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Five lessons for investors from the COVID-19 crisis 

COVID-19 unleashed a torrent of sharp movements across global financial markets. We highlight five key lessons for investors regarding global investing, managing factors, active management, indexed investing and ESG investing.

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Coronavirus and oil hit equities — how low can we go? 

We compare the market turmoil sparked by the coronavirus pandemic with levels of volatility, drawdown and recovery after 9/11 and the global financial crisis (the two other similarly severe economic and market shocks of the last 20 years).

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The state of global investing 

Financial markets are inherently unpredictable, while structural forces such as shifts in monetary policy, trade conflicts and climate change compound the challenges facing investors. Read our analysis commissioned by Norway’s Ministry of Finance.

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Lessons from Woodford: Shutting the barn door after the horses have bolted 

The suspension of the U.K.’s Woodford Equity Income Fund highlights the value of regularly reviewing a portfolio’s factor exposures and liquidity characteristics for signs of style drift or deteriorating ability to redeem shares.

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How can active managers add factors to the portfolio? 

Discretionary managers use fundamental analysis to select stocks and construct portfolios that seek to beat the market. These managers face substantial headwinds in the current environment. From a business perspective, they are under pressure to reduce cost and improve performance. The market environment has also been challenging, as high correlations between stocks and the dominance of a handful of large technology companies have made it harder to generate alpha from stock selection.

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Why is Tesla a short-selling target? 

Elon Musk, founder and CEO of Tesla, suggested in a series of tweets that going private could help Tesla avoid the scrutiny of quarterly reporting and pressure from short selling. Do companies targeted by short sellers share common characteristics? Could factor analysis help investors identify stocks that may become short-selling targets?

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How can active managers put ESG to work? 

Our research shows how favorable ESG characteristics have historically had a positive impact on equity valuation, risk and performance. But many active managers may have concerns that using ESG data could disrupt their investment process and introduce unintended biases to the portfolio.

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Why index funds promote market efficiency 

Institutions and individuals increasingly invest through funds that track indexes. While index funds bring transparency and low cost, their critics claim that they allocate capital indiscriminately, hurting market efficiency. Is this claim supported by the evidence? It is not. Our analysis shows that, far from damaging market efficiency, index funds1 facilitate active portfolio management by offering investors diverse and efficient tools to express investment views and implement active investment decisions.

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Putting the spotlight on Spotify: Why have stocks with unequal voting rights outperformed? 

Nearly 15 years after Google’s initial public offering, the debate about listed companies that offer unequal voting rights to outside investors rages on. A number of high-profile technology companies including Dropbox Inc., Spotify and Snap Inc. have recently listed shares with unequal voting rights, adding fuel to the debate. Meanwhile, investors are trying to determine if they should shun the stock issued by these companies or include them in equity portfolios.

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Do factors stand up to FAANG? 

Large U.S. technology companies, the so-called FAANG, dominated the U.S. stock market in the last few years and had a significant impact on many investment strategies. These companies have been underrepresented in most factor-based strategies due to their unattractive factor characteristics. Have factor investors suffered from not investing in these stocks?

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Dissecting the stock market sell-off 

Growing fears about rising inflation and interest rates sparked a decline across equity markets in the last few days.

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Are Market Valuations in Nosebleed Territory? 

Markets have enjoyed a relatively long period of positive returns and low volatility, making some investors wonder if a correction is imminent. One possible trigger for a correction would be investors concluding that market valuations have become extreme, which could lower future returns.

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Integrating ESG into Factor Portfolios 

Over the past decade, many long-term institutional investors have incorporated Environmental, Social and Governance (ESG) considerations into their portfolios, by creating segregated ESG mandates or by incorporating ESG criteria across the entire portfolio.

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Which Factors Are More Time-Sensitive? 

Hedge funds and other investors who manage portfolios that rebalance frequently face a challenge when it comes to the use of factors for trading, hedging and risk monitoring: Which factors tend to break down over time?

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Separating facts from fiction in passive investing 

For institutional investors, float-adjusted market capitalization weighted indexes remain the tools of choice to implement their passive allocations. Such indexes are used widely as policy and performance benchmarks and as the basis for ETFs and other passive vehicles. Is this use justified or even appropriate? Do benchmark indexes suffer from shortcomings that undermine their suitability in implementing investment strategies?

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Why economic exposure matters 

Investors with global portfolios need to know where the companies they invest in are domiciled. It is equally important, however, for them to know where those companies earn their revenue. Data from MSCI shows that the geographic distribution of companies’ revenues can have a significant impact on their stock prices.

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Brexit shows (again) the benefits of minimum volatility 

Brexit brought mayhem to Britain, at least in the short run. Markets fell, the pound dropped, the prime minister resigned and, worst of all, the English national football team was knocked from the European Championship by Iceland!

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How the Brexit vote may impact your portfolio 

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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Using Systematic Equity Strategies 

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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Is momentum crashing? 

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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Multi-factor strategies highlight benefits of diversification 

The 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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Unpacking the volatility so far 

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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Constructing Low Volatility Strategies 

Low volatility is one of the few factors that have historically performed well in turbulent markets.

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RIDING ON MOMENTUM 

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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SELECTING THE RIGHT BLEND OF FACTOR INDEXES 

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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THE DIFFERENT WAYS MACRO RISK IMPACTS FACTOR INDEXES 

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 

Institutional 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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40 YEARS OF HISTORY - WITH DEEPER HISTORY COMES NEW INSIGHTS 

We 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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IMPLEMENTING FACTORS THOUGH MULTI-FACTORS INDEX ALLOCATIONS-- A NEW APPROACH FOR INSTITUTIONAL MANDATES 

Let’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.