How can investors incorporate transformative, but volatile thematic investments while seeking to control for valuation and total and active risk? We examine three approaches that improved a portfolio’s “innovation profile” with modest changes to risk.

Despite institutional investors, globally, continuing to allocate funds to indexed strategies, active management remains attractive across various products and geographies. The ability to select skilled managers in opportune markets who can add value beyond a indexed investment tracking an index, may justify the case for active implementation. We analyze different segments of the equity markets to find the intersection of those that have provided the greatest opportunity and where managers...

Factors are important systematic sources of risk and return in equity portfolios. Given the pervasive use of factors via both active and indexed strategies, a standard approach is needed for defining factors and evaluating the factor characteristics of portfolios. We introduce MSCI FaCS, a classification standard and framework for analyzing and reporting of style factors in equity portfolios that is based on the Barra Global Total Market Equity Model for Long-Term Investors. Managers can use...

In constructing portfolios, asset managers expose the portfolio to factor tilts that greatly influence fund performance. Some of these exposures, which can provide sources of excess return, may be intentional but others may not. A manager who makes the wrong bet could be on the wrong side of history.

Asset owners face a challenge in determining how the factor allocation fits into the overall equity program, in particular how the factor allocation relates to the existing roster of active managers. This paper uses a risk budgeting framework to investigate how active mandates and factor allocations can be combined. We address three key questions: 1) how does the level of active risk in active management affect the factor allocation decision, 2) what share of the portfolio can be deployed to...

U.S. equity investors in 2016 experienced a roller coaster ride. The U.K.’s vote to leave the European Union and the U.S. presidential election each resulted in sharp market moves. Together, the two events contributed to a shift in the underlying fabric of equity markets starting in the second half of the year.

The size premium has been widely used in asset allocation and in risk models for decades. However, some academics and practitioners have contested the validity of the size premium. They argue: 1) the size premium has disappeared in the last 20 years and no longer exists; 2) the size premium exists only in the United States and not in other markets; 3) the size premium disappears after filtering out smaller stocks for investability. In this paper, we refute these claims and examine ways of...

The perennial appeal of value investing is based on the excellent long-term performance of global value stocks. Investors today use various approaches to identify and compare the exposure of stocks with "value" characteristics that help explain risk and return. In this Research Spotlight, we create a common definition of “value” and examine how value strategies can be implemented, in both active and passive portfolios, using three generations of value indexes as examples.

The perennial appeal of value investing is based on the excellent long-term performance of global value stocks. Investors today use various approaches to identify the exposure of stocks with “value” characteristics that help explain risk and return.  In this Research Insight, we create a common definition of “value” and examine how value strategies can be implemented, in both active and passive portfolios, using three generations of value indexes as examples.

Factor investing has become increasingly popular in developed markets. In this paper, we show that they have worked in emerging markets as well. All six MSCI Emerging Markets Factor Indexes outperformed the parent index over a 15-year plus period, based on simulations. Investors seeking premia in addition to broad EM beta can explore factor index investing via this index series. Active EM managers can also benefit from these tools. Traditionally, they have mainly harvested EM beta, along with...

With Research Spotlight - MSCI Factor Indexes in Perspective:Insights from 40 Years of Data, we launch our new publication called the Research Spotlight. IEach paper in the series, we will focus on the key findings of a longer white paper, summarizing the research for a non-technical audience. While certain readers will be drawn to the longer publication for the full scope of the study, the Research Spotlight affords a quick and focused summary for those interested in a concise...

Until recently, MSCI had calculated 25 years of simulated history for its factor indexes. In this Research Insight, we extend the simulated history to 40 years, providing new insights into the behavior of factor indexes over various time periods. We look at factor index behavior over various time frames; the changes in the correlation between factor returns over this period; historical variations in valuation of factor indexes and their exposure to GICS sectors. We also use IndexMetrics,...

Until recently, MSCI had calculated 25 years of simulated history for its factor indexes. In this Research Insight, we extend the simulated history to 40 years, providing new insights into the behavior of factor indexes over various time periods. We look at factor index behavior over various time frames; the changes in the correlation between factor returns over this period; historical variations in valuation of factor indexes and their exposure to GICS sectors. We also use IndexMetrics,...

Factor-based investing has become a widely discussed topic of today's investment canon. In this paper - which is the last delivery of a four-paper series focusing on factor investing - we discuss the combinations of Factor Indexes taking as an example the MSCI Quality Mix Index.The MSCI Quality Mix Index is an equal weighted combination of the MSCI Quality, Value and Minimum Volatility Indexes. Academic research shows that quality, value and low volatility strategies have not only...

Factor investing has become a widely discussed part of today’s investment canon. This paper is the second in a three-paper series focusing on factor investing. In the first paper, "Foundations of Factor Investing," we discussed six factors - Value, Low Size, Momentum, Low Volatility, Yield, and Quality - that historically have earned a premium over long periods, represent exposure to systematic sources of risk, and have strong theoretical foundations. We also discussed how...

Factor investing has become a widely discussed part of today’s investment canon. This paper is the first in a three-paper series focusing on factor investing. In this paper we lay out the rationale for factor investing and how indexation can capture factors in cost-effective and transparent ways.[1] [1] The next papers series cover various aspects of implementation including use cases we have seen.

Benchmarks are practical tools used by investors at every stage of the investment process, including policy portfolio creation, asset allocation, fund selection, performance evaluation, and product creation. But despite their central role in the investment process, a comprehensive discussion of benchmarking standards or best practices has not been addressed in recent industry literature.This paper aims to provide a framework for benchmark assessment. The framework is drawn primarily from...

This paper discusses the rationale for factor investing and how indexe can be constructed to reflect factor returns in cost-effective and transparent ways. We currently identify six equity risk factors that have historically earned a long-term risk premium and represent exposure to systematic sources of risk: Value, Low Size, Low Volatility, High Yield, Quality and Momentum.

Supported by strong academic and industry evidence that risk premia are primary drivers for long-term asset class performance, institutional investors have recently started to allocate strategic mandates to the growing array of investment strategy indices—also referred to as risk premia indices. In this research bulletin we illustrate the case of one US pension plan, Wyoming Retirement System (WRS), that incorporated risk premia allocations within in their strategic global equity...

If you would like to gain a greater understanding of current practices and emerging trends in the implementation of global equity allocation policies, take a look at Global Equity Allocation, three of our most popular papers on this topic compiled into one easy-to-read publication.

The small cap as a source of equity risk premia has been well documented in finance literature. Although small-cap stocks are often perceived as risky relative to their large-cap counterparts, they have other characteristics that may provide an opportunity for portfolio diversification and return enhancement. In particular, moving beyond the universe of large- and mid-cap stocks into the small-cap segment triples the opportunity set in terms of number of stocks available for investors. Also,...

Globalization has brought about a major rethinking of the equity investment. Thought leaders in the industry are questioning the merit of the existing equity allocation practices and are increasingly looking towards an integrated global equity investment process. The partitioned domestic/non-domestic approach to equity investing may have been built on the grounds of segmented economies, high levels of foreign investment restrictions, and heavily domestically-focused companies but its validity...