MSCI GLOBAL INVESTABLE MARKET VALUE AND GROWTH INDEX METHODOLOGY

Transcription

1 INDEX METHODOLOGY MSCI GLOBAL INVESTABLE MARKET VALUE AND GROWTH INDEX METHODOLOGY September 2017 SEPTEMBER 2017

2 CONTENTS 1 MSCI Global Investable Market Value and Growth Indexes Methodology Overvew Introducton... 4 Partton of the MSCI Global Investable Market Indexes Defnng the Value and Growth 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 Growth Indexes Constructng the MSCI Global Investable Market Value and Growth Indexes Varables Used to Specfy Value and Growth Characterstcs Calculatng the Z-Scores Wnsorzng the Varable Calculatng the Z-Scores Aggregatng the Style Z-Scores Calculatng the Value Z-Score Calculatng the Growth Z-Score Identfyng the Overall Style Characterstcs Assgnng Intal Style Incluson Factors Intal Style Incluson Factors for Securtes wth Both Value and Growth or Non-Value and Non-Growth Characterstcs Allocatng Securtes to the Value and Growth Indexes Sortng Securtes by Dstance from the Orgn Applyng Buffer Rules MSCI.COM PAGE 2 OF 36

3 2.5.3 Allocatng Securtes to Reach 50% Target Mantanng MSCI Global Investable Market Value and Growth Indexes Sem-Annual Style Index Revew Elgblty Crtera Ongong Event-related mantenance Appendx I: Varable Defntons and Computatons Appendx II: Calculaton of Market Mean and Standard Devaton MSCI.COM PAGE 3 OF 36

4 1 MSCI GLOBAL INVESTABLE MARKET VALUE AND GROWTH INDEXES METHODOLOGY OVERVIEW 1.1 INTRODUCTION 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 Growth Index Seres. From 1997 to May 2003, 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, 2003, 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. PARTITION OF THE MSCI GLOBAL INVESTABLE MARKET INDEXES The MSCI Global Investable Market Value and Growth 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 Growth Indexes s a subset of the MSCI Global Investable Market Indexes. Therefore, common ndex attrbutes such as free float estmaton, number MSCI.COM PAGE 4 OF 36

5 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 Growth Indexes. The changes nclude addtons, deletons, changes n Foregn Incluson Factors (FIFs), updates n number of shares and changes n ndustry classfcaton. 1.2 DEFINING THE VALUE AND GROWTH INVESTMENT STYLES AND INDEXES In constructng the MSCI Global Investable Market Value and Growth Indexes, MSCI has adopted 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 MULTI-FACTOR APPROACH The value nvestment style characterstcs for ndex constructon are defned usng the followng three varables: Book value to prce rato (BV / P) 12-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 Growth 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) TWO-DIMENSIONAL FRAMEWORK Usng the varables mentoned above, value z-scores and growth z-scores are calculated as descrbed n Secton 2 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 twodmensonal framework, non-value does not necessarly mean growth, and vce versa. MSCI.COM PAGE 5 OF 36

6 Addtonally, some securtes can exhbt both value and growth characterstcs, whle others may exhbt nether. Exhbt 1 MSCI Value and Growth Style Space Value Value (and Non-Growth) Value and Growth Non-Growth Growth -1.0 Non-Value and Non-Growth Growth (and Non-Value) 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-Growth) quadrant as t exhbts clear value characterstcs. 2. A securty wth a negatve or zero value z-score and a postve growth z-score s stuated n the Growth (and Non-Value) quadrant as t exhbts clear growth characterstcs. MSCI.COM PAGE 6 OF 36

7 1.2.3 INDEX DESIGN 3. A securty wth a postve value z-score and a postve growth z-score s stuated n the Value and Growth 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-Growth quadrant as t exhbts both nonvalue and non-growth characterstcs. The objectve of the MSCI Value and Growth 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 float-adjusted 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 UNIVERSE AND APPROACH FOR STYLE SEGMENTATION The MSCI Global Investable Market Value and Growth 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 Growth Indexes are derved usng the Value and Growth Incluson Factors from the Standard Value and Growth Indexes. The Investable Market Value and Growth Indexes are created by aggregatng the Value and Growth 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. MSCI.COM PAGE 7 OF 36

8 Standard Index Standard Value Standard Growth Small Value Large Value Md Value Large Growth Md Growth Standard Value Standard Growth Small Value Investable Market Index Value Investable Market Index Growth Small Cap Index Small Growth Small Growth 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 CONSTRUCTION OF THE MSCI GLOBAL INVESTABLE MARKET VALUE AND GROWTH 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. MSCI.COM PAGE 8 OF 36

9 2 CONSTRUCTING THE MSCI GLOBAL INVESTABLE MARKET VALUE AND GROWTH INDEXES 2.1 VARIABLES USED TO SPECIFY VALUE AND GROWTH CHARACTERISTICS 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) 12-month forward earnngs to prce rato (E fwd / P ) Dvdend yeld (D / P) For 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 Growth 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 Growth Rate (g). 1 The long-term forward EPS growth rate s not taken nto account for the Small Cap Global Value and Growth Indexes. No long-term hstorcal SPS growth trend s calculated for securtes classfed n the Banks (4010) and Dversfed Fnancals (4020) ndustry groups, other than securtes classfed n 1 For a detaled descrpton of the varables, please refer to the MSCI Fundamental Data Methodology, avalable at MSCI.COM PAGE 9 OF 36

10 the Mult-Sector Holdngs ( ) and Fnancal Exchanges & Data ( ) subndustres, under the Global Industry Classfcaton Standard (GICS). For further detals on defntons and computatons of the varables, see Appendx I, enttled Varable Defntons and Computatons. 2.2 CALCULATING 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 WINSORIZING THE VARIABLE 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 200 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 192 through 200, ther values become equal to the value of the 191st ranked securty CALCULATING 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 floatadjusted market captalzaton weghted market mean and standard devaton of the relevant varable wthn each MSCI Market Index. MSCI.COM PAGE 10 OF 36

11 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: Where: Z x mcap weghted mcap weghted 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. Example: Calculatng Dvdend Yeld Z-Scores: Index Securty A Securty B Securty C Mean dvdend yeld for the country ndex 2.50 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 0.72 standard devaton above the market dvdend yeld of 2.5. 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 MSCI.COM PAGE 11 OF 36

12 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. 2.3 AGGREGATING 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 CALCULATING 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 2 Value ZScore Z BV / P ZD / P 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 MSCI.COM PAGE 12 OF 36

13 2.3.2 CALCULATING THE GROWTH 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 Growth 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 Growth 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 (4020) ndustry groups, other than securtes classfed n the Mult-Sector Holdngs ( ) and Fnancal Exchanges & Data ( ) sub-ndustres, under the Global Industry Classfcaton Standard (GICS). 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 Growth Z Score 2* 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 Growth ZScore 4 For a fnancal company: Z 1 Growth Z Score 2* Z 5 STfwd EPS LT G Z fwd EPS G g Z Z LT hs EPS G STfwd EPS G Z Z g LT Z hssps G LT hs EPS G For the Small Cap Value and Growth Indexes, the z-score for the long-term forward EPS growth rate s not taken nto account: MSCI.COM PAGE 13 OF 36

14 1 Growth ZScore 4 Z STfwd EPS G Z g Z LT hs EPS G Z LT hssps G Example Calculatng the Growth 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 Growth 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) Growth 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 IDENTIFYING THE OVERALL STYLE CHARACTERISTICS 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 Growth Z-Score Style Characterstcs Postve Negatve or Zero Value Negatve or Zero Postve Growth Postve Postve Both Value and Growth Negatve or Zero Negatve or Zero Nether Value nor Growth MSCI.COM PAGE 14 OF 36

15 2.4 ASSIGNING INITIAL STYLE INCLUSION 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. 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 Growth 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 float-adjusted 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 2 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 INITIAL STYLE INCLUSION FACTORS FOR SECURITIES WITH BOTH VALUE AND GROWTH OR NON-VALUE AND NON-GROWTH CHARACTERISTICS 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 non-growth, 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 z-score dstance value value z-score z-score growth z-score 2 2 value contrbut on growth z-score dstance growth value z-score 2 2 growth contrbut on valuecontrbuton growth contrbut on 1 z-score growth z-score MSCI.COM PAGE 15 OF 36

16 For securtes where a style contrbuton of a postve style z-score (a negatve style z-score) s at least 80% (less than 20%), 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 (nongrowth) or growth (non-value) contrbuted at least 80% (less than 20%) to the dstance respectvely. Ths s represented by the 80/20 lne (20/80) n Exhbt 2, 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 20% and less than 80%, the VIF and GIF are determned usng the table below. Exhbt 2 MSCI Value and Growth Style Space, Allocatng Intal VIF & GIF Value /20 60/ a 3b Value and Growth - Partal Allocaton 40/60 Value - Full Allocaton 3c d 20/ e Non-Growth Growth 4a /20 60/40 4b 4c Non-Value and Non-Growth - Partal Allocaton 4d 4e Growth - Full Allocaton 2 40/60 20/ Non-Value MSCI.COM PAGE 16 OF 36

17 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 2 3a 3b 3c 3d 3e 4a 4b 4c 4d 4e Style Characterstcs Value Growt h Value/ Growt h Value/ Growt h Value/ Growth Value/ Growth Value/ Growth Non- Value/ Non- Growth Non- Value/ Non- Growth Non- Value/ Non- Growth Non- Value/ Non- Growth Non- Value/ Non- Growth Style Bas Value Growt h Value Value- Bas No Bas Growth -Bas Growth Value Value- Bas No Bas Growth -Bas Intal VIF Intal GIF Growth Example: Calculatng the Dstance and the Style Contrbuton: Securty A Securty B Securty C Value z-score Growth z-score Value z-score squared Growth z-score squared Dstance from the orgn squared Value contrbuton to the dstance 94% 50% 85% Growth 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% MSCI.COM PAGE 17 OF 36

18 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. 2.5 ALLOCATING SECURITIES TO THE VALUE AND GROWTH 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 SORTING SECURITIES BY DISTANCE FROM THE ORIGIN 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. The dstance from the orgn (d) s computed as follows: Calculatng the Dstance: d value zscore 2 growth zscore Securty A Securty B Securty C 2 Value z-score Growth z-score Value z-score squared Growth z-score squared Dstance from the orgn MSCI.COM PAGE 18 OF 36

19 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 APPLYING 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 +/- 0.2 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 +/- 0.2, as shown n the shaded area n Exhbt 2. Example: Reassgnng Style Incluson Factors Based on Buffer Rule Securty A Securty B Securty C Value z-score Growth 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. MSCI.COM PAGE 19 OF 36

20 2.5.3 ALLOCATING SECURITIES 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. 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. MSCI.COM PAGE 20 OF 36

21 Example: Reallocatng Securtes wth a Weght of Less than 5% to Reach 50% Target: Securtes Dstance Securty Cumulatve Index Weght Post Buffer Fnal VIF Weghts Value Growth VIF A % 0.1% 0.0% B % 0.3% 0.0% C % 0.4% 0.0% X % 46.5% 50.2% Y % 47.4% 50.2% 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 50.2%, above the 50% target. Securty X s the mddle securty. Securtes startng from Securty Y are fully reallocated to the value ndex. MSCI.COM PAGE 21 OF 36

22 Example: Reallocatng Securtes wth a Weght of More than 5% to Reach 50% Target: Securtes Dstance Securty Cumulatve Index Weght Post Buffer Fnal VIF Weghts Value Growth VIF A % 0.1% % B % 0.3% % C % 0.4% % X % 48.5% 50.6% 0.00 Reallocated 0.35 Y % 49.4% 50.2% 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 52.5% 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 MSCI.COM PAGE 22 OF 36

23 3 MAINTAINING MSCI GLOBAL INVESTABLE MARKET VALUE AND GROWTH 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 Growth Indexes nvolves two man dmensons. The frst s the style mantenance of consttuents resultng from the revew of the Global Investable Market Value and Growth 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. 3.1 SEMI-ANNUAL STYLE INDEX REVIEW 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 2. 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. 3.2 ELIGIBILITY CRITERIA 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. MSCI.COM PAGE 23 OF 36

24 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 float-adjusted 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 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. 3.3 ONGOING EVENT-RELATED MAINTENANCE 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. MSCI.COM PAGE 24 OF 36

25 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, the spun-off securtes wll keep the style of the spnnng-off securty. MSCI.COM PAGE 25 OF 36

26 APPENDIX I: VARIABLE DEFINITIONS AND COMPUTATIONS 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. VARIABLES USED TO DEFINE VALUE INVESTMENT STYLE CHARACTERISTICS 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. 12-month Forward Earnngs to Prce Rato (E fwd / P) MSCI.COM PAGE 26 OF 36

27 The E fwd / P s calculated as follows: E fwd / P = EPS12F / prce of securty Where: EPS 12F s the 12-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 2. EPS 12 F Where M * EPS 1 2 (12 M )* EPS 12 EPS 1 s the consensus of analysts earnngs estmates for fscal year 1 EPS 2 s the consensus of analysts earnngs estmates for fscal year 2 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 2 s not avalable and M s greater than or equal to 8, EPS 1 s used as an approxmaton of EPS 12F Example: Calculatng the 12-month forward earnngs as of January 20, 2005: Securty A Securty B Securty C Latest reported Fscal Year Dec 31, 2004 Mar 31, 2004 Dec 31, 2003 M EPS EPS1 date Dec 31, 2005 Mar 31, 2005 Dec 31, 2004 EPS EPS2 date Dec 31, 2006 Mar 31, 2006 Dec 31, 2005 EPS EPS3 date Dec 31, 2006 EPS12F For Securty C, the results for the fscal year endng December 31, 2004 are not yet avalable. As a result, the EPS 1 estmates stll pertan to the fscal year endng December 31, MSCI.COM PAGE 27 OF 36

28 Therefore, n order to have meanngful 12-month forward earnngs, the EPS 2 and the EPS 3 are used nstead of the EPS 1 and EPS 2. Example: Calculatng the 12-month forward earnngs as of January 20, 2005 when EPS 2 s mssng: Securty A Securty B Securty C Latest reported Fscal Year Sep 30, 2004 Jun 30, 2004 Dec 31, 2004 M EPS EPS1 date Sep 30, 2005 Jun 30, 2005 Dec 31, 2005 EPS EPS2 date Sep 30, 2006 EPS12F 0.67 N/A 1.04 For securty B, estmates for June 30, 2006 are not avalable. Snce M s smaller than 8, EPS 12F s not avalable. In the case of Securty C, estmates for December 31, 2006 are not avalable but as M s greater than 8, EPS 1 s used as EPS 12F. 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. VARIABLES USED TO DEFINE GROWTH INVESTMENT STYLE CHARACTERISTICS Long-term Forward Earnngs per Share Growth Rate (LT fwd EPS G) MSCI.COM PAGE 28 OF 36

29 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. Short-term Forward Earnngs per Share Growth Rate (ST fwd EPS G) The ST fwd EPS G s a growth rate between the 12-month backward earnngs per share and the 12-month forward earnngs per share. The ST fwd EPS G s computed as follows: EPS 12F EPS ST forward EPS G EPS 12B 12B Where EPS 12B = 12-month backward EPS s derved n a smlar fashon as the EPS 12F but from the last reported fscal year and the consensus of analysts earnngs estmates for fscal year 1 EPS 12 B M * EPS 0 (12 M )* EPS 1 12 Where EPS 0 s last fscal year end reported earnngs per share For cases where EPS 1 s used as an approxmaton of EPS 12F, EPS 0 s used as the value for EPS 12B. Example: MSCI.COM PAGE 29 OF 36

30 Calculatng the Short-term forward EPS growth rate as of the January 20, 2005: Securty A Securty B Securty C Fscal Year End Dec 31, 2004 Nov 30, 2004 Mar 31, 2004 M EPS EPS EPS EPS12F EPS12B ST fwd EPS G 26.7% 69.7% 41.9% Current Internal Growth Rate (g) The Current Internal Growth Rate s calculated as follows: g = ROE*(1-PO) Return on Equty (ROE) s calculated usng the tralng 12-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. MSCI.COM PAGE 30 OF 36

31 Payout rato (PO) s calculated usng the current annualzed dvdend per share dvded by the tralng 12-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 Growth Trend (LT hs EPS G) and Long-term Hstorcal Sales per Share (SPS) Growth 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: ~~~ EPS n 1 EPS n ~~~ SPS n 1 SPS n The growth trend s fnally obtaned as follows: LT hs EPS G aeps ~~ ~ EPS asps LT hs SPS G ~~ ~ SPS MSCI.COM PAGE 31 OF 36

32 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. Growth 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 20, 2003: Years t EPS SPS Fscal Year End 0 Dec 31, Fscal Year End 1 Dec 31, Fscal Year End 2 Dec 31, Fscal Year End 3 Dec 31, Fscal Year End 4 Dec 31, a a, annualzed EPS ~~~ ~~~ & SPS Growth Trend 70.6% 9.36% MSCI.COM PAGE 32 OF 36

33 APPENDIX II: CALCULATION OF MARKET MEAN AND STANDARD DEVIATION 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 2 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 2 MSCI.COM PAGE 33 OF 36

34 The followng sectons have been modfed snce Dec 2007 Secton 2.1 Varables used to specfy Value and Growth characterstcs Clarfcaton of treatment for the newly created Fnancal Exchanges & Data subndustry ( ) Secton Calculatng the Growth Z-Score Clarfcaton of treatment for the newly created Fnancal Exchanges & Data subndustry ( ) The followng sectons have been modfed snce August 2016 Secton 1: Updates to the descrpton Secton 1.2.2: Updates to the descrpton Secton 2.1: Added lnk to the MSCI Fundamental Data Methodology Secton 3: Structural changes MSCI.COM PAGE 34 OF 36

35 INDEX METHODOLOGY CONTACT US AMERICAS Amercas * Atlanta Boston Chcago Monterrey New York San Francsco Sao Paulo Toronto EUROPE, MIDDLE EAST & AFRICA Cape Town Frankfurt Geneva London Mlan Pars * ABOUT MSCI For more than 40 years, MSCI s researchbased ndexes and analytcs have helped the world s leadng nvestors buld and manage better portfolos. Clents rely on our offerngs for deeper nsghts nto the drvers of performance and rsk n ther portfolos, broad asset class coverage and nnovatve research. Our lne of products and servces ncludes ndexes, analytcal models, data, real estate benchmarks and ESG research. MSCI serves 98 of the top 100 largest money managers, accordng to the most recent P&I rankng. For more nformaton, vst us at ASIA PACIFIC Chna North * Chna South * Hong Kong Mumba Seoul * Sngapore * Sydney Tape * Tokyo * = toll free SEPTEMBER 2017

36 NOTICE AND DISCLAIMER 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 modfed, reverse-engneered, reproduced or redssemnated n whole or n part wthout pror wrtten permsson from MSCI. The Informaton may not be used to create dervatve works or to verfy or correct other data or nformaton. For example (but wthout lmtaton), the Informaton may not be used to create ndexes, databases, rsk models, analytcs, software, or n connecton wth the ssung, offerng, sponsorng, managng or marketng of any securtes, portfolos, fnancal products or other nvestment vehcles utlzng or based on, lnked to, trackng or otherwse derved from the Informaton or any other MSCI data, nformaton, products or servces. The user of the Informaton assumes the entre rsk of any use t may make or permt to be made of the Informaton. 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It s not possble to nvest drectly n an ndex. Exposure to an asset class or tradng strategy or other category represented by an ndex s only avalable through thrd party nvestable nstruments (f any) based on that ndex. MSCI does not ssue, sponsor, endorse, market, offer, revew or otherwse express any opnon regardng any fund, ETF, dervatve or other securty, nvestment, fnancal product or tradng strategy that s based on, lnked to or seeks to provde an nvestment return related to the performance of any MSCI ndex (collectvely, Index Lnked Investments ). MSCI makes no assurance that any Index Lnked Investments wll accurately track ndex performance or provde postve nvestment returns. MSCI Inc. s not an nvestment advser or fducary and MSCI makes no representaton regardng the advsablty of nvestng n any Index Lnked Investments. Index returns do not represent the results of actual tradng of nvestble assets/securtes. MSCI mantans and calculates ndexes, but does not manage actual assets. Index returns do not reflect payment of any sales charges or fees an nvestor may pay to purchase the securtes underlyng the ndex or Index Lnked Investments. The mposton of these fees and charges would cause the performance of an Index Lnked Investment to be dfferent than the MSCI ndex performance. The Informaton may contan back tested data. Back-tested performance s not actual performance, but s hypothetcal. There are frequently materal dfferences between back tested performance results and actual results subsequently acheved by any nvestment strategy. Consttuents of MSCI equty ndexes are lsted companes, whch are ncluded n or excluded from the ndexes accordng to the applcaton of the relevant ndex methodologes. Accordngly, consttuents n MSCI equty ndexes may nclude MSCI Inc., clents of MSCI or supplers to MSCI. Incluson of a securty wthn an MSCI ndex s not a recommendaton by MSCI to buy, sell, or hold such securty, nor s t consdered to be nvestment advce. Data and nformaton produced by varous afflates of MSCI Inc., ncludng MSCI ESG Research Inc. and Barra LLC, may be used n calculatng certan MSCI ndexes. More nformaton can be found n the relevant ndex methodologes on MSCI receves compensaton n connecton wth lcensng ts ndexes to thrd partes. MSCI Inc. s revenue ncludes fees based on assets n Index Lnked Investments. Informaton can be found n MSCI Inc. s company flngs on the Investor Relatons secton of MSCI ESG Research Inc. s a Regstered Investment Advser under the Investment Advsers Act of 1940 and a subsdary of MSCI Inc. Except wth respect to any applcable products or servces from 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 MSCI s products or servces are not 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. Issuers mentoned or ncluded n any MSCI ESG Research materals may nclude MSCI Inc., clents of MSCI or supplers to MSCI, and may also purchase research or other products or servces from MSCI ESG Research. 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 MSCI Inc. All rghts reserved. MSCI.COM PAGE 36 OF 36