Research Paper

In constructing portfolios, asset managers expose the portfolio to factor tilts that greatly influence fund performance. Some of these exposures, which can provide sources of excess return, may be intentional but others may not. A manager who makes the wrong bet could be on the wrong side of history. Using MSCI’s Peer Analytics dataset, we examined the composition and performance drivers of active global funds through the lens of our Global Total Market Equity Model. Our key finding: Exposure...

Indexes Portfolio Management Analytics

Research Paper

The perennial appeal of value investing is based on the excellent long-term performance of global value stocks. Investors today use various approaches to identify the exposure of stocks with “value” characteristics that help explain risk and return.  In this Research Insight, we create a common definition of “value” and examine how value strategies can be implemented, in both active and passive portfolios, using three generations of value indexes as examples.

Indexes Factor Indexes Value Weighted

Research Paper

Earnings yield - typically defined as the inverse of the price-to-earnings ratio - is viewed as a strong value signal. In this paper, we provide examples of portfolios that track the Earnings Yield factor return from the Barra US Equity Model (USE4). We examine different sets of constraints - including long-only, turnover and number of assets and leverage - to see how they affect the performance of tracking portfolios.

Portfolio Management Analytics

Research Paper

U.S. cap-weighted, small-cap indexes have produced superior returns historically than their parent indexes. Barra equity factor models demonstrate that passive, small-cap portfolios also have style tilts when compared to the broader U.S. equity market. Some of these tilts can be favorable, such as cheaper valuations. Others can be unfavorable, such as lower earnings quality and weaker profitability. In this Research Insight, we show that by using equity risk models tailored to the investment...

Portfolio Management Analytics

Research Paper

Linear regression models have been the workhorses of finance and economics. However, given increasing attention to nonlinear methods, we investigate the extent to which nonlinearities not captured by standard linear models within equity factor risk models are present. Adding nonlinear factors in simple polynomial functions of their linear counterparts contributed some additional explanatory power to the cross-section of security returns. Furthermore, some generated factor returns and...

Portfolio Management Analytics

Research Paper

Why has there been no clear consensus as to whether ESG has improved returns on a risk-adjusted basis? We find that many of the ESG investing methodologies used in studies were designed to meet social or ethical values and not financial objectives. To understand the link between companies’ ESG characteristics and their financial risk and performance, it is important to evaluate only the studies that use ESG methodologies specifically designed to identify financially relevant issues, such as...

ESG Products & Services Portfolio Management Analytics Risk Management Analytics

Research Paper

Understanding the Risk and Return Profiles of Asia ex-Japan Factor Strategies.Institutional investors use fundamental factors to create systematic portfolio strategies. To help investors construct better Asia ex-Japan portfolios, this Research Insight evaluates the behavior of factors in the new Barra Asia Pacific Equity Model (ASE2) under five forward-looking macroeconomic scenarios. This paper aims to answer these key questions: 1) What factors provide persistent systematic return in Asia...

Indexes

Research Paper

MSCI Insights is a monthly publication where we provide commentary on the market using MSCI Barra Equity Models, the MSCI Macroeconomic Model, the RiskMetrics Factor Model and MSCI Indexes.

Research Paper

Factor-based investing has become a widely discussed topic of today's investment canon. In this paper - which is the last delivery of a four-paper series focusing on factor investing - we discuss the combinations of Factor Indexes taking as an example the MSCI Quality Mix Index.The MSCI Quality Mix Index is an equal weighted combination of the MSCI Quality, Value and Minimum Volatility Indexes. Academic research shows that quality, value and low volatility strategies have not only...

Indexes

Research Paper

Brinson sector-based attribution explains active return in terms of intuitive allocation and selection decisions. However, it cannot easily disentangle competing industry and style effects. We introduce a special type of factor model with five defining characteristics that exactly replicates the classic Brinson model. We show that this “Brinson-replicating” factor model easily extends to explain more general types of investment processes. In this extension,...