Wednesday, October 17, 2012

Vanguard Abandons MSCI and MSCI's Share Price Crashes

By Tim Dulaney, PhD and Tim Husson, PhD

 A few weeks ago, the Wall Street Journal reported that Vanguard is replacing the benchmarks on nearly two dozen of its index funds currently provided by MSCI and replacing them with benchmarks provided by either FTSE or the Center For Research In Security Prices (CRSP) at the University of Chicago.  For the press release dated October 2, 2012, see here.

This is clearly great news for FTSE since this index change by Vanguard makes them the "third-largest equity exchange traded product index benchmark provider globally, with more than $124 billion in ETF assets benchmarked to FTSE indices."

MSCI, on the other hand, is having sort of a bad month as a result of this news.  As the Wall Street Journal reports, MSCI's stock price was hovering around $36 for the month of September, but has dropped to about $27 as a result of this news even though "S&P pegged Vanguard's contribution at under 3%".


An interesting side note to the story is that a fairly significant insider sale occurred less than a month before this event.  The insider was Mr. C.D. Baer Pettit and, according to his Form 4 filed with the SEC, he was MSCI's Head of Index Business as of the September 7, 2012 transaction date.  (An earlier dated Form 4 from February 2012 states his position as Head of Client Coverage).  Pettit sold over 72,000 shares of MSCI -- or more than 38% of his ownership -- as of the transaction date. The average price received was $36.61 since the transaction "was executed in multiple trades at prices ranging from $36.52 to $36.69."  Clearly this is almost a full $10 more than what Pettit would have received if he had waited just a few weeks to sell these shares. 

MSCI's closing price on October 1, 2012 was $35.82 and the closing price on October 2, 2012 was $26.21.  The shares Baer Pettit sold on September 7, 2012 would have lost over $694,572. The intraday price graph is included below with the price dropping right around the time of the announcement by Vanguard.

 

According to MarketBrief's News Feed on this transaction, this single transaction accounted for (coincidentally) over 38% of the shares of MSCI sold by insiders during the twelve months preceding this transaction.  Furthermore, insiders at MSCI have been net sellers over the same period with over 186,000 shares sold and only 10,000 shares bought. 

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