WHAT ARE FACTOR MODELS

What are Factor Models?

Factor models are financial tools that help investors identify and manage investment characteristics that influence the risks and returns of stocks and portfolios. While the mathematics of factor models may be unfamiliar to some, the underlying concepts are straightforward. Factor models help investors classify and estimate equity risk and assess the relationships between securities and returns to help guide investment decisions. The models are commonly used to construct portfolios by targeting specific dimensions and to attribute investment performance across multiple factor characteristics.

MSCI FACTOR MODELS - 1

Equity Factor Models by MSCI

The next generation Barra factor models are here — where deep research, comprehensive data and computational power convene to solve modern investing’s most pressing challenges.

equity factor models video

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Equity Factor Models

Mark Carver and George Bonne discuss how our new equity factor models can help investors take a deeper look at their portfolio and get better transparency into the characteristics driving their portfolio risk and return as market conditions change.

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MSCI factor models enable investors to build more adaptive and resilient portfolios by understanding and managing risk and return through a modern investing lens, including factors such as sustainability, crowding and machine learning. These models help investors implement and measure factor-based strategies and communicate their performance showcasing a differentiated approach. Informed by decades of factor research and developed with our clients, these innovative models are built on the Barra legacy of factor models.

Equity Factor Model Mind Map

Equity Factor Models help clients:

  1. Understand and manage downside risk and identify allocation opportunities in crisis events with factors such as crowding and machine learning
  2. Integrate sustainability factor to understand new and emerging risks and their impact on portfolio performance 
  3. Adjust to market regimes with more dynamic and adaptive covariance capabilities and enhanced risk-forecasting methodology
  4. Identify clusters of highly similar companies that may lead to “cluster risk” in portfolios
  5. Get frictionless access to our models in the most modern and flexible way via Snowflake

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Our Clients

Our clients

Investors aim to differentiate their strategies and demonstrate and communicate their value across various dimensions. MSCI's solutions provide an integrated view of risk and return, helping investors construct, monitor and report portfolios cohesively and completely. While the managers of capital use the models to construct portfolios, the owners of capital use models to get transparency into the drivers of portfolios' risk and return. The result is a common factor standard that allows managers and investors to communicate.

Construct differentiated portfolios

We provide leading research, analytics, data and tools to help quantitative and fundamental managers build portfolios that aim to deliver benchmark-beating performance throughout market regimes. Asset managers can take advantage of our factor models with an adaptive covariance matrix to limit drawdown risk as they weather market regime changes. Using our factor descriptor data to complement existing alpha research processes and build highly differentiated portfolios is another key use case among leading asset managers.

Effective manager evaluation and selection

The complexity in manager evaluation and selection means asset owners need the proper tools to help them make informed decisions. Our solutions help asset owners effectively assess a fund manager’s performance against stated investment objectives so that they can easily distinguish a manager’s skill from luck. Increasingly, global asset owners seek to integrate sustainability factors into the asset allocation process. Now more than ever, it’s important to have the tools to accurately assess the risk and effectiveness of these allocations. Our factor models with ESG and carbon efficiency factors are derived from MSCI’s industry leading methodologies and are designed for this very purpose.

Generate and maximize portfolio alpha

Our factor models help hedge fund managers preserve and maximize their unique source of alpha while minimizing risk. In addition to helping them keep their portfolio risk in check, our new crowding factor also makes it possible for portfolio managers to identify and make informed decisions to avoid excessively crowded pockets of the market or identify allocation opportunities and create a well-balanced portfolio.

Decision making in real-time

Our bank and broker-dealer clients face market events in real time. To stay ahead of these incidents, they need to make the right decisions, fast. MSCI continuously innovates to offer these clients factor models that are tailor-made for short-term trading so they can better risk manage their trading books while providing best execution services to their clients. Our differentiating research and content also make it easy for them to customize products and solutions to better serve their clients and capture new business opportunities.

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MSCI EQUITY MODELS

Factor model suite by MSCI

MSCI offers more than 70 models across 80,000+ securities, 45 industry factors and 85+ countries.

Global model

 
  • Global Equity Factor ModelNEW - Long-term and Trading
    Global Total Market Equity Model - Long-term and Trading
  • Multi-Asset Class Factor Model
  • Global Investable Markets Equity Model - Long-term

Regional models

 
    • Europe Equity Factor ModelNEW- Long-term and Trading
    • Europe Total Market Equity Model - Long-term and Trading
  • Europe Stochastic Factor Model
  • Asia Pacific Equity Factor ModelNEW- Long-term and Trading
  • Emerging Markets Equity Model

Single country equity models

 
Americas
  1. USA Equity Factor ModelNEW - Long-term and Trading
  2. US Total Market Equity Model - Long-term, Medium- term, Trading
  3. US Sector Equity Models
  4. US Small Cap Equity Model
  5. Canada Equity Model
  6. Brazil Equity Model
  7. Mexico Equity Model
Europe, Middle East & Africa
  1. South Africa Equity Model
  2. United Kingdom Equity Model
  3. United Kingdom Trading Equity Model
Asia Pacific
  1. Australia Equity Model
  2. China Equity Model
  3. China International Equity Model
  4. Hong Kong Equity Model
  5. India Equity Model
  6. Indonesia Equity Model
  7. Japan Equity Factor ModelsNEW - Long-term and Trading
  8. Korea Equity Model
  9. Malaysia Equity Model
  10. New Zealand Equity Model
  11. Singapore Equity Model
  12. Taiwan Equity Model
  13. Thailand Equity Model

If you would like to learn more about how our innovative factor models can help you build more resilient and adaptive investment portfolios, contact us.

Factsheets

factor model related content