NEW YORK, April 29—Risk declined in the first quarter of 2013, the fifth consecutive quarter in which overall risk levels trended downward, according to Axioma Insight: Quarterly Risk Review, a report on the state of risk in publicly traded equity markets around the globe.

“US sequestration, panic in Cyprus, weak job growth in Europe and the US—none of it had much impact on risk in the first quarter,” said Melissa Brown, CFA, Senior Director, Applied Research and co-author of the Quarterly Risk Review. “Once again, we detected no definitive undercurrents pointing to an imminent reversal of the current risk regime.”

Asset-asset correlations fell to five-plus year lows in most markets during the quarter, driving a continued decrease in top-line risk, according to the Axioma report.

“Not only were the assets within markets much more differentiated, but the markets themselves appeared to be slightly less correlated,” said Brown. “From a risk perspective, the current investment landscape is substantially different from the crisis-driven markets that resulted from the global and European financial crises. With markets no longer in lockstep, equity investment managers and asset owners should see increased investment opportunities for active returns.”

Added Brown: “We continue to believe that current risk levels, which are near historically low levels, remain sustainable for at least a while. Low volatility, coupled with a lack of good alternatives, can drive more investors into the equity markets, as we have already observed this year.”

Nevertheless, there were whiffs of change in the latest Axioma report. “Risk forecasts for China, Japan and Australia rose in the quarter, bucking the overall trend,” said Brown. “China’s forecast risk now exceeds that of the Euro-Crisis countries, and FTSE Japan is now one of the riskiest benchmarks we cover.”

The report also noted that changes in the risk exposures of benchmark stocks, or in the composition of the benchmark itself—not changing factor volatility—drove risk changes in some markets; a distinct departure from recent quarters. And lower correlations were a bigger driver of declining risk than lower stock volatility, another shift in direction.

Axioma Insight: Quarterly Risk Review is based on an analysis of Axioma’s fundamental and statistical risk models covering global, regional and single-country equity markets. The eight editions of the report provide topline measures of risk for each market, as well as an analysis of the underlying components and drivers of risk in those markets. The reports cover:
* Asia Pacific Ex-Japan
* Australia
* China
* Japan
* Emerging Markets
* Europe
* Global Developed
* US

Axioma’s Quarterly Risk Review is published by Axioma, Inc., a leading provider of decision support, risk analysis and portfolio rebalancing and performance attribution tools.  The report can be accessed on the Axioma Insight page of the company’s website.

About Axioma
Axioma, Inc. develops and markets innovative risk analysis, portfolio rebalancing and performance attribution products for the financial services industry. Founded in 1998 and headquartered in New York with additional offices in Atlanta, San Francisco, London, Hong Kong, Singapore, Geneva and Sydney, Axioma helps leading financial firms manage risk, increase returns and improve operational efficiency. For more information about Axioma, please contact Topher Wurts at 212.991.4506, or visit the company’s website at www.axioma.com.

Axioma Managing Director for Asia-Pacific Olivier D’Assier discusses risk. He speaks with Rishaad Salamat on Bloomberg Television’s “On the Move Asia”

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Olivier d’Assier, Managing Director, Europe and Asia at Axioma says risks in the euro zone remain and problems within Italy will probably stay for another 3 to 4 months.

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Global Banking & Finance Review published a byline by Ian Webster, EMEA Managing Director of Axioma, where he discusses the future of the ETF industry.

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Winter 2013 issue of Axioma Advisor eNewsletter is now availalbe

Analysis firm Axioma says its Insight Quarterly Risk Review of eight markets and regions has found risk continued to ease across the world in the fourth quarter of 2012, and does not see any signs of risk increasing in the near term.

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NEW YORK, January 31—Risk continued to ease in the fourth quarter of 2012, on the heels of a sharp drop in the third quarter, with no signs of a reversal ahead, according to Axioma Insight Quarterly Risk Review, a comprehensive reference on the state of investment markets for portfolio managers, risk managers, and other investment professionals.

“It is a testimony to these uncertain times that a decrease in risk seems only to stir anxieties over the possibility of an unforeseen increase,” said Melissa Brown, Senior Director, Applied Research and co-author of the Quarterly Risk Review.  “But as Freud observed, sometimes a cigar is just a cigar.  There is no evidence in Axioma’s risk models of an upturn in risk on the horizon.”

The decline in risk, noted Brown, “should give investors the opportunity to focus on achieving active returns, rather than fretting over common themes that affect all stocks.”

Among the highlights of Axioma’s latest risk report was a continued decrease in risk for European benchmarks, with medium-horizon risk for the Euro Crisis countries (Greece, Spain, Italy, Portugal and Ireland) falling nine percentage points.

Medium-horizon risk for the Russell 1000 and Russell 2000 also dropped in the fourth quarter.  Forecast risk for large-cap US stocks was on par with that of the FTSE Emerging index, in sharp contrast with the fourth quarter of 2011 when the Russell 1000 was well below the Emerging index.

Short- and medium-horizon forecasts also fell substantially for the FTSE Asia-Pacific ex-Japan.

“We are cautiously optimistic about the current environment,” said Brown.  “While risk is much closer to all-time lows than historical peaks, we can reference instances where risk has held steady at current levels for periods lasting years.”

Brown added that while the current market is hardly devoid of worry, existing concerns are already accounted for in current stock prices.

Speaking specifically to the danger of an unanticipated threat ahead, Brown noted that Axioma’s statistical models may give hints about unknown risks bubbling beneath the surface.  For example, in mid-October 2008, Axioma’s statistical models at both horizons were approximately five percentage points higher than their fundamental counterparts, clearly picking up a factor not measured by the fundamental models.  At the end of 2012, statistical models around the globe were generally below, or well below, the fundamental models at the same horizon.

“We believe this shows that those factors not covered by the fundamental models have seen risk fall even more than the explicit factors we are measuring,” said Brown.  “In other words, if there is a shoe waiting to drop, there’s no evidence of it in our risk models.”

Axioma’s Quarterly Risk Review is currently available in eight editions:
* Asia Pacific Ex-Japan
* Australia
* China
* Japan
* Emerging Markets
* Europe
* Global Developed
* US

Axioma’s Quarterly Risk Review is published by Axioma, Inc., a leading provider of decision support, risk analysis and portfolio rebalancing and performance attribution tools.  The report can be accessed on the Axioma Insight page of the company’s website.

About Axioma
Axioma, Inc. develops and markets innovative risk analysis, portfolio rebalancing and performance attribution products for the financial services industry. Founded in 1998 and headquartered in New York with additional offices in Atlanta, San Francisco, London, Hong Kong, Singapore, Geneva and Sydney, Axioma helps leading financial firms manage risk, increase returns and improve operational efficiency. For more information about Axioma, please contact Topher Wurts at 212.991.4506, or visit the company’s website at www.axioma.com.

The Fundamental Law of Active Management tells us that good forecasts should directly translate to outperforming portfolios. Why, then, do we so often hear the frustrated lament that they do not? Can this discrepancy between the clear theoretical rigor and the negative practical experience be explained?

Research Paper No. 044

In the US, Axioma’s style risk factors experienced two periods of high alignment: 1999 through 2001 and from 2008 to 2009. In each instance, the increased alignment of the style risk factors preceded subsequent steep market downturns by months. The recent decrease in US absolute correlation is likely a positive economic indicator.

Research Paper No. 043

October 2012 issue of Axioma Advisor eNewsletter is now available