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Research Articles by MSCI Applied Research

7 Published Papers

"Value Stocks and the Macro Cycle", MSCI Research Insight, January 2011

Topic: Risk Management, Investing (Investment Management) | Asset Class: Equities | Show/Hide Details >>

Value investing is a common investment strategy, but like all other strategies it has suffered during certain periods, such as the tech rally in the late nineties. This paper examines the Value cycle globally, as well as specifically for Asia Pacific, and considers the impact of possible drivers, including those involving the overall stock market and macroeconomic factors. It was found that the Value cycle was closely linked with the level of risk aversion and, among macroeconomic variables, was most associated with the interest rate cycle.

Publication: MSCI Research Insight
Authors: MSCI Applied Research

"Micro Caps - A Distinct Segment", MSCI Research Bulletin, January 2011

Topic: Asset Allocation and Asset Liability Management, Investing (Investment Management) | Asset Class: Equities | Show/Hide Details >>

A few large asset owners have expressed a preference for an expanded opportunity set that goes beyond the traditional equity universe comprised of large, mid, and small capitalization companies. These investors have typically focused on the domestic equity market. In order to address these needs, MSCI recently launched the MSCI All Cap Indices, which aim to provide comprehensive yet accessible coverage of all capitalization segments. The MSCI All Cap Indices include micro cap securities across 24 Developed Markets and complement the existing MSCI Investable Market Indices (IMI), which cover large, mid and small cap companies.
The universe of micro cap securities represents a dynamic and evolving segment of the global equity landscape. Although micro cap securities may be perceived as more risky compared to their large cap counterparts, they have differentiated performance characteristics from other size segments and may provide an opportunity for portfolio diversification. The inclusion of the micro cap segment within MSCI All Cap Indices nearly doubles the investment opportunity set for investors and can help to address the evolving needs of global investors. This research bulletin presents the distinct characteristics of the micro cap segment and contrasts it with the investable market (IMI) segments.

Publication: MSCI Research Bulletin
Authors: MSCI Applied Research

"The Road to Retirement", MSCI Research Insight, January 2011

Topic: Asset Allocation and Asset Liability Management | Asset Class: Multi-Asset Class | Show/Hide Details >>

Defined Contribution (DC) plans are rapidly becoming the primary retirement investment vehicle for a majority of employees across the US and other markets around the globe. Asset allocation for DC plans has to strike a balance between growth and protection assets over the savings lifecycle while protecting the long-term purchasing power of the nest egg. Due to the long duration of retirement investing and various risks associated with it, implementing the right asset allocation has become critical and challenging for DC plans.
The unique Risk Focused methodology presented in this paper aims to address the shortcomings of conventional Target Date Funds experienced during the 2008 financial crisis. The proposed approach addresses the cumulative impact of shortfall, sequence of returns, longevity, and market risks in determining asset allocation at different time horizons. This is accomplished by combining the term structure of risk, return, and covariance of asset classes with an explicit risk budget. The Risk Focused glide path potentially delivers comparable retirement wealth outcomes with enhanced downside protection, lower journey volatility, and attempts to facilitate a smoother journey on the road to retirement. Hence, the caption of the paper, “ Road to Retirement – Bumpy or Smooth, Depends on your Route”.

Publication: MSCI Research Insight
Authors: MSCI Applied Research

"Update on MSCI Equal Weighted Indices", Update on MSCI Equal Weighted Indices, December 2010

Topic: Investing (Investment Management) | Asset Class: Equities | Show/Hide Details >>

Some investors argue that the risk of a market capitalization weighted benchmark is not limited to volatility, but also includes other dimensions, such as high concentration, and excess volatility due to pricing inefficiency. Removing the influence of prices from index weighting schemes could address the issues associated with capitalization weighted benchmarks. Historically, equal weighting has been one such approach.
The MSCI Equal Weighted Indices offer an alternative to market capitalization weighted indices. In the MSCI Equal Weighted Indices, each security is weighted equally at the quarterly index rebalancing. Weights may fluctuate between rebalancings based on the performance of each security. This alternative weighting methodology removes the influence of prices from the market capitalization weighting scheme at each index rebalancing. Equal weighted portfolios may provide a potential way for earning the small cap premium and avoiding the “bubble traps” or pricing inefficiencies in security prices.

Publication: Update on MSCI Equal Weighted Indices
Authors: MSCI Applied Research

"QE2 Aftermath: What Has a Steepening Curve Meant for Equity Sectors?", MSCI Research Bulletin, November 2010

Topic: Investing (Investment Management), Risk Management | Asset Class: Equities, Fixed Income | Show/Hide Details >>

At the November 3, 2010 meeting, the US Federal Reserve divulged its widely anticipated second round of Quantitative Easing (QE2 plan), formally announcing it would purchase an additional USD600bln in US Treasuries by the end of the second quarter 2011. In the aftermath of the announcement the US yield curve continued to steepen given the Fed’s planned purchases of intermediate maturities. In this analysis we highlight equity sector and industry observations during three steep curve regimes using Barra US Equity Model (USE3) data.

Publication: MSCI Research Bulletin
Authors: MSCI Applied Research

"The Third Quarter Ends with a Blast", MSCI Researh Bulletin, October 2010

Topic: Investing (Investment Management), Risk Management | Asset Class: Equities | Show/Hide Details >>

The US equity markets showed their strongest gains for any September on record in the 40-year history of the MSCI USA Index. Here, we highlight a few main observations through the lens of the Barra US Equity Model:

• The Growth story was really a Technology story
• The Small Cap story was partially a real small cap effect, but in fact had an important Volatility story behind it (i.e., small caps benefited from being high beta and high volatility)
• Certain sectors, like Health Care and Financial, benefited indexes across the board

Publication: MSCI Research Bulletin
Authors: MSCI Applied Research

"Uncovering Biases within Sectors", MSCI Research Bulletin, June 2010

Topic: Factor and Risk Modeling | Asset Class: Equities | Show/Hide Details >>

This bulletin is part of a series highlighting the ways in which factor models can help managers with fundamental processes. Most PMs are familiar with sector trends. Sectors go through periods of under- and overperformance, and some are more risky than others. But sectors also exhibit different characteristics that can affect their performance. Bank stocks in 2007, for instance, had significant overweights in stocks with low price-to-book ratios and high leverage. These stocks were hit harder by the 2008 financial downturn than other sectors. This short piece illustrates how factor models help quantify these biases hidden within sectors.

Publication: MSCI Research Bulletin
Authors: MSCI Applied Research

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