The “quant meltdown” of 2007 and the subsequent global financial crisis highlighted the risks of crowded investment strategies. The recent growth of “smart beta” indexes and their use in ETFs has added to concerns about crowding. In this Research Spotlight, we explore the risks posed by crowded strategies and explain how the MSCI Crowding Scorecard enables asset managers to assess these risks as they exist in today’s markets. The Scorecard employs four metrics...

AUTHORS: Mehmet K. Bayraktar, Stuart Doole, Altaf Kassam, Stan RadchenkoThe “quant meltdown” of August 2007 and the subsequent unfolding of the global financial crisis highlighted the risks of crowded investment strategies. The rapid growth of smart beta indexes and their use in ETFs has added to the need for scrutiny. In this Research Insight, we propose a set of four key metrics (our “Crowding Scorecard”) for monitoring and detecting the crowding risk of any...

Actively managed large cap mutual funds have significantly underperformed their benchmarks from March 1 through April 30 this year, which has raised questions among investors since this happened during a flat stock market with volatility levels at historically low levels. In this paper, we demonstrate the significance of this recent performance, measure mutual fund tilts on investment styles and analyze the impact of these styles by calculating contributions of tilts to the performance of...

In "Market Spin-cycle: Uncovering Style and Sector Rotation in a Flat Market", we investigated the sector and investment style rotations in the US market from March 1st through May 8th, 2014. In particular, we identified declining performance in growth-oriented styles associated with risk-taking behavior, such as Beta, Growth, and Momentum, with improving performance in Value, Profitability, and Size suggesting rotation in investment styles.In this follow-up paper, we extend this...

Recent U.S. equity market performance, driven by a significant decline in glamour (high-growth, high-momentum) names, has attracted a lot of attention from market analysts. By now it is well publicized that, despite the range-bound performance of the US equity market since March, there have been significant differences among the performance of various sectors of the economy.We contribute to this discussion by focusing on what we view as a rotation in investment styles. This rotation has been...

This Research Insight, second in a series, introduces the Seasonality factor in our equity models; this factor was identified as part of MSCI's Systematic Equity Strategies (SES) research program. Seasonal behavior of stock returns is widely discussed in finance literature. The most prominent is the "January Effect," where prices tend to rise during January after stock sell-offs in December. In this paper, we examine how the SES Seasonality factor identifies seasonal pricing patterns for US...

In this Research Insight, we introduce the Prospect factor. Systematic implementation of Prospect theory may be thought of as a contrarian investment strategy that takes long positions in stocks with poor historical performance and short positions in stocks with historical good performance. We find that the Prospect factor is significant in explaining risk and return characteristics of Japanese and US securities. The Prospect factor was identified as part of our Systematic Equity Strategies...

This Model Insight explains MSCI's motivation for building the Barra US Sector Equity Models, describes the methodology and factor structure, and provides empirical results for the US Sector model family, which includes 10 individual sector models and a fully integrated model.

In this Research Insight, we introduce “Systematic Equity Strategies” (SES), which refers to a rules-based implementation of investment strategies and anomalies.  Our research finds that SES, when used as factors in risk models, can help predict both expected and abnormal stock returns, thus improving forecast accuracy. Some Systematic Equity Strategies may lead to crowding risk as large pools of capital pursue shared strategies; by using SES factors, investors can monitor...