MSCI Barra Factor Indexes Methodology

1 JUNE 2017 INDEX Methodology JUNE 2017 MSCI Barra Factor Indexes Methodology June 2017 | PAGE 2 OF 25 2017 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document. MSCI Barra Factor Indexes Methodology | JUNE 2017 1 Introduction ..3 2 Main Characteristics of MSCI Long-Short Barra Factor Indexes ..4 3 Constructing the MSCI Long-Short Barra Factor Indexes ..5 Specifying the Parent Index, Benchmark and the Barra Equity Model for optimization ..5 Specifying the Target Factor and optimization objectives ..6 Specifying the optimization constraints ..6 Calculating the optimized 4 Maintaining the MSCI Barra Factor Indexes ..8 Monthly index reviews ..8 Ongoing event related changes.

2 8 Appendix I: Current List of MSCI Barra Factor Indexes as of June 10 Appendix II: Optimization Settings for Constructing MSCI Long-Short Barra Factor Indexes .. 11 Appendix III: Monthly Rebalancing Timeline .. 14 Appendix IV: Defining Shorting Cost Cutoff .. 15 Appendix V: Defining Trade 16 Appendix VI: Handling Infeasible Optimizations .. 17 Appendix VII: New release of Barra Equity Model or Barra 18 Appendix VIII: Barra Model Data Delays or 19 Appendix IX: Constructing the MSCI Long-Only Barra Factor 20 CONTENTS | PAGE 3 OF 25 2017 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document. MSCI Barra Factor Indexes Methodology | JUNE 2017 1 INTRODUCTION Fundamental factors have become i ncreas ingly i mportant i n various areas of the i nves tment proces s , i ncluding ri sk management and portfol i o cons tructi on.

3 Fundamental factors repres ent s ources of s ys temati c ri sk and return. MSCI has done extens i ve res earch to i denti fy the common factors dri ving equi ty markets and bui l d Factor model s to capture thes e common s ources of ri s k and return. MSCI res earch s hows that three types of fundamental factors account for a s i gnificant part of the commonal i ty i n equi ty returns acros s di fferent markets and ti me peri ods : country factors , i ndus try factors , and s tyle factors . The mai n s tyl e factors i nclude s ize, val ue, momentum, vol ati l ity, and growth, to name j us t a few. MSCI has devel oped a fami l y of Barra Factor Indexes that ai m to capture s ome of thes e i mportant s tyl e factors i n an i ndex.

4 The MSCI Long-Short Barra Factor Indexes are cons tructed by opti mi zi ng a parent MSCI Index to achi eve a s peci fi ed hi gh l evel of expos ure to a particular style Factor (herein, Target Factor ), very low exposure to all other style, i ndus try and country factors , and l ow tracking error to a corres pondi ng MSCI benchmark i ndex1 (herein, Benchmark ). For institutional investors with restri ctions on s horti ng, MSCI al s o calculates MSCI Long-Onl y Barra Factor Indexes cons tructed us i ng a s imi lar opti mization proces s but des i gned to maxi mi ze expos ure to the Target Factor whi l e control l ing expos ure to other factors and mi ni mizi ng tracking error rel ative to the Benchmark. MSCI currentl y offers Barra Factor Indexes that target the momentum, l everage, vol ati lity, val ue and earni ngs yi el d factors and may expand the i ndex fami l y to cover a wi der range of factors .

5 Thi s methodol ogy book des cri bes a generi c methodol ogy to create MSCI Barra Factor Indexes based on the existing MSCI global or domestic equity Indexes (herein, Parent Indexes ) using the Barra Optimizer and the relevant Barra Equity Model. Further i nformati on about the MSCI Barra Factor Indexes , Barra Opti mizer and the vari ous Barra Equi ty Model s can be found at ci .com/res earch-archive. 1 Typically the corresponding MSCI Standard Index | PAGE 4 OF 25 2017 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document. MSCI Barra Factor Indexes Methodology | JUNE 2017 2 MAIN CHARACTERISTICS OF MSCI LONG-SHORT Barra Factor Indexes The MSCI Long-Short Barra Factor Indexes aim to have the fol l owi ng characteri stics.

6 Performance s i mi l ar to that of the Benchmark pl us the Target Factor Speci fi ed hi gh expos ure2 to the Target Factor rel ati ve to the Benchmark Low expos ure to other factors rel ati ve to the Benchmark Low tracki ng error rel ati ve to the Benchmark Control l ed l evel of i ndex turnover Monthl y rebal ancing A pure Factor repl i cating i ndex coul d be compos ed of al l s ecuriti es pres ent i n the es ti mati on uni vers e of the rel evant Barra Equi ty Model (typi cal ly thous ands of l arge, mi d and s mal l capi talization s ecurities ) wi th l ong and s hort pos iti ons. Thi s i ndex would i ncur hi gh turnover wi th mos t s ecuri ty wei ghts changi ng at each monthl y update of the model.

7 A methodol ogy to create reas onabl y repl icable i ndexes needs to i ncorporate a number of cons traints , s uch as cons traints on the number of i ndex cons ti tuents , monthl y i ndex turnover, trade l i mi t and s horti ng cos ts to achi eve repl i cability and i nves tability. 2 The target Factor exposure may be positive or negative depending on the Target Factor . Please refer to Appendix I. | PAGE 5 OF 25 2017 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document. MSCI Barra Factor Indexes Methodology | JUNE 2017 3 CONSTRUCTING THE MSCI LONG-SHORT Barra Factor INDEXES3 The MSCI Long-Short Barra Factor Indexes are cons tructed by opti mi zi ng an MSCI Parent Index to achi eve a s peci fi ed s table l evel of expos ure to the Target Factor and a control l ed l evel of expos ure to al l other s tyl e, i ndus try and country factors , whi le mi ni mi zing the tracki ng error rel ati ve to the Benchmark, for a gi ven s et of cons trai nts.

8 Cons tructing the MSCI Barra Factor Indexes i nvolves the fol l owi ng s teps : Speci fyi ng the Parent Index, Benchmark and the Barra Equi ty Model for opti mi zati on Speci fyi ng the Target Factor and opti mi zati on obj ecti ve Speci fyi ng the opti mi zati on cons traints Cal cul ating the opti mi zed i ndex The s teps for cons tructi ng the MSCI Long-Short Barra Factor Indexes are des cri bed bel ow. SPECIFYING THE PARENT INDEX, BENCHMARK AND THE Barra EQUITY MODEL FOR OPTIMIZATION Cons tructi ng the MSCI Barra Factor Indexes begi ns wi th s el ecti ng the Parent Index, Benchmark and the rel evant Barra Equi ty Model for the opti mi zati on. For the MSCI Long-Short Barra Factor Indexes : the Parent Index i s the corres pondi ng MSCI Inves table Market Index and s erves as the uni vers e of el i gi bl e s ecuriti es for the opti mi zati on; the Benchmark for the opti mi zati on i s the corres pondi ng MSCI Standard Index; and the Barra Equi ty Model i s the corres ponding gl obal, regi onal or s i ngle country Barra Equi ty Model.

9 For exampl e, to cons truct the MSCI Europe Long-Short Barra Factor Indexes , the MSCI Europe Inves tabl e Market Index woul d be us ed as the uni vers e of el i gi ble s ecuri ties , MSCI Europe Index woul d be us ed as the Benchmark for the opti mi zati on, and the Barra Europe Short-Term Model woul d be us ed as the ri s k model for the opti mi zati on. The opti mi zati on rel ies on the Factor expos ures for al l the s ecuri ti es i n the Parent Index and the Factor co-vari ance matri x of the rel evant Barra Equi ty Model . The opti mi zati on i s performed from a bas e currency pers pecti ve ( , Euro for the MSCI Europe Barra Factor Indexes ) and al l ows s hort s el ling of s ecuri ties . 3 Please refer to Appendix IX for the construction of MSCI Long-Only Factor Indexes .

10 | PAGE 6 OF 25 2017 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document. MSCI Barra Factor Indexes Methodology | JUNE 2017 SPECIFYING THE TARGET Factor AND OPTIMIZATION OBJECTIVES The opti mi zati on obj ecti ve of the MSCI Long-Short Barra Factor Index i s to have the l owes t tracki ng error rel ati ve to the Benchmark, s ubj ect to the opti mi zati on cons traints s pecified i n Secti on Dependi ng on the Target Factor , the MSCI Long-Short Barra Factor Index wi l l target 1 or -1 s tandard devi ation of expos ure rel ati ve to the Benchmark. Pl eas e refer to Appendi x I for the current l i s t of MSCI Long-Short Barra Factor Indexes and thei r Target Factor Expos ure.