Capital Group Questions MSCI’s Country-Base Index Model

Capital Group Cos., the investment firm that created the forerunner to MSCI indexes used as a benchmark for $7.5 trillion in assets, said the regional indexes should be revised to reflect the growing globalization of companies.

The benchmarks for international investing should take into account where companies receive their revenue because country of domicile no longer is an accurate reflection of a company’s geographic exposure, Rob Lovelace, a money manager for Capital Group, said today at a conference in Washington held by Charles Schwab Corp. Los Angeles-based Capital Group is in talks with MSCI Inc. about a revision, he said.

“We think you should be focusing on revenue as a new proxy for where a company does business,” Lovelace said. “The country where a company is incorporated in, where it’s listed, is no longer as accurate.”

Capital Group pioneered the Capital International indexes, which later became the MSCI brand, as it began investing outside the U.S. in the 1960s. The company’s American Funds have about $1.1 trillion in assets. Vanguard Group Inc., the largest U.S. mutual-fund firm, last year dropped MSCI Inc. as the benchmark provider for 22 of its index funds to cut costs.

“Global is now the new norm for mid- and large-sized companies,” said Lovelace, the grandson of Capital Group founder Jonathan Bell Lovelace.

In a European index fund, the component companies derive much of their revenue from outside the continent, Lovelace said. He cited Burberry Group Plc, the London-based luxury retailer, as an example. Seventy percent of the company’s sales last year came from outside Europe, according to data compiled by Bloomberg.

The benchmarks for international funds need to be updated and revenue is the best option as a new proxy because it’s the most widely disclosed metric, Lovelace said.

Capital Group, which runs the American Funds, hasn’t created a suite of products that solve all the challenges of increasingly global companies in portfolios, he said.

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