Defined Contribution (DC) plans are rapidly becoming the primary retirement investment vehicle for a majority of employees across the US and other markets around the globe. Asset allocation for DC plans has to strike a balance between growth and protection assets over the savings lifecycle while protecting the long-term purchasing power of the nest egg. Due to the long duration of retirement investing and various risks associated with it, implementing the right asset allocation has become...

A few large asset owners have expressed a preference for an expanded opportunity set that goes beyond the traditional equity universe comprised of large, mid, and small capitalization companies. These investors have typically focused on the domestic equity market. In order to address these needs, MSCI recently launched the MSCI All Cap Indices, which aim to provide comprehensive yet accessible coverage of all capitalization segments. The MSCI All Cap Indices include micro cap securities...

Some investors argue that the risk of a market capitalization weighted benchmark is not limited to volatility, but also includes other dimensions, such as high concentration, and excess volatility due to pricing inefficiency. Removing the influence of prices from index weighting schemes could address the issues associated with capitalization weighted benchmarks. Historically, equal weighting has been one such approach.The MSCI Equal Weighted Indices offer an alternative to market...

At the November 3, 2010 meeting, the US Federal Reserve divulged its widely anticipated second round of Quantitative Easing (QE2 plan), formally announcing it would purchase an additional USD600bln in US Treasuries by the end of the second quarter 2011. In the aftermath of the announcement the US yield curve continued to steepen given the Fed’s planned purchases of intermediate maturities. In this analysis we highlight equity sector and industry observations during three steep curve...

The US equity markets showed their strongest gains for any September on record in the 40-year history of the MSCI USA Index. Here, we highlight a few main observations through the lens of the Barra US Equity Model: • The Growth story was really a Technology story • The Small Cap story was partially a real small cap effect, but in fact had an important Volatility story behind it (i.e., small caps benefited from being high beta and high volatility) • Certain...

This year, the government of China approved the launch of index futures, margin trading, and short selling of stocks. The trial program for short selling rolled out with 90 stocks in the program as of March 31, 2010. In this paper, we explore the effect of the relaxation of short sale constraints on AH premium (the price differential between the domestic listed A-shares and the Hong Kong listed H-shares). We examine the AH premium movements of the group of dual-listed Chinese shares that are...

This bulletin is part of a series highlighting the ways in which factor models can help managers with fundamental processes. Most PMs are familiar with sector trends. Sectors go through periods of under- and overperformance, and some are more risky than others. But sectors also exhibit different characteristics that can affect their performance. Bank stocks in 2007, for instance, had significant overweights in stocks with low price-to-book ratios and high leverage. These stocks...

Stock picking often is carried out with stock screens that reduce the set of eligible stocks. Such screens usually are assessed through the level and volatility of the resultant returns, mostly with associated statistics such as information ratio or Sharpe ratio. This evaluation, however, often is insufficient to uncover unintended bets, and this research bulletin suggests complementing this evaluation by conducting Barra performance attribution on the portfolios obtained from such screening...

The oil spill in the Gulf of Mexico has turned into a catastrophic event with major environmental and financial implications. Has this stock specific event had an impact on the wider market? What are the implications for institutional portfolios? What are the long-term investment repercussions from this crisis? This research bulletin discusses these important questions facing institutional investors in the aftermath of the BP oil spill crisis.

The analysis of a possible positive relationship between economic growth and stock market returns is interesting both theoretically and practically. Investors often wonder if they should assign higher weight to countries with higher economic performance, hoping that economic growth will eventually show up in equity returns. Although this relationship seems quite intuitive, historically long-run stock price growth has fallen short of GDP growth in many countries. In this bulletin, we use...

This Research Bulletin considers Momentum in Asia Pacific stock markets.  We find that Momentum has performed better in some markets than others, and its effectiveness varies across time.  We use the new Barra Asia Pacific Equity Model to capture these variations across markets and over time.  In addition, we test a Momentum timing strategy based on hedging exposure to Momentum during market crashes.  The filter we apply, which is based on those months in which the...

This research bulletin is the first in a series covering various aspects of stress testing and scenario analysis. In this paper, we compare and contrast two historical scenarios that may be of current interest given the increasing uncertainty regarding the returns on sovereign fixed income investments. The scenarios we consider here are the 1998 Russian debt crisis and the 1994 US rate hike that followed the savings and loan (S&L) crisis. We put a stylized US pension plan through the...

This bulletin is the first in a series aimed at asset managers with fundamental processes. Here, we look at the momentum characteristics of deep value managers and highlight the importance of monitoring momentum tilts at the portfolio level. Value investing has been around for years and it is one of the most common investment themes around the world. Although this paper uses US based value managers for illustration, the concepts should appeal broadly to value managers around the globe.

We examine the co-movement of sector returns with business cycles in a global context, using long run historical data between 1976 and 2009. We develop an approach that allows us to classify sectors as defensive or cyclical, based on the strength of this co-movement. We then use this framework to examine the relative performance of cyclical and defensive sectors in different regions over the last 33 years.

The Momentum factor in the Barra Global Equity Model (GEM2) recently experienced its largest negative historical return in more than a decade. The Momentum factor has declined for 10 consecutive months, which is unprecedented in the 13-year GEM2 factor return history. In this Research Bulletin, we explore the reasons for this decline as well as other reasons, particularly economic reasons, for Momentum changes. Focusing on GEM2, we find consumer sentiment to be a significant explanatory...

This Research Bulletin reviews the performance of style factors in the enhanced Barra Europe Equity Model (EUE3) in different macroeconomic regimes. These economic cycles affect both the cash flows of companies and the discount rates applied to their valuation. We find that the performance of style factors has varied with economic conditions during the period under investigation. While past research has shown that linkages between equities and macroeconomic variables are sensitive to the...

In this Research Bulletin, we take a look at the performance of the BRIC countries—Brazil, Russia, India, and China—in 2009.  These equity markets have experienced significant gains since the start of the year.  We decompose the performance of the MSCI indices for these markets using the Barra Global Equity Model (GEM2).  While many investors often think of investing in BRICs as pure country plays, there may be significant industry biases that drive performance at...

Unprecedented political, economic, and technological developments in the last 20 years have resulted in a high degree of integration across companies, industries, and markets around the world. Institutional equity portfolio construction appears to be lagging behind, with most institutional portfolios still suffering from significant home bias effects. Using data from the UK market, we have shown that adopting a market-cap weighted global policy benchmark instead of a traditional home bias...

The Barra Global Equity Model (GEM2) introduced Volatility, a new factor that provides managers with a tool that enables close control of a portfolios' exposure to global beta. GEM2's Volatility factor includes global beta as its most significant descriptor. In contrast its predecessor, GEM, provided much less control, i.e., only through exposures to country factors. In this Research Bulletin, we backtest a high global beta portfolio using both GEM and GEM2, and we use performance attribution...

The relationship between stocks and bonds has important implications for asset allocation and risk diversification. This Research Bulletin examines the recent history of this relationship in the G5 economies. It also uses the multi-asset class platform of the Barra Integrated Model (BIM) to consider some of the possible drivers behind the evolution of this relationship. In addition, it is shown that scenario testing is useful in determining the impact on the stock-bond correlation from...

This Research Insight reviews the evolution of the equity allocation policy of Japanese institutional investors and discusses how globalization has altered the global equity landscape and created the basis for a major rethinking of the investment process of global investors. We present the key rationales for  an integrated global equity investment process, and explore potential implementation paths for Japanese institutional investors.

Backtesting the enhanced Barra Global Equity Model (GEM2) against the previous version, GEM, highlights key differences between the two models. A large difference is in the risk attribution to country factors. We explain that GEM2's inclusion of the new World and Volatility factors allows the regression model to separate out country from global market effects. In contrast, GEM's regression model lumps together both effects, leading to a substantially larger country risk attribution.

The ongoing shakeout in global markets has had far-reaching consequences for equities across the world. For developed market investors seeking diversification through emerging markets at the aggregate level, the recent performance has been disappointing due to the dominance of overall negative market effects, which is consistent with what we have observed in past crises. The good news for developed market investors is that diversification possibilities did exist over the recent period for...

The Liquidity style factor in the new and enhanced Barra Europe Equity Model (EUE3) helps to assess the systematic risk associated with infrequent trading. In this Research Bulletin we look at the risk and return to the EUE3 Liquidity factor in different market environments, the link between stock liquidity and stock size and sector, and the relationship between the significance of the Liquidity factor and market performance. This factor's return varied with the market cycle during the rally...

After the market turmoil of the last two years, many institutional investors are revisiting the way they approach asset allocation. For decades, the traditional breakdown of asset classes has been along the lines of equities, fixed income, alternatives, etc., sometimes with domestic versus foreign flavors. The main point we highlight in this Research Bulletin is that many asset classes share the same underlying drivers. While this notion is a familiar one, the insights gained by analyzing...

In this bulletin we illustrate how Barra Extreme Shortfall (xShortfall), forecast from a factor model, can provide useful information that complements volatility. Shortfall is a natural guide to potential losses in extreme market conditions.  Forecasting extreme risk through a multi-factor framework not only provides the advantage of more accurately reflecting the return properties of the portfolio based on up-to-date exposures, but also gives helpful information regarding portfolio...

Traditional models in finance rely heavily on the use of normal (Gaussian) distribution.  Using examples of asset, factor and index returns, we illustrate that the assumption of normality does not capture the empirical properties of returns and volatility alone cannot be relied on as a measure of portfolio risk.  We outline how extreme value theory can help to model the tails of the return distribution and, using data from 1996 to 2007, show how Barra Extreme Risk can improve...

The China A share market has experienced tremendous volatility over the last three years. This research bulletin examines this volatility through the lens of the Barra China Equity Model (CHE2), especially in light of the turbulence of global markets in recent months.

We investigate the question of whether currency hedging pays off in the long run using data from the hedged and unhedged versions of the MSCI Global Investable Market Indices.  These data allow us to perform comparisons of unusually large breadth (4 base currencies and 40 markets) and history (1987 to 2008). Our research indicates that the answer depends not only on the base currency, market, and hedging horizon, but also on the investor's goals, e.g. risk reduction or return/risk...

An earlier MSCI Barra Research Bulletin on the risk environment in Japanese stocks, published in June 2008, noted that market volatility in Japan rose sharply since August 2007 but declined after peaking in early 2008. Since then, the risk environment has deteriorated significantly, especially in October and November 2008. This Research Bulletin provides an update to the current risk climate for Japanese equities and identifies significant changes in major risk factors after this latest...

In this Research Bulletin, we review the recent risk environment in Gulf Cooperation Council (GCC) countries using the new and enhanced Barra Global Equity Model (GEM2). The main finding of this paper is that despite the segmented nature of the GCC markets, correlations of GCC countries' stocks with Developed and Emerging Markets have increased. Despite higher correlations and the large exposure of GCC markets to the Financial sector, risk forecasts for GCC markets have grown considerably...

This latest research bulletin in the GEM2 Series considers the degree of global exposure of different industries at the global level, and constructs a measure that is based on the GEM2 Model.  It then examines how differences in global exposure across industries are related to style, return and risk characteristics.

This is the fourth in a series of research bulletins marking the launch of the new and enhanced Barra Global Equity Model (GEM2). In this piece, we focus on characteristics of the global momentum factor. Under varying market conditions, the performance of the momentum factor will be examined, especially in bull versus bear markets. In addition, the global diversification benefits for this strategy will be analyzed. We also consider the implied country and sector tilts in a momentum strategy,...

This Research Bulletin uses the responsiveness of the new GEM2 model to examine the discrete jumps in risk forecasts during the current crisis as well as past crises.  We find that the October risk forecast jump of 74% is unprecedented in the last 15 years and relates to large changes in the leverage factor.

As the year draws to an end, the ongoing shakeout in the financial sector and recessionary woes continue to fuel uncertainty in the US equity market. Volatility has far surpassed its previous 2002 peak. This brief bulletin highlights the remarkable increase in the USE3 Barra risk forecasts in November and December 2008.

This is the third of a series of Research Bulletins to mark the launch of the new and enhanced Barra Global Equity Model (GEM2), and its focus is on the newly-introduced liquidity factor. This factor reflects the stock performance of firms with high trading activity relative to those with low trading activity. The stable and upward trend of this factor over the last decade indicates that stocks with high trading volumes had provided a sizable and persistent premium in this period. It is also...

Although the equity markets in October 2008 generated seemingly grim news day after day, how bad were they really? In this Research Bulletin, we examine the returns in historical context using the MSCI Equity Indices.  We find that while October 2008 was, in fact, exceptionally bad, the severity depended on the market, the frequency of the returns examined, and the currency over which returns were calculated.

Given the extreme market events of recent weeks, MSCI Barra revisits the performance of various risk measures in this update to our March 2007 Research Bulletin, 'Fear Factor and the Barra Risk Model'. As discussed in that article, both the Chicago Options Exchange Volatility Index (VIX) and the Barra US Equity Models reacted rapidly to changing levels of market risk.

This is the second of a series of Research Bulletins to mark the launch of the new and enhanced Barra Global Equity Model (GEM2), and its focus is on the new financial leverage factor. This factor reflects the performance of highly leveraged firms relative to firms with low leverage. The relative performance of high-leverage firms is examined under varying stock market conditions and risk environments. The leverage factor is also analyzed for any industry tilts that would result in unintended...

In this Research Bulletin, MSCI Barra presents some case studies detailing how the short selling ban on stocks of financial companies affects the construction and performance of sample pan-European equity portfolios. While these case studies do not amount to a full-scale empirical investigation, they illustrate the detrimental effects of this ban on a sample of optimal portfolios. Overall, our results suggest that the constraint on short sales of financial companies may increase the risk of...

Climate change has far-reaching implications for the global economy and it is being recognized as a long-term investment theme. As more investors take note of companies that are well-positioned to handle climate change, a common factor may account, in part, for the share prices of these companies. This Research Bulletin addresses the question of whether returns to firms that are beneficiaries of climate change display common properties that are not captured by risk factors in use today. In...

This is the first in a series of Research Bulletins to mark the launch of the new and enhanced Barra Global Equity Model (GEM2). In this piece, it is shown how GEM2 may be used to track the changing importance of country and industry effects in global equity markets. This information is of use to a portfolio manager in determining the relative size of the opportunity set to generate active returns from country allocation or sector rotation. The results indicate that the relative importance of...

The global credit crunch that has unfolded over the past 12 months culminated last week in a number of unprecedented events, including the disappearance of a major US investment bank, the government bailout of the largest US insurance company, and the overnight takeover of the largest UK mortgage bank. In this latest Research Bulletin we look at how the performance and risk characteristics of financial sectors and stocks around the world have been affected by the current market turmoil.

Significant turmoil in the US financial services sector have continued since the start of 2008, culminating this past weekend in the collapse of a large investment bank and the acquisition of another. With the financials industry in shakeout, we look at how the characteristics of the industry and some of its key players have evolved over the past year.

The ongoing financial crisis in the US has caused financial markets to become very volatile. This Research Bulletin takes an Asia-Pacific perspective on the US financial turmoil and examines the spillover effect on stock markets in the Asia-Pacific region.  Despite the low exposure to the US subprime issue, it appears that the credit squeeze in the US has weighed on Asia-Pacific financial stocks with a relative lag, but yet has not appeared to consistently impact firms with high leverage...

This Research Bulletin looks at an often overlooked but important challenge—the allocation of resources behind investment strategies. All asset managers face the problem of how to best allocate resources, be it analysts, computational power or physical resources. Assigning more resources to segments that have more names to cover is one straightforward way. Alternatively, return dispersion (i.e., cross sectional volatility) reflects the opportunity set available to asset managers, and...

This Research Bulletin presents a snapshot of the current risk environment in several Asian emerging markets.  The analysis includes a look at volatility and recent developments in the risk environment as well as investment trends.

The objective of this study is to search for equity attributes that can be used to hedge against inflation by looking into the behavior of common factors during inflationary periods. Using the results, we analyze the properties of the recently launched MSCI Commodity Producers Indices to assess their potential application in addressing inflation.

This Research Bulletin presents a snapshot of the current risk environment in the US.  The analysis includes a look at volatility and recent developments in the risk environment as well as investment trends. 

This Research Bulletin presents a snapshot of the current risk environment in Japan.  The analysis includes a look at volatility and recent developments in the risk environment as well as investment trends.

Are growth stocks truly more interest-rate sensitive, or "long-duration," than value stocks? We find that between 1985 and 2008 the MSCI Growth Index did have longer duration than the MSCI Value Index, and that this sensitivity was linked to a number of stock-level growth-related attributes including historical and predicted growth in earnings, recent earnings changes, and book-to-price.

The bursting of the credit market bubble last year and the collapse of a major US investment bank last week resulted in a aggressive rate cutting action from 5.25% to 2.25% during the last six months, similar to the bursting of the equity market bubble in 2000 and the terrorist attacks in 2001 which prompted the Fed to cut interest rates aggressively from 6.50% to 1.75% during 2001. In this note, we examine Barra USE3S (Short term US equity risk model) factor returns' performance,...

This article illuminates the drivers behind the large and extreme movements observed on August 8 and November 12.  The paper looks at Momentum factors both in the U.S. and Europe and analyzes the relationships to daily trading volume and asset returns along with a discussion of the other quantitative factors.

Explores the benefits of allocating to small caps for Japanese investors. Small caps are increasingly attracting interest in Japan, with the GPIF recently announcing their intent to start allocating to this group of stocks.  

Over the long run in the US, value stocks have outperformed growth stocks, a premium that has averaged roughly 200 basis points annually over the last four decades. Since May of this year, growth stocks have exhibited strength over value stocks, as evidenced by the MSCI USA Value and Growth Indices. In fact, the growth premium has averaged 14 percentage points annualized over the last four months—June, July, August, and September. In this article, we put this recent development in...

Over the long run globally, value stocks have outperformed growth stocks, a premium that has averaged roughly 300 basis points annually over the last four decades. Since May of this year, growth stocks have exhibited strength over value stocks, as evidenced by the MSCI World Value and Growth Indices. In fact, the growth premium has averaged 11.5 percentage points annualized over the last five months—May, June, July, August, and September. In this article, we put this recent...

This set of short articles discusses the increase in volatility during the first two weeks of August 2007 in the U.S., European, and Japanese equity markets.

This article provides interesting insights into recent changes in the risk environment in the Chinese stock market.

This brief article discusses the rise in volatility during the last week of February 2007 in the U.S. market.