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MSCI acquired Barra, a provider of portfolio risk analytics tools that launched its first risk analytics products in Factors are the building blocks of many portfolios - the elements capable of turning data points into actionable insights. Download Transcript. Factors have historically been identified as critical drivers of portfolio risk and return and can now be used to better inform the investment process.
Factors may help investors meet their objectives such as reducing risk, increasing returns, and increasing diversification by providing a better understanding of risk and returns. Have an MSCI representative reach out to you. MSCI Factor Indexes are designed to help institutional investors seeking to capture the excess return of factors in a cost-effective and transparent manner. Factor indexes can be used to implement factors through a passive portfolio.
A factor index can also bring transparency to factor allocations, helping to alleviate the well-known problem of manager style drift and may have positive implications for risk management. Due to the historical cyclicality of factors, investors may choose to diversify away from a single factor but do not want to dilute their exposure to their targeted factors or change the risk profile of their portfolios. Read more. MSCI Factor Indexes are rules-based, transparent indexes targeting stocks with favorable factor characteristics — as backed by robust academic findings and empirical results — and are designed for simple implementation, replicability, and use for both traditional passive and active mandates.
Investors may want to diversify away from just a single factor without diluting the strength of their exposure to their targeted factors. These indexes combine four well-researched factors — value, momentum, size and quality — with a control mechanism designed to keep volatility in line with the market. For large-scale asset managers and asset owners for whom investability is critical, narrow factor indexes may not have sufficient liquidity and capacity due to their concentrated nature.
The MSCI Factor Tilt Indexes have higher investability requirements by tilting market capitalization weights of securities based on the relevant factor score. Factor Investing is transforming the way investors construct and manage portfolios. The increasing popularity of Factor Investing can create the need for standards. MSCI has been at the forefront of driving factor innovation for over 40 years, beginning with Barra, which established a common language to explain risk and return through the lens of factors.
Download the factsheet. Our obsession with data and new insights leads us to our latest factor innovation. Download the transcript. It is well established that Factors have historically been key drivers of risk and return in equity portfolios. MSCI FaCS creates a common language and definitions around Factors to be used by a broader audience including asset owners, managers, advisors, consultants, and investors.
Investment managers can use the framework to analyze and report Factor characteristics, while investors and consultants can use the data to compare funds using common Factor standard definitions. Investors who use factors to help construct and manage portfolios need a common standard in order analyze funds and conduct due diligence. Download the factsheet for more information. The Factor Box provides a visualization designed to easily compare Factor exposures between funds and benchmarks.
It includes factors, which have historically demonstrated excess market returns over the long run. This may help investors to make better informed decisions on their fund selection, fund monitoring and holistic portfolio analysis based on their fund exposures and investment objectives.
Whether building portfolios, implementing strategies, or measuring performance, MSCI helps clients identify and solve for implementing factors throughout the investment process. Our latest models include factors like Sustainability, Crowding and Machine Learning that helps investors better understand the characteristics that drive portfolio risk and performance as market conditions change.
These factor models help:. Download the brochure. MSCI helps clients build, implement and measure factor based strategies through consistent and transparent factor frameworks. We employ one of the largest research teams in our industry — which contains extensive academic credentials with broad financial and investment industry experience.
This is based on extensive research to identify common drivers of risk and return and back tested for relevance across markets and investment strategies. Our in-house team of more than researchers blends academic research with practical experience and is continuously innovating to introduce new factors into risk models. Select your topics and use cases to stay current with our award winning research, industry events, and latest products.
Factor Investing Factor Investment Hero. Sidebar Navigation. About factors by MSCI In the realm of investing, a factor is any characteristic that can explain the risk and return performance of an asset. Factor Timeline. Academic Factor Milestones. The measurement of the sensitivity of a security to the broader market was called Beta Developed by: Treynor Sharpe Litner Mossin. Creation of the multi-factor Barra risk models.
Suggested that Macroeconomic factors can systematically affect stock market returns. If an investor wants to understand how equity markets perform, the best measurement is the market cap weighted benchmark. The market beta portfolio is also a natural benchmark for any other strategies, including factor investing or pure alpha investments. The very DNA of factor investing is to provide tilts away from market capitalization weighted benchmarks, by following a standardized, disciplined, transparent and rules-based process of stock selection.
Figure 2 shows the actual multi-step process required to construct a factor-exposed index. This process defines a rigorous portfolio construction, with stocks that best qualify for the factor exposure. These strategies have very intuitive appeal on the one hand, and they are well researched and backed by empirical studies in the financial literature on the other hand.
For example, the total shareholder yield strategy aims to select these companies that return capital - either through dividend payments or buyback programs - to their shareholder. To achieve this objective, this factor strategy will screen in the entire universe stocks that consistently deliver shareholder value. It will then rank the companies in view of the shareholder yield, select top companies meeting certain threshold, and finally the strategy will overweight or tilt towards the most valuable stocks generating shareholder value.
UBS Asset Management. Addition of alternative beta to the portfolio requires better understanding of the factor exposures and their properties. Each factor strategy has its own objective which determines its application in the portfolio.
The value factor looks for relatively undervalued stocks as measured by fundamental company metrics e. Numerous studies have demonstrated that value stocks tend to outperform their peers in the long-term. The outperformance can be rationalised by the fact that value investors take on additional risk by investing in cheap stocks, and expect higher return for risk-taking. Value stocks are mostly looked for when financial markets experience off-equilibrium valuations.
The low volatility factor selects companies whose stock market price variation is low and hence help to reduce portfolio risk. Low volatility stocks tend to outperform high volatility stocks; this is known as 'the low volatility anomaly', as it contradicts the conventional financial wisdom of risk-return trade-off. However, low volatility stocks prove to be in high demand when uncertainty around financial markets increases, leading to their more robust market behaviour.
The quality factor provides exposure to a portfolio of boring stocks. Quality companies are characterized by durable business models which should remain profitable, regardless of the business cycle. In addition, quality stocks tend to have modest variability in earnings, e. High quality stocks, as selected by accounting criteria e. They are particularly in demand when financial markets are expected to experience turbulence. The yield strategies are designed to capture the performance of companies that return above-average cash to shareholders either by paying dividends or through share buybacks.
The excess cash can either be reinvested to finance further company growth, or it can be partially shared with the shareholders. Many yield-focused strategies select companies that have balanced pay-out ratios and have proven to generate persistent shareholder value in the long-term. Every factor strategy represents exposure to systematic sources of risk expressed through the factor load 2. Figure 3 shows the historical factor loads of the four factor indices.
This chart is a standard way to evaluate the factor load of specific strategies 3. In this framework, every investor must first assess the role of factor investing and what it aims to achieve through the investment. For example, the quality companies have a relative negative tilt towards financial leverage defined as debt-to-equity ratio. This implies that quality companies use relatively low level of debt to finance increased operations, investments and business activities.
While highly leveraged companies may have potential to generate higher earnings in expansive economy, then the cost of debt financing might turn excessively high with the economic downturn. For many years, factor-based investment strategies have not been widely accessible and rather exclusive to a small group of investors. The recent increase of interest and demand has led many of the factor strategies to become 'indexed' and widely recognized and well established index providers e.
With the rise of passive investments e. Exchange Traded Funds , the access to value, volatility, quality and yield has never been easier than today, and there are many good reasons to consider them as an addition to a portfolio see summary in Figure 4. Traditionally, portfolio allocation has been defined as a core-satellite approach, where core exposure was covered by market beta portfolios and satellite investments were covered by alpha investments.
With the emergence of factor indices, the new core-factor-satellite investment approach develops, where the factor beta investments can be accessed through investible factor indices. Implementation of factor investing is generally governed by the investor's constraints risk budgets, investment horizon, costs etc.
The core-factor-satellite framework offers a number of ways to implement factor allocations in a portfolio. The implementations can focus on addition of one preferred factor, or combining two or more factors in addition to market beta, as shown in Figure 5. The factor exposures differ in their properties and their behaviour over different business cycle phases.
For example, value and yield are more pro-cyclical, whilst low volatility and quality are more counter-cyclical. Most importantly, regarding diversification, combining factors historically could have helped offset the downside risk of the market portfolio, or could have help achieving higher participation in the upside market.
In general, the implementation of factor investing depends on the investor's objectives and constraints. The stock exchange price may differ from the net asset value. The fund is passively managed. The relative weightings of the companies correspond to their weightings in the index.