In May, MSCI, the world’s largest compiler of stock market indexes, included the first Estonian company, Wise plc, in its global equity market indexes. As a result, Wise shares were added to our pension fund portfolio. Interestingly, just a few months earlier, MSCI had removed Western Union, a company operating in a similar sector but with an outdated business model.(1)
A stock market index is essentially a list. The MSCI ACWI index, which we follow, comprises approximately 3,000 of the world’s largest listed companies ranked in terms of market value. The relative share of each company in the index is its market value divided by the total market value of all the companies in the index. (2)
MSCI reviews the list quarterly, adding companies whose market value has increased sufficiently to qualify as one of the largest and removing companies that have consistently fallen below a predetermined minimum value. (3)
Wise in, Western Union out
During the May revision, 86 companies were added to the ACWI index, while 39 were dropped. Notably, Electrolux shares were among those removed. In an interesting twist, in February, Western Union, a former heavyweight and rival of Wise from ages past, was excluded from the index. The company’s market value had dwindled to €4 billion, rendering it too small to remain in the index.
This is how passive investing works. Growing companies are included in our portfolio, while those performing poorly are eliminated. Find out more about what one index fund is doing to ensure future capital growth.
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But wait, why am I even bothering to talk about the addition of just one stock to Tuleva’s portfolio? I mean, they add and remove stocks all the time, right? Well, let me tell you straight up: Tuleva and Wise are like peas in a pod! They’ve got more in common than meets the eye.
Taavet and Kristo, founders of Wise, are among our founding members, and Kristo also serves on Tuleva’s supervisory board. This connection is not coincidental. Wise emerged from the same frustration that led to the establishment of Tuleva. They are combating hidden fees imposed by banks for currency exchange and international payments. Similarly, Tuleva aims to challenge high government fees and concealed costs associated with pension funds, allowing Estonian people to save money for themselves rather than the banks.
It was only natural for Kristo and Taavet to support pension system improvements and participate in building a startup that belongs to the Estonian people. I am delighted that the connection now goes both ways. It is only fitting for a progressive financial company to be part of Tuleva’s investment portfolio.
I personally hold some Wise shares in my trading account. A few years back, I received 200 shares as one of Wise’s first customers (my username is number 7). I also went ahead and bought some more shares on the stock exchange last year. And since the end of last year, I have been serving as a proud member of the supervisory board of TINV Europe AS, a subsidiary of Wise.
This raises a valid question: Why do I buy individual shares? I follow Jack Bogle’s advice: allocate 90% of your funds to an index fund and invest the remaining 10% in a trading account, using it to make bold strategic moves. While I’m passionate about financial markets and deeply interested in company reports and analyses, the money in my trading account represents less than 5% of my total holdings in index funds.
Our other board member, Erko, is also no stranger to the world of Wise. Back when Wise’s market value wasn’t sky-high, Erko spent over two years working there and was lucky enough to receive a decent chunk of stock options along with his salary. Although those Wise shares turned out to be the shining star in Erko’s portfolio, he doesn’t consider himself an investing prodigy – just a darn good engineer who happened to strike gold by working for an amazing company like Wise.
But what really ties us to Wise is the fact that they’re an Estonian initiative. Whenever we spot a big news story about an Estonian financial company making waves in the Financial Times, our hearts swell with pride. And this time, it’s not some scandalous tale about banks laundering money.(smiley)
Of course, what’s also crucial is that the decision to include Wise in our portfolio wasn’t made by me or anyone else at Tuleva. It was MSCI following its own set of rules for compiling the index that made the call.
(1) You can find the MSCI announcement regarding the inclusion of Wise here.
(2) To clarify, shares in more than 30,000 companies are traded across the world’s stock exchanges. The MSCI ACWI, however, sets a practical limit by focusing on the 3,000 largest companies. Companies falling below this limit would have a negligible impact on the overall composition of the index.
(3) The composition of the MSCI index can be explored in a more detailed (and much more complex) discussion available here.