Research Articles

Systematic factors account for a substantial part of long-term portfolio performance. While market-cap indices represent effective instruments to capture the market beta, systematic indices are important tools to capture additional style and strategy betas. A factor based approach to asset allocation is increasingly gaining recognition among institutional investors. Systematic indexes could facilitate the implementation of such factor based asset allocation, by enabling investors to capture systematic risk premia in a disciplined and cost-effective fashion. In this paper, we review various systematic equity indices and examine their potential practical applications in the institutional investment process.

Publication: MSCI Research Insight
Authors: KANG Xiaowei, MELAS Dimitris

The oil spill in the Gulf of Mexico has turned into a catastrophic event with major environmental and financial implications. Has this stock specific event had an impact on the wider market? What are the implications for institutional portfolios? What are the long-term investment repercussions from this crisis? This research bulletin discusses these important questions facing institutional investors in the aftermath of the BP oil spill crisis.

Publication: MSCI Barra Research Insight
Authors: KANG Xiaowei, MELAS Dimitris, MSCI Barra Applied Research

We present alternative methods for constructing factor mimicking portfolios in practice. We illustrate how portfolios with a limited number of assets and relatively low turnover can be used to track pure factor returns. These portfolios provide an effective instrument to support the practice of investment management. We illustrate how they can be used to hedge out unintended factor exposures of a passive benchmark thus facilitating the optimal management of beta exposure. We illustrate how they can be used to hedge out unintended factor exposures of an active strategy thus isolating pure alpha and facilitating the management of alternative sources of alpha.

Publication: The Journal of Portfolio Management
Authors: CAVAGLIA Stefano, MELAS Dimitris, SURYANARAYANAN Raghu

The market turmoil of 2008 highlighted the importance of risk management to investors in the UK and worldwide. Realized risk levels and risk forecasts from the Barra Europe Equity Model (EUE2L) are both currently at the highest level for the last two decades. We explore the historical diversification effects of an international allocation for UK investors. We illustrate that investing only in the UK market can be considered an active deviation from a global benchmark. A UK domestic strategy has high concentration, leading to high asset-specific risk, and significant style and industry tilts. We show that an international allocation resulted in higher returns and lower risk for a UK investor in the last one, three, five, and ten years. In GBP terms, the MSCI All Country World Investable Market Index (ACWI IMI) — a global index that could be viewed as a proxy for a global portfolio — achieved higher return and lower risk compared to the MSCI UK Index during these periods. The decreases in risk represented by allocations to MSCI ACWI IMI were robust based on four different measures of portfolio risk.

Publication: MSCI Barra Research Insights
Authors: MELAS Dimitris, RUBAN Oleg

In this article, we examine the relationship between macroeconomic and fundamental factors and demonstrate how fundamental factor models can be used to extract the macroeconomic perspective and enhance our understanding of the common sources of portfolio risk and return. We start by assessing the importance of macroeconomic factors, both from a theoretical as well as a practical perspective, and we discuss the reasons why we have seen renewed interest in these factors in recent years. The main part of the article focuses on how we should model the relationship between macroeconomic factors and equity returns. We highlight some of the difficulties associated with the direct approach and show how fundamental factor models can be extended to measure and attribute macroeconomic risk in a robust and consistent manner. We conclude by discussing various practical applications of the proposed macro-modeling framework in the investment process. Specifically, we discuss applications of this framework in the areas of return forecasting, portfolio construction, and risk management of equity portfolios. 

Publication: MSCI Barra Research Insights
Authors: LIU Yang, MELAS Dimitris