the November sem-annual style ndex revews, fundamental and forward lookng data as of the end of March and the end of September are used respectvely. The revew date for market captalzaton and prces s generally any one of the last 10 busness days of Aprl and October for the May and the November sem-annual style ndex revews respectvely. The prces from that same date are used for the calculaton of the three prce based ratos used to determned value style characterstcs. 3. Securty Style Revew Outsde of the Sem-Annual Style Index Revews Style revews outsde the sem-annual style ndex revews are conducted for new securtes n cases of addtons to the underlyng MSCI Global Investable Market Country Indexes. For these securtes, the style revew nvolves the followng: Determnng the values of the eght varables used to specfy value and growth characterstcs of affected securtes usng the latest avalable underlyng fundamental and forward lookng data. Calculatng the z-scores of each varable for affected securtes usng the prevous daly free floatadjusted market captalzaton weghted mean and standard devaton of the relevant varables. Aggregatng the style z-scores for the affected securtes to determne ther overall style characterstcs. Allocatng the affected securtes wth the approprate style ncluson factors wthout consderng the buffer rules or the 50% free float-adjusted market captalzaton target. Addtons of consttuents to the value and growth ndexes outsde the regular ndex revews can result from: Inclusons to the underlyng MSCI Global Investable Market Country Indexes durng the February and August quarterly ndex revews for the MSCI Global Investable Market Indexes, or 1 of 30

22 Inclusons to the underlyng MSCI Global Investable Market Index Country Indexes due to M&As, spn-offs, large IPOs and other early nclusons as descrbed n the MSCI Global Investable Market Indexes Methodology Book. Style revews are conducted for new ndex consttuents except n the followng cases: When a non-consttuent company acqures a consttuent company and the consttuent company s securtes are replaced by the securtes of the acqurng company, the securtes of the acqurng company wll keep the style of the securtes of the acqured company. When a consttuent company merges wth a non-consttuent company and the merged company replaces the consttuent company, the securtes of the merged company wll keep the style of the consttuent securtes before the merger. When two consttuent companes merge and the merged company replaces the two consttuent companes, the securtes of the merged company wll keep the style of the consttuent securtes to whch t s hstorcally lnked. When securtes spun-off from exstng consttuents are consdered for early ncluson at the tme of the event and the spnnng-off securty s not deleted from the Global Investable Market Index Index, the spun-off securtes wll keep the style of the spnnng-off securty. of 30

23 Appendx I: Varable Defntons and Computatons Ths appendx provdes detals on the defntons and computatons of the eght varables used to defne the value and growth nvestment style characterstcs for ndex constructon. All forward varables are based on consensus analysts estmates are provded by specalzed data vendors. Currently, the prmary vendor for forward varables s Thomson I/B/E/S. For Japan, Toyo Keza s used as secondary source for securtes whch are not covered by Thomson I/B/E/S. For all other fundamental data, MSCI data are used. As a general rule, n order to avod nconsstences of data between the dfferent provders, the fundamental data used n the forward varable calculatons are also provded by Thomson I/B/E/S. Thomson I/B/E/S provdes data at the company level. Hence, MSCI propagates the company level Thomson I/B/E/S data to all securtes of the same company when combnng t wth securty level prces. In case of par value dfference between multple securtes of the same company, MSCI adjusts Thomson I/B/E/S data accordngly. In certan crcumstances, such as for securtes recently lsted or undergong sgnfcant events where forward-lookng data s not yet avalable from I/B/E/S and Toyo Keza, MSCI s usng an average of analyst estmates avalable from other sources. Varables Used to Defne Value Investment Style Characterstcs Book Value to Prce Rato (BV / P) The BV / P calculaton s as follows: BV / P = book value per share / prce of securty The most recently reported book value s used to estmate book value per share. 1-month Forward Earnngs to Prce Rato (E fwd / P) The E fwd / P s calculated as follows: E fwd / P = EPS1F / prce of securty Where: EPS 1F s the 1-month forward EPS estmate and s derved on a rollng bass from the consensus of analysts earnngs estmates for fscal year 1 and fscal year. 3 of 30

24 Where EPS1 F M * EPS1 (1 M )* EPS 1 EPS 1 s the consensus of analysts earnngs estmates for fscal year 1 EPS s the consensus of analysts earnngs estmates for fscal year M s the number of months remanng before the fscal year end The fscal year 1 corresponds to the fscal year followng the last fscal year for whch the company has made ts results publcly avalable For cases where EPS s not avalable and M s greater than or equal to 8, EPS 1 s used as an approxmaton of EPS 1F. Example: Calculatng the 1-month forward earnngs as of January 0, 005: Securty A Securty B Securty C Latest reported Fscal Year Dec 31, 004 Mar 31, 004 Dec 31, 003 M EPS EPS 1 date Dec 31, 005 Mar 31, 005 Dec 31, 004 EPS EPS date Dec 31, 006 Mar 31, 006 Dec 31, 005 EPS EPS 3 date Dec 31, 006 EPS 1F For Securty C, the results for the fscal year endng December 31, 004 are not yet avalable. As a result, the EPS 1 estmates stll pertan to the fscal year endng December 31, 004. Therefore, n order to have meanngful 1-month forward earnngs, the EPS and the EPS 3 are used nstead of the EPS 1 and EPS. 4 of 30

25 Example: Calculatng the 1-month forward earnngs as of January 0, 005 when EPS s mssng: Securty A Securty B Securty C Latest reported Fscal Year Sep 30, 004 Jun 30, 004 Dec 31, 004 M EPS EPS 1 date Sep 30, 005 Jun 30, 005 Dec 31, 005 EPS 0.74 EPS date Sep 30, 006 EPS 1F 0.67 N/A 1.04 For securty B, estmates for June 30, 006 are not avalable. Snce M s smaller than 8, EPS 1F s not avalable. In the case of Securty C, estmates for December 31, 006 are not avalable but as M s greater than 8, EPS 1 s used as EPS 1F. Dvdend yeld (D / P) D / P = Current Annualzed Dvdend per Share / Prce of Securty The current annualzed dvdend per share s the sum of all the latest declared dvdends representng one year of dvdends. For the USA and Canada, the current annualzed dvdend per share s calculated by annualzng the latest publshed quarterly dvdend. Yelds are gross, before wthholdng tax, and take nto account specal tax credts when applcable. Varables Used to Defne Investment Style Characterstcs Long-term Forward Earnngs per Share Rate (LT fwd EPS G) The LT fwd EPS G s the consensus of analysts earnngs growth rate estmates typcally provded for the next 3 to 5 years. LT fwd EPS G wth values above 50 or below -33 are not taken nto account and consdered as mssng f contrbuted by only one analyst. 5 of 30

26 Short-term Forward Earnngs per Share Rate (ST fwd EPS G) The ST fwd EPS G s a growth rate between the 1-month backward earnngs per share and the 1- month forward earnngs per share. The ST fwd EPS G s computed as follows: Where EPS1F EPS ST forward EPS G EPS EPS 1B = 1-month backward EPS s derved n a smlar fashon as the EPS 1F but from the last reported fscal year and the consensus of analysts earnngs estmates for fscal year 1 1B 1B EPS1 B M * EPS 0 (1 M )* EPS1 1 Where EPS 0 s last fscal year end reported earnngs per share For cases where EPS 1 s used as an approxmaton of EPS 1F, EPS 0 s used as the value for EPS 1B. Example: Calculatng the Short-term forward EPS growth rate as of the January 0, 005: Securty A Securty B Securty C Fscal Year End Dec 31, 004 Nov 30, 004 Mar 31, 004 M EPS EPS EPS EPS 1F EPS 1B ST fwd EPS G 6.7% 69.7% 41.9% 6 of 30

27 Current Internal Rate (g) The Current Internal Rate s calculated as follows: g = ROE*(1-PO) Return on Equty (ROE) s calculated usng the tralng 1-month EPS dvded by the most recently reported book value. The ROE s consdered meanngful and s calculated f the followng condtons are met: the book value s postve and the dfference between the book value and earnngs date s less than 18 months and the book value s date s older than the earnngs date and the ssuer results are consoldated or not consoldated for both book value and earnngs. Otherwse, the ROE value s consdered mssng. Payout rato (PO) s calculated usng the current annualzed dvdend per share dvded by the tralng 1-month EPS. In the event of a mssng value for ether the payout rato or the ROE, the g value s consdered to be mssng. Long-term Hstorcal EPS Trend (LT hs EPS G) and Long-term Hstorcal Sales per Share (SPS) Trend (LT hs SPS G) For the calculaton of the LT hs EPS G and LT hs SPS G, frst a regresson (ordnary least square method) s appled to the last 5 yearly restated EPS and SPS respectvely. EPS t at b Where: a, the slope coeffcent, b, the ntercept, t, the year expressed n number of months. Then, an average absolute EPS or SPS s estmated: 7 of 30

28 ~~~ EPS n 1 EPS n The growth trend s fnally obtaned as follows: ~~~ SPS n 1 SPS n LT hs EPS G aeps ~~ ~ EPS LT hs SPS G asps ~~ ~ SPS In order to compute a meanngful long-term hstorcal growth trend for the EPS and SPS, 5 years of comparable data are requred. In the event that comparable restated pro forma data are unavalable, MSCI may restate the data usng adjustments. A mnmum of the last four EPS or SPS values are needed to compute ther hstorcal growth trends. trends for securtes wthout suffcent EPS or SPS values are consdered to be mssng. Example: Calculatng Long-term hstorcal EPS and SPS growth trend January 0, 003: Years t EPS SPS Fscal Year End 0 Dec 31, Fscal Year End 1 Dec 31, Fscal Year End Dec 31, Fscal Year End 3 Dec 31, Fscal Year End 4 Dec 31, a a, annualzed EPS ~~~ ~~~ & SPS Trend 70.6% 9.36% 8 of 30

29 Appendx II: Calculaton of Market Mean and Standard Devaton Ths appendx explans the calculaton of the market mean and Standard devaton used n the determnaton of the z-score. The calculaton nvolves the followng three steps: Frst, the varable values are wnsorzed usng the 5th and 95th percentle cut-off. Second, the wnsorzed per share values are used to compute the market mean. Thrd, the market standard devaton s computed. The market mean s the market captalzaton weghted average of the varable and s computed as follows: varable Shares P FIF Shares P FIF Varable The market standard devaton s computed as follows: wnsorzed Shares P FIF wnsorzed varable Varable varable Shares P FIF For example, the market mean and the market standard devaton for BV/P s calculated as follows: BV P Shares P FIF Shares P FIF BV P wnsorzed BV wnsorzed Shares P FIF BV / P Shares P FIF P Please note that only securtes wth non-mssng varables are ncluded n the market mean and standard devaton. BV P 9 of 30

30 Clent Servce Informaton s Avalable 4 Hours a Day clentservce@ Amercas Europe, Mddle East & Afrca Asa Pacfc Amercas Atlanta Boston Chcago Monterrey New York San Francsco Sao Paulo Toronto (toll free) Cape Town Frankfurt Geneva London Mlan Pars (toll free) Chna North Chna South Hong Kong Seoul Sngapore Sydney Tape Tokyo (toll free) (toll free) (toll free) (toll free) (toll free) Notce and Dsclamer Ths document and all of the nformaton contaned n t, ncludng wthout lmtaton all text, data, graphs, charts (collectvely, the Informaton ) s the property of MSCI Inc. or ts subsdares (collectvely, MSCI ), or MSCI s lcensors, drect or ndrect supplers or any thrd party nvolved n makng or complng any Informaton (collectvely, wth MSCI, the Informaton Provders ) and s provded for nformatonal purposes only. The Informaton may not be reproduced or redssemnated n whole or n part wthout pror wrtten permsson from MSCI. 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( ISS ) and MSCI ESG Research Inc. are Regstered Investment Advsers under the Investment Advsers Act of Except wth respect to any applcable products or servces from ISS or MSCI ESG Research, nether MSCI nor any of ts products or servces recommends, endorses, approves or otherwse expresses any opnon regardng any ssuer, securtes, fnancal products or nstruments or tradng strateges and nether MSCI nor any of ts products or servces s ntended to consttute nvestment advce or a recommendaton to make (or refran from makng) any knd of nvestment decson and may not be reled on as such. The MSCI ESG Indexes use ratngs and other data, analyss and nformaton produced by MSCI ESG Research Inc. Issuers mentoned or ncluded n any MSCI ESG Research materals may be a clent of MSCI, ISS, or another MSCI subsdary, or the parent of, or afflated wth, a clent of MSCI, and may also purchase research or tools from MSCI ESG Research Inc. MSCI ESG Research materals, ncludng materals utlzed n any MSCI ESG Indexes or other products, have not been submtted to, nor receved approval from, the Unted States Securtes and Exchange Commsson or any other regulatory body. Any use of or access to products, servces or nformaton of MSCI requres a lcense from MSCI. MSCI, Barra, RskMetrcs, IPD, FEA, InvestorForce, and other MSCI brands and product names are the trademarks, servce marks, or regstered trademarks of MSCI or ts subsdares n the Unted States and other jursdctons. The Global Industry Classfcaton Standard (GICS) was developed by and s the exclusve property of MSCI and Standard & Poor s. Global Industry Classfcaton Standard (GICS) s a servce mark of MSCI and Standard & Poor s. About MSCI MSCI Inc. s a leadng provder of nvestment decson support tools to nvestors globally, ncludng asset managers, banks, hedge funds and penson funds. MSCI products and servces nclude ndexes, portfolo rsk and performance analytcs, and governance tools. The company s flagshp product offerngs are: the MSCI ndexes wth approxmately USD 8 trllon estmated to be benchmarked to them on a worldwde bass 1 ; Barra mult-asset class factor models, portfolo rsk and performance analytcs; RskMetrcs mult-asset class market and credt rsk analytcs; IPD real estate nformaton, ndexes and analytcs; MSCI ESG (envronmental, socal and governance) Research screenng, analyss and ratngs; ISS corporate governance research, data and outsourced proxy votng and reportng servces; and FEA valuaton models and rsk management software for the energy and commodtes markets. MSCI s headquartered n New York, wth research and commercal offces around the world. 1 As of September 30, 013, as reported on January 31, 014 by evestment, Lpper and Bloomberg Feb of 30