Research
Take a closer look at innovations and shifts in investment management and risk assessment.
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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.
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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.
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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.
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Constraining Optimized Portfolios: Handle with Care…
Our new series of papers extends our earlier work looking at the impact of constraints on optimized factor portfolios. The current analysis examines global developed-market portfolios constructed to tilt on Low Volatility, Value, and Momentum.
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10 Years After: A Changed World for Financials?
On the occasion of the 10th anniversary of the failure of Lehman Brothers, we dug into the risk and return characteristics of US Financial stocks to see what has changed — and what has not.
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In Trade War, the US Skates While China Suffers—So Far
The short-term effects of the escalating trade war between the US and China have been rather lopsided thus far—quite positive for the US and negative overall for China. Given the differences in the two countries’ sensitivities to non-energy commodities, which are bearing the brunt of the turmoil, the results are not that surprising.
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ESG’s Evolving Performance: First, Do No Harm
We evaluate the investment performance of ESG, paying particular attention to recent performance and highlighting the difference between ESG scores that overlap with traditional risk model factors and those that don’t. Our analysis indicates that, in general, increasing exposure to ESG rarely underperforms the market, and often outperforms the market, especially during the last few years.
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Q2 2018 Insights
Risk Retreated in Q2 But...
Active Managers Need to Look Under the Hood
Markets worldwide saw large swings in Q2 2018, and while US stocks were up for the quarter, many world markets were barely in the black. Volatility remained elevated from historical lows, but has eased globally, driven by the fall in market risk. Other components of risk, however, rose in Q2 which may have an important impact on active managers.
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What’s in a Name? Part 2: Stress-Testing Smart Beta ETFs
In this paper, we show results of stress tests on a number of different Smart Beta ETFs. As we noted in our first paper on this topic, even portfolios with similar investment philosophies (and seemingly identical names) can have quite different exposures. We look at reactions to various types of stresses and show once again how results can differ substantially from one fund to the next. We also show how stress-test results can vary widely over time.
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A Tactical Asset Allocation Workflow
Long-term investors often passively track a strategic asset allocation benchmark whose weights across the various asset classes remains constant over a multi-year horizon (usually 10, 15 years, or longer). Specialist teams, internal or external, may be setup to add an active overlay portfolio in the form of a tactical asset allocation which deviates from the strategic benchmark over shorter time horizons. These programs are used to either de-risk the strategic portfolio in times of market stress, or to add alpha by aligning the portfolio with the economic cycle over shorter time periods (i.e. usually three to five years).
