BOSTON -- Shares of MSCI Inc. plunged in afternoon trading Tuesday after a key index-licensing customer, Vanguard Group, said that some of its mutual funds will drop MSCI as the provider of market benchmarks that the funds track.
THE SPARK: Vanguard said it negotiated lower-cost licensing deals for 22 index funds that currently track indexes, or groups of stocks in certain market segments, licensed from MSCI. In coming months, 16 U.S. stock funds from Vanguard will switch to indexes from the University of Chicago's Center for Research in Security Prices, while six foreign stock funds will begin tracking FTSE indexes.
THE BIG PICTURE: New York-based MSCI generates revenue from its market indexes through licensing agreements with investment clients, including asset managers such as Vanguard. In response to Vanguard's announcement, MSCI issued a statement saying the 22 Vanguard funds contributed about $24 million annualized revenue and operating income for MSCI.
That means the Vanguard funds represented less than 3 percent of MSCI's overall revenue, based on the $901 million in operating revenue that the company reported last year. However, Vanguard offered strong growth potential as an MSCI client, as it's the largest mutual fund company based on assets managed. Vanguard has recently gained market share from rivals in traditional mutual funds as well as in the faster-growing exchange-traded fund industry.
MSCI said the impact to its financial results is expected to start in January, as the Vanguard funds begin the transition to new benchmarks.
THE ANALYSIS: Standard & Poor's Ratings Services said the Vanguard announcement did not affect its ratings on MSCI, or its outlook on the company's creditworthiness. "Although the Vanguard business represents a meaningful loss for MSCI's asset-based fee business, both in revenues and prestige, it is a small part" of the company's revenue base and earnings. S&P said.
SHARE ACTION: Shares of MSCI fell $8.98, or 25.1 percent, to $26.84 in afternoon trading after falling as low as $24.75 earlier in the session, the stock's lowest price since July 2009.