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

  • 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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  • Q4 2018 Insights

    Risk Finally Rears Its Ugly Head
    And takes a bite out of 2018

    Year-end 2018 was the antithesis of the close-out in 2017. While investors reveled in large equity gains and low volatility the year before, 2018 brought the misery of steep losses and high levels of volatility. Markets were choppy throughout the year and especially in the fourth quarter, with stocks wavering between gains and losses. Major indices around the globe fell abruptly from the record levels reached in January, ending the year under water. The corresponding increase in volatility of indexes, countries, style factors, etc. suggest that managers of all stripes may want to reevaluate their portfolios to reflect the changed environment.

    Applied Research Team Research Paper No. 133
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  • Crowded Trades Don't Explain Managers' Recent Pain

    It has been a tough couple months for many managers, especially hedge funds. Some have speculated that there has been a large unwinding of crowded risk-factor positions. We do not see that in our factor returns, and instead propose a few other possible culprits.

    Melissa R. Brown, CFA, Managing Director, Applied Research Research Paper No. 132
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  • The Year of the Central Banks

    2019 will be a decisive year for three of the world’s biggest central banks. In this paper, we use the stress-testing capabilities of our Axioma Risk™ platform to examine the impact of rate hikes on a global multi-asset class portfolio, with a particular focus on equity and credit spread performance in response to a yield curve inversion.

    Christoph V. Schon, CFA, CIPM Executive Director, Applied Research Research Paper No. 131
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  • Outlook for 2019?

    In this paper, we mimic the annual process of forecasting the road ahead for markets in the following year from initial forecast to target portfolio. Starting with three variants of a high-level macro forecast on economic conditions going forward, we model each one as a stress test scenario to translate our macro views into predictive market movements for 2019 across multiple asset classes. In a second step, we take a model portfolio and use the stress test results to extract scenario-implied alphas. We then construct optimal portfolio variants for each of our three macro forecasts and analyze the paths from our current portfolio under each macro scenario and to the optimal solution for that stress test. The process described in this paper brings transparency and predictability by aligning portfolio construction and rebalancing with macro views on market conditions.

    Olivier d'Assier Research Paper No. 129
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  • Stress Testing for Alphas

    In this paper, we took the stress-testing process one step further and showed how the resulting contributions to expected loss could be used as inputs to construct portfolios for each specific stress scenario. Using the process described, investors can also construct candidate portfolios representing a hedge for each scenario and include the target portfolio in their risk management process during rebalancing.

    Olivier d'Assier Research Paper No. 128
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  • Q3 2018 Insights

    Top-Line Risk Drop in Q3 Masks Underlying Turmoil

    Q3 2018 saw large divergences between indexes typically viewed as “risk on”-type assets and their presumably less-risky counterparts. Top-line risk was down led by the fall in market risk, but other sources—many of which are the things managers tilt on and that drive active risk—actually bucked the market trend and increased.

    Applied Research Team Research Paper No. 127
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  • Smart Beta: Even Smarter with an Optimizer and a Custom Risk Model

    Axioma and CS HOLT have collaborated to create a smart beta index --- the Credit Suisse HOLT Global Multi-Factor Portfolio --- that united the stock selection prowess of CS HOLT with Axioma’s portfolio construction and risk model expertise. In this paper, we highlight three key principles that drove the process to create this portfolio.

    Kartik Sivaramakrishnan, PhD, Melissa R. Brown, CFA, Bharat Kasturi Research Paper No. 126
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