MSCI Research

US Market Report - Should I "Like" Facebook's IPO?

Wed, 16 May 2012 22:30:29 +0100

The Facebook IPO raises questions about both the stock’s valuation and its risk characteristics. In this report, we explore how including or exluding Facebook might affect the risk of style, or size segment portfolios of US equities. We also explain how the USE4 Model estimates factor exposures and specific risk of stocks before and after their IPO. For Facebook, we provide an estimation of those risk numbers, which can be used to create proxy assets in Barra Aegis or Barra Portfolio Manager.

Why Currency Returns and Currency Hedging Matters

Wed, 16 May 2012 12:31:55 +0100

With the growth of international investing, the impact of currency movements continues to be of significance. All investors are exposed to currency risk when investing in equities abroad and adverse moves in exchange rates can dramatically impact their performance. Hedging currency exposure is one technique for taking currency risk out of the equation when investing in foreign companies. The MSCI Hedged Indices provide one way to measure the performance of currency hedged equities. Here we explore the effects of currency on foreign investments and how currency hedging can help investors who do not have a viewpoint on the direction of exchange rates.

Incorporating Risk Premia Mandates in a Strategic Allocation

Thu, 10 May 2012 18:13:40 +0100

Supported by strong academic and industry evidence that risk premia are primary drivers for long-term asset class performance, institutional investors have recently started to allocate strategic mandates to the growing array of investment strategy indices—also referred to as risk premia indices. In this research bulletin we illustrate the case of one US pension plan, Wyoming Retirement System (WRS), that incorporated risk premia allocations within in their strategic global equity allocation seeking to lower equity volatility and improve risk-adjusted returns.

Barra Term Structure Models - Model Insight

Wed, 09 May 2012 11:52:49 +0100

MSCI has enhanced Barra government bond models that cover all developed nominal and inflation-protected markets and added five new emerging market models. BIM301 models improve in-sample and risk forecasting by estimating more detailed and longer term structures and improved risk modeling, including higher frequency weekly returns, short and long horizon models, and improved specific risk models.

The Barra Australia Equity Model (AUE4) - Empirical Notes

Wed, 09 May 2012 10:07:35 +0100

This Model Insight provides empirical results and analysis for the new Barra Australia Equity Model (AUE4). These notes include extensive information on the structure, the performance, and the explanatory power of the factors. Furthermore, these notes also include a thorough side-by-side comparison of the forecasting accuracy of the AUE4 Model and the AUE3 Model, its predecessor.

Global Equity Market Watch - May 2012

Tue, 08 May 2012 10:38:32 +0100

Global Equity Market Watch is a monthly publication that looks at global equity markets through the lens of the factors in the Barra Global Equity Model (GEM2). In each issue, we examine the various sources of global equity returns and risk - including the World factor, countries, industries, styles, currencies, and stock-specific sources - and monitor returns, volatilities, and correlations for those sources over the trailing 1-12 months. We also examine how the explanatory power and statistical significance of the factors evolve over time.

Global Market Report - Volatility Regimes and the Drivers of Risk - April 2012

Mon, 30 Apr 2012 22:53:14 +0100

As measured by the VIX and VDAX, implied volatilities in both the US and Europe have fallen sharply since October 2011. However, in the past ten years the declines in implied volatility have not been uniform: for example, when the dotcom bubble burst the VIX declined more rapidly than the VDAX. During the two most recent declines in volatility seen in 2009-2010 and 2011-2012, the US trended with global volatility while Europe decoupled from the global trend as it moved into the sovereign debt crisis in the Eurozone. Portfolio managers who understand the source of changing risk can better rebalance their portfolios. Through the lens of the Barra Global Equity Model (GEM3), we examine the relationship between implied volatilities and forecast volatilities to identify drivers of changing risk.

Europe Market Report - The Recent Value Conundrum - April 2012

Mon, 30 Apr 2012 22:04:21 +0100

According to popular index-based measures, value stocks have tended to underperform growth stocks since 2010. Alternative measures of the value effect have shown different return profiles. In this report, we compare these different measures while touching on the practical issues of value investing, illustrating how unintended biases in a portfolio designed to capture the value effect could strongly influence its performance.

US Market Report - The Effect of the Bush Dividend Tax Cut - April 2012

Mon, 30 Apr 2012 21:17:31 +0100

US investors are bracing themselves for the potential expiration of the 2003 Bush dividend tax cut. To help portfolio managers prepare for this potential change in the US tax code, this Market Report uses the rich factor structure of the Barra US Equity Model to examine these issues: (1) what effect the initial tax cut had on dividend-paying stocks, (2) the impact of this policy on the overall stock market, and (3) the change in dividend policies of the issuing firms.

Multi-Asset Class Market Report - Stress-Testing in BarraOne: Contemplating a Eurozone Breakup - April 2012

Mon, 30 Apr 2012 19:47:55 +0100

Since the beginning of the Eurozone crisis in 2009 it is apparent that structural issues persist, particularly in the European peripheral economies. Stress testing plays a pivotal role in the risk management process. This paper shows how a well-specified scenario can be used to understand and mitigate contagion effects resulting from a hypothetical sovereign default in Greece, Spain or Italy. Global asset and factor representative portfolios are stressed to reflect the impact of default on countries, sectors, and industries.

Market Insight: Diversity on the Frontier

Fri, 20 Apr 2012 09:01:38 +0100

The integration of global financial markets has caused concern that future returns and volatility may become increasingly correlated with developed markets. Risk-tolerant investors are exploring fledgling equity markets in far flung corners of the globe, hoping to find better growth prospects and investment returns that are less dependent on global integration. In this paper we review the potential for international diversification that frontier markets could offer relative to its more mature emerging and developed counterparts. We observe that the relative isolation and idiosyncratic nature of frontier markets could provide an attractive source of equity exposure while mitigating overall portfolio volatility.

Quantitative Insight - The Impact of Macro Factors for Canada Equities

Fri, 20 Apr 2012 08:54:37 +0100

The characteristics of the Canadian economy suggest that commodity returns are an important risk driver for Canadian equities. One of the highlights of the new Barra Canada Equity model (CAE5) is an enhanced style factor structure, which includes two commodity-related factors: oil and gold sensitivity. These factors explain the return differences between stocks caused by sensitivity to spot commodity returns. We illustrate how these factors add value by providing information in addition to industry structure. Historically, commodity sensitivity factors have had strong return profiles, intuitive correlations with market performance, and significant contributions to portfolio returns.

Small Caps - No Small Oversight

Thu, 12 Apr 2012 11:10:09 +0100

Many investors recognize that their reference universe should encompass large, mid and small caps, and furthermore accept the investment belief that smaller companies should earn a risk premium over larger ones. Nevertheless, in practice, most of these investors underweight the small cap segment. Institutional investors - particularly in Europe and Asia - tend to have limited small cap representation, even within their own markets.

We review various aspects of this puzzle and argue that omitting small caps is in fact a significant active decision which many investors may be making unintentionally. Excluding small caps represents an active decision to ignore up to 14% of the universe and amounts to a negative view on the small cap premium. This active decision would have forfeited 60 bps of annual performance over the last decade and could have consumed a substantial part of an asset owner’s risk budget as well, in the range of 50% to 75%.

Why do so many institutional investors exclude global small caps in their equity universe? We discuss some of the investment beliefs and perceptions that may underlie this exclusion and also address small cap implementation issues such as free float availability, liquidity, and trading costs.

Global Equity Market Watch - April 2012

Wed, 11 Apr 2012 15:10:27 +0100

Sun Hung Kai - Falling from Grace

Tue, 03 Apr 2012 09:16:14 +0100