Take a closer look at innovations and shifts in investment management and risk assessment.

  • Minimum Variance: A Leg Up on Geopolitical Risk?

    In this paper, we take a look at how minimum variance performed vis-à-vis its core market counterpart during nine recent geopolitical risk events. The nature of these events is that they tend to push correlations towards 1.0. This may pose a problem for minimum-variance portfolios, as they are constructed by leveraging the covariance matrix in order to build portfolios with strong systematic hedges, simultaneously going long on negatively correlated factors or (in active space) long and short positively correlated ones. In these types of crises, is their ability to significantly reduce portfolio risk vis-à-vis a core benchmark hampered? If not, what kind of outperformance can we expect in down-markets, and what are the performance costs of this insurance in up-markets?

    Olivier d’Assier, Christoph Schon, and Marco Della Seta, Research Paper No. 143
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  • Is Your Smart Beta Product Scalable?

    In this paper, we use the backtester capabilities of the Axioma Portfolio Optimizer to investigate the maximum capacity of a smart beta strategy, based on the Profitability factor in the Asia ex-Japan equity market. Profitability is one of the style factors in the Axioma Asia Pacific ex-Japan fundamental factor model (v4) that has had a persistently positive return over the last several years, and has become a popular style tilt with regional managers.

    Olivier d'Assier, Applied Research, APAC Research Paper No. 142
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  • Q2 2019 Insights

    A Strong Market ... but on Thinning Ice?
    With the US remaining riskier than most benchmarks
    While equity markets were strong overall in Q2—and risk levels did not stand out—some trends were troubling and investors should be cognizant of them. This report contains a detailed analysis of what happened to top-line risk and its drivers across the globe in the quarter, as well as a detailed analysis of style factor performance. We take particular note of the unusually poor performance of a number of style factors on which many investors bet, continuing the trend of the last few quarters. It has been our experience, albeit difficult to prove statistically, that unusually anomalous factor performance may be a harbinger of a change in the market’s direction.

    Applied Research Team Research Paper No. 141
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  • What Is a Factor? Part 2: The Impact of the Long-Only Constraint

    In this paper we extend our analysis of how the construction of a factor portfolio, even using the same underlying factor definition, can have substantial impact on the returns the factor generates. The current paper digs deeper into the impact of a long-only constraint, and describes the characteristics of these portfolios as well as the associated performance. One main goal is to describe how a traditional factor-mimicking portfolio might misstate the returns a long-only manager can achieve.

    Melissa R. Brown, CFA, Esther Mezey, PhD, Ipek Onat, MSc, Dieter Vandenbussche, PhD Research Paper No. 140
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  • The Stock-Bond Correlation: Where to from here?

    With earnings and bond yields converging and starting to move in the same direction more and more often, many investors are beginning to wonder what the relationship between the two major asset classes will look like going forward. In this paper, we review the historical relation between share and bond prices and relate it to recent developments. We examine the impact on portfolio risk, explore alternatives for diversification options and provide an outlook on a potential future relationship.

    Christoph V. Schon, CFA, CIPM Executive Director, Applied Research Research Paper No. 139
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  • Q1 2019 Insights

    Risk Retreats Around the Globe
    Though US remains riskier than most benchmarks.
    Stocks rallied around the globe in the first quarter of 2019, with most indices nearly recouping the steep losses of the previous quarter. Stocks rose as major central banks kept interest rates unchanged, allaying investor concerns of a global economic slowdown. With most US economic indicators on the positive side, some US indices recorded the biggest quarterly gains since the global financial crisis, while others approached record highs.The turnaround corresponded to a sharp decline in risk. China was the only exception, with its risk at quarter-end higher than where it started. Even the UK market saw its risk fall, despite Brexit-related tumult. That said, the US remained at the top of the risk list, an atypical position it occupied in Q4 2018.

    Applied Research Team Research Paper No. 138
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  • Introducing Axioma’s ROOF™ Score Methodology

    In this whitepaper, we are undertaking an ambitious task of leveraging factor return and benchmark risk data from Axioma’s standard fundamental equity models to determine whether we are in a risk-tolerant (risk-on) or risk-averse (risk-off) market; and develop a market-sentiment indicator that will help predict the future market risk behavior.

    Olivier d’Assier, Applied Research APAC Research Paper No. 137
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  • What, Exactly, Is a Factor?

    What, Exactly, Is a Factor? According to BlackRock, as of June 2018 there was $1.9 trillion invested in factor-based strategies—a figure expected to grow by nearly 80% to $3.4 trillion by 2022. There is no question that these strategies have moved to the forefront of investing, but their growing popularity begs the basic question: what do we mean by “factor”?

    Melissa R. Brown, CFA, Managing Director, Applied Research Research Paper No. 136
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  • A Survey of ESG Vendor Data: Strategies for Managing Score Differences

    Environmental, social and governance (ESG) data availability, marketing presence and regulation continue to increase in the investment community. Recent articles have reported several remarkable instances of score divergence between data vendors. However, those articles did not attempt to determine whether the disparities represented isolated outliers or were a common occurrence in ESG data.

    Anthony A. Renshaw, Ph.D. Research Paper No. 135
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  • Catch Me If You Can - Capturing Runaway Asian Spreads in the Equity World

    The big story in 2018 has been the surge in spreads of USD Asian High-Yield bonds. Hit by a combination of higher US interest rates, a stronger USD, and volatile geopolitics, the risk premium demanded by investors for holding Asian High-Yield corporate bonds surged in 2018 returning to their 2015 highs. In this research note, we use the newly released APAC ex-Japan model from Axioma (AX-APxJP4) to construct an equity portfolio of high-yield issuers and use the new fundamental style factors in the model to draw a parallel between the equity and the bond world. The idea behind this exercise is to see if we can create a sort of ‘canary in the coal mine’ equity portfolio that will mimic the warning signs of spreads in the bond market for equity investors. We find that exposures to the additional fundamental style factors in the new model accurately capture the profile of high-yield issuers and can help equity investors build an early warning system mimicking that of rising spreads in the bond market.

    Olivier d'Assier Research Paper No. 134
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