MSCI’s Crucial Verdict: The High-Stakes Strategy to Fight Index Exclusion

Index exclusion isn't a death sentence—it's a catalyst for reinvention. MSCI's latest verdict forces asset managers into a strategic corner, where passive tracking meets aggressive adaptation.

The New Playbook: Beyond Passive Tracking

Gone are the days of blindly following the benchmark. When a major stock faces removal from a flagship index, the ripple effect hits portfolios instantly. Fund managers aren't just rebalancing; they're engineering workarounds—synthetic exposures, custom baskets, and strategic overlays that mimic index performance without the official stamp. It's financial jiu-jitsu: using the index's own weight against it.

Liquidity vs. Mandate: The Fund Manager's Dilemma

Selling excluded assets en masse tanks prices—a textbook liquidity trap. Holding them violates fund mandates tied to index composition. The solution? A hybrid approach. Trim positions gradually, hedge with derivatives, and reallocate to correlated assets that maintain beta without the baggage. It's a high-wire act between regulatory compliance and return optimization, where a single misstep triggers outflows from skittish investors. After all, nothing moves money faster than the fear of underperforming a benchmark it's supposedly tracking.

The Ripple Effect: From Boardrooms to Algorithms

Exclusion decisions don't happen in a vacuum. They trigger chain reactions: internal governance overhauls, ESG metric recalculations, and algorithmic trading adjustments. Companies facing removal often launch aggressive investor relations campaigns—promising buybacks, strategic pivots, or operational shake-ups. Sometimes it works; sometimes it's just corporate theater for the analyst crowd. The real action happens in the dark pools and swap desks, where exposure is reshuffled away from public scrutiny.

Survival of the Most Adaptive

MSCI's gavel doesn't just judge companies—it tests the entire financial ecosystem's agility. The winners won't be those who mourn index exclusion, but those who treat it as a strategic catalyst. They'll build more resilient portfolios, develop sophisticated risk tools, and maybe even whisper a quiet 'thank you' for the forced innovation. In finance, as in nature, adaptation isn't optional—it's the only strategy that never gets excluded from the game.

Recently, MSCI announced the potential removal of companies like Strategy from their indices. The institution plans to declare its decision on January 15, with JPMorgan expressing doubts in its reports. The decline observed in November partly stemmed from this announcement. However, Saylor remains determined not to give up.

The Argument Against Exclusion

A letter signed by Michael Saylor and CEO Phong Le argues against the removal of digital asset treasury companies (DATs) from the MSCI index. This 12-page document represents the last effort before the decision date. MSCI’s proposal to exclude these companies aligns with their performance similar to funds, as observed in Global Investment Market Indices.

Strategy contends that DATs function as operational companies and disputes the arbitrary 50% crypto reserves threshold. They believe the proposal integrates inappropriate policy factors into index construction. Furthermore, they highlight potential risks to innovation from such exclusion.

The Industry’s Call for MSCI’s Neutral Stance

“We urge MSCI to reject this proposal,” the company states, arguing that the suggestion mischaracterizes DATs and introduces unfeasible conditions that WOULD stifle innovation. Such a decision could harm MSCI’s reputation and clash with national priorities. History shows that institutions allowing markets to test foundational technologies have succeeded. Now, as digital assets reach a pivotal point, MSCI must choose whether to maintain its neutrality or react with a short-term perspective.

The fear of delisting has already hinted at possible significant plummets in the crypto market by January 15. Many funds track and invest in MSCI indices automatically. For companies like MSTR involved with crypto reserves, this passive investment approach draws significant capital. It is estimated that passive investments within MSTR holders reach $8 billion, and any delisting could severely impact their MNAV score, already struggling.

Consequently, Strategy’s letter today calls for “neutrality” from MSCI, not to be labeled as “uninvestable.” MSCI presents itself as the unbiased provider of comprehensive indices, reflecting ‘the development of Core stock markets’ without judging any market, company, strategy, or investment as good or bad.

However, implementing this proposal could breed concerns about the impartiality of MSCI indices, as it would introduce a digital-asset-specific criterion lacking historical grounding in index practice. Technologies like Bitcoin$92,039 symbolize innovation and the future potential foundation of global financial systems and economic growth engines. As the US strives for leadership in digital asset technologies, any action weakening this innovative field would be ill-timed.