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How to think bigger about small cap investing
Jul 15, 2016 Raman Aylur SubramanianGlobal Investing , Factor Investing
Learn MoreInvestors who allocate to small-cap stocks can use either a benchmark weighted according to the market value of companies that constitute it or indexes that track the performance of factors such as size. But all small-cap indexes are not the same.
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While the long-term consequences for investors of the decision by U.K. voters to leave the European Union may take time to unfold, our analysis of the months that preceded the referendum shows that tremors from Brexit already have stirred up markets and upped systemic risk for Britain compared with developed markets generally. The question now is whether the waves will continue and how they may (or may not) intensify.
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It may be time for institutional investors to rethink whether to hedge their exposures to foreign currencies. Though hedging can help investors avoid losing money amid swings in the foreign-exchange market, the strategy can be an expensive one for investors based in countries with structurally low interest rates.
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Investors who aim to understand what drives returns over the long run might look to the Land of the Midnight Sun.
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Analyzing Credit Strategies from a Risk and Return Perspective
May 3, 2016 Andy Sparks Learn MoreUnderstanding the performance of credit portfolios is essential in explaining a strategy’s merits to clients and prospects.
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Market movements in the first three months of the year reflected wide gyrations in investors’ assumptions about macroeconomic conditions and asset pricing.
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On a quarterly basis, MSCI reviews the principal asset classes in the preceding three months through the prism of MSCI’s factor models, which are used by investors to manage risk and construct portfolios.
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Top-down managers assess the economic outlook and translate macro views into country and industry portfolio positions. In contrast, bottom-up managers select securities based on a set of common criteria, for example valuations, profitability, growth, quality, yield, as well as company-specific attributes.
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Emerging-market equities revived in the first quarter after a rather dismal performance over the past five years. The pickup has left investors to wonder whether the gains might continue and to think anew about how to approach the segment.
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Momentum, the tendency of past winners to continue to do well in the near future, is a pervasive return regularity in equities and across asset classes. It is used both as a signal in alpha models and as a factor in risk models.
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The volatility of currency has increased in recent years as a combination of quantitative easing and currency wars fuel swings in the foreign-exchange market.
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The falloff in the price of a barrel of oil that began in June 2014 has highlighted how such fluctuations can affect economies and asset prices worldwide.
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As we highlighted in a recent post, minimum volatility strategies have outperformed this year to date amid unrest in financial markets.
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Britain’s leaving the European Union would send the U.K. and Europe into the unknown with possibly major consequences for multi-asset class portfolios.
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Multi-Factor Strategies Highlight Benefits of Diversification
Mar 14, 2016 Dimitris Melas Learn MoreThe cyclicality of factor strategies means that individual factors can deliver a premium against the market over time but that any one factor can experience periods of underperformance.
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Many institutional investors develop proprietary return forecasting models, but use third-party/alternative models to measure risk and transaction costs.
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Call it a lost decade. The value factor recently marked 10 years of decline in the U.S.
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The year that began in January stands out for the uncertainty that has rocked the global economy. The search for growth, the prospect of deflation and a slowdown in China have combined to roil financial markets and challenge asset owners and managers worldwide
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The fitfulness of the global recovery has produced quick and unexpected changes in financial markets and handed portfolio managers the challenge of allocating assets amid the market stress.
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Low volatility is one of the few factors that have historically performed well in turbulent markets.
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If 2015 market volatility frayed investor nerves, 2016 might be even more of a nail-biter. MSCI identified 12 stress points globally to be used in quantifying the effect on portfolios of a range of shifts in markets, liquidity and the macroeconomy.
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Ever since central banks slashed interest rates in response to the Global Financial Crisis, investors have been searching for yield.
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Momentum, the tendency of past winners to continue to do well in the near future, is used widely in risk models and in quantitative strategies. Recently, momentum has also been the basis for factor indexes aiming to replicate the performance of this pervasive factor.
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The U.S. Federal Reserve is on the verge of raising short-term rates for the first time since the global financial markets crisis hit seven years ago.
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The decline in Chinese equities and commodity prices this summer renewed investor concerns about a possible economic hard landing in the Asian giant. In particular, the 8.5% market plunge on August 24 spread fear into global markets that continues to this time.
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As investors shift toward global, multi-asset class strategies from narrower mandates, the number of dimensions to manage is rapidly increasing. This complexity requires seeing both the forest and the trees. Investors need a multi-asset class view of the markets, but they also need to understand the unique drivers of risk and return within each market.
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The quality factor has demonstrated long-term outperformance against the market, but it has not received the same attention as the value, size or momentum factors.
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Risk measures, such as Expected Shortfall and Value at Risk, are designed to calculate the risk of a portfolio. But different risk models may work better than others for different asset classes and in varying time horizons. The MSCI Model Scorecard provides an innovative tool designed to help select the best risk model in terms of Expected Shortfall (ES) and Value at Risk (VaR) predictivity.
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"Active Share” — a popular measure of how a portfolio’s composition differs from its benchmark — has been widely credited as a predictor of manager skill. Initial academic research has shown that active managers with high Active Share and low Tracking error enjoyed persistent outperformance.
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Despite agreement on the principles of value investing, the investment community uses a number of different metrics to describe the value factor. Each metric (or descriptor) has its own advantages and pitfalls.
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As companies expand their footprint globally, the geographic distribution of their revenues evolves over time and their economic exposures may diverge from their country of domicile and primary listing. We believe that this raises a critical issue for institutional investors.
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Private equity is both “private” and “equity.” The valuations look smooth from quarter to quarter, but in the long run, private equity shows a strong relationship with equity and is exposed to many of the same systematic factors that drive traditional assets.
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Institutional investors are increasingly gravitating towards multi-factor allocations as the preferred approach to factor investing. But how should factor indexes be combined?
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Some large institutional investors prefer the granularity of a bottom‐up factor model – the way risk is allocated across markets, styles, issuers and industries – while others may prefer a more aggregated view. These investors would rather decompose risk into a few broad themes, such as by grouping fixed-income risk across markets into a level and a slope factor.
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Traditional investment thinking posits that alpha depends on the active decisions of portfolio managers. The search for alpha is daunting, however, because even the best analysis can be upended if the market draws a different conclusion. In addition, geopolitical and macroeconomic events can change the market environment without warning.
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Asset managers look at both risk and return in their portfolios. However, it is not always so easy to report and analyze risk and performance attribution on the same platform and along the same dimensions. This type of integrated ex‐ante and ex-post analysis can be carried out in BarraOne, MSCI’s multi‐asset class, multi‐currency, risk and performance analysis platform.
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Tilting to U.S. Small Caps: Using MSCI Analytics in Portfolio Construction
May 15, 2015 Raman Aylur Subramanian Learn MoreU.S. cap-weighted, small-cap benchmarks have historically displayed structural biases that affect performance. For example, small-cap indexes have sector, revenue and style tilts compared to the broad U.S. market.
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Maintaining a “home bias” in the equity portfolio may come with huge opportunity costs. In a 2012 study MSCI prepared for Norway’s Ministry of Finance, we examined...
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After the global financial crisis of 2008, investors and regulators realized that liquidity risk in multi-asset class portfolios could no longer be overlooked. Too many risk models had assumed ample funding and low trading costs, which contributed to the meltdown.
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Using Systematic Equity Strategies to Build Better Portfolios
Apr 23, 2015 Mehmet Bayraktar Learn MoreSystematic Equity Strategies, when represented as factors in risk models, allow investment managers to better monitor the sources of risk and return in equity portfolios. We believe that they also improve forecast accuracy and help construction of portfolios that tilt towards (or away from) these strategies, which are rules-based or computer-based implementations.
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When RiskMetrics, now a part of MSCI, announced Value-at-Risk (VaR) as its stated measure of risk in 1996, it initiated an industry standard for institutional risk management that was quickly adopted by the Basel Committee on Banking Supervision for its internal capital adequacy models.
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China A-Shares are too big to be ignored but remain difficult for many institutional investors to access. How can global investors avoid a stock market that is now the world’s third-largest, with a total market value of nearly USD 4 trillion, putting it just behind the United States and Japan?
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U.S. Market Brief - Momentum Strategies Outperformed in a Volatile Month
Feb 2, 2015 Mehmet Bayraktar Learn MoreJanuary saw the return of volatility to the U.S. equity market. A confluence of factors led to this uncertainty: Investors were faced with the influence of a stronger dollar and the effect of lower oil prices on corporate earnings growth.
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Many institutional investors have struggled to determine the appropriateness of factors for their own plan, what role these allocations might play, which factors should be adopted and how factor indexes can be used.
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Many institutional investors recognize that their reference universe should include large-, mid- and small-cap equities and that smaller companies should earn a risk premium over larger ones. In practice, however, many of these investors - particularly in Europe and Asia - underweight the small-cap segment.
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Some Like it Hot: Very Active Mandates in a Core-Satellite Structure
Nov 24, 2014 Raman Aylur Subramanian Learn MoreInvestors have long debated the benefits of active versus passive investing. There are institutional investors with strong convictions in each camp, but many have become increasingly pragmatic, combining active and passive mandates in pursuit of the best risk-adjusted return.
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Factor indexes historically have generated premia in developed markets. Now, as global markets have become more correlated, investors are starting to seek additional sources of returns within emerging markets.
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Equity factor investing aims to capture exposures to different equity risk premia. Factor modeling and factor investing are rooted in the Capital Asset Pricing Model (CAPM) dating from the mid-1960s, Arbitrage Pricing Theory from the 1970s and Fama and French’s three-factor model from the 1990s.
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The Roots of Active Managers' Underperformance in March and April
Jul 7, 2014 Mehmet Bayraktar Learn MoreMarch and April of this year saw one of the worst periods of active performance over the past 10 years for actively managed portfolios. And this happened, despite a flat stock market and historically low volatility levels.
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Analyzing Index performance During Economic Regimes Classified Using CLI and CPI
Apr 18, 2014 Altaf Kassam Learn MoreInstitutional investors are trying to better understand how their portfolios benchmarked to factor indexes may behave in different economic regimes. In previous posts, we tried to answer the question: "I think economic activity/inflation is going to increase/decrease over the near term...
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40 Years of History - With Deeper History Comes New Insights
Apr 11, 2014 Dimitris Melas Learn MoreWe recently extended our simulated index factor history to 40 years, providing a unique set of data compared to others available in the marketplace. This extended history, combined with IndexMetrics, MSCI’s analytical framework, offers investors sharper tools for creating and analyzing portfolios.
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As we recently said in our post, systematic factors have historically been sensitive to macroeconomic and market forces but not in the same way. For example, some, such as Value, Momentum and Size have been pro-cyclical, meaning they outperformed when economic growth and volatility were rising.
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Factor Index Performance in Changing Economic Environments
Apr 11, 2014 Dimitris Melas Learn MoreInstitutional investors have historically been concerned over the changing state of the economy and its impact on their investments whether it was about "Abenomics" or "taper tantrums." As a result, we are noting that they are increasingly taking changing macroeconomic conditions into consideration for their asset allocations.
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We’ve observed that many institutional investors have abandoned their historical domestic-equity bias and now view global equities as a single, broad asset class. In high-growth economies, however, particularly in Asia, Central and Eastern Europe, Africa and Latin America, many investors remain focused primarily on domestic stocks.
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IMPLEMENTING FACTORS THOUGH MULTI-FACTORS INDEX ALLOCATIONS-- A NEW APPROACH FOR INSTITUTIONAL MANDATES
Dec 3, 2013 Dimitris Melas Learn MoreLet’s look at how factor allocations fit in the traditional institutional portfolio setting. Factor investing utilizing indexes can be viewed as active decisions implemented through passive replication. As such, factor allocations should be tailored to each institution.