Research Articles

As part of the MSCI Research series on global equity implementation, this paper reviews the active management opportunity in different market segments, and discusses the role of very active mandates across segments in a core-satellite portfolio structure.

Our research based on manager performance data over the last 10 years indicates that there is little evidence that average emerging markets or small cap managers have produced higher or more persistent risk-adjusted returns relative to their developed markets large cap peers. Therefore institutional investors may consider active and passive management as complementary strategies across these different equity segments.

Due to the outperformance of high active risk mandates over the analyzed period, a simulated core-satellite structure across different equity segments achieved a higher information ratio than a combination of low active risk managers. The outperformance of high active risk mandates may reflect links between higher manager skill, higher investment conviction, and/or fewer constraints. Depending on investment beliefs, institutional investors might explore such a core-satellite structure to implement the global equity allocation.

 

Publication: MSCI Research Insight
Authors: NIELSEN Frank, KANG Xiaowei, Fachinotti Giacomo

This paper highlights the fundamental-based origins of the factor models used at Barra. Barr Rosenberg and Vinay Marathe (1976) first discussed the theory that the effects of macroeconomic events on individual securities could be captured through microeconomic characteristics such as industry membership, financial structure, or growth orientation. This linkage between macroeconomic events and microeconomic (or fundamental) characteristics lies at the heart of the factor model. We discuss the intuition behind a fundamental factor model, showing how it is linked to traditional fundamental analysis, and point out the insights these models can provide. Our goal is to highlight the complementary role of the fundamental factor model to traditional security analysis.

Publication: MSCI Research Insight
Authors: BENDER Jennifer, NIELSEN Frank

The 2008 crisis has offered another look at how emerging market stocks have behaved relative to developed markets.  In the aftermath of the crisis, we take a fresh look at emerging markets to explore these questions: Have emerging markets matched growth forecasts? Which segments have performed well? How have emerging markets behaved relative to developed markets?  While in the aggregate, emerging market stocks were not immune to the crisis, there were some clear differences between emerging and developed markets in the performance of particular sectors and styles.

Publication: MSCI Barra Research Insight
Authors: BENDER Jennifer, NIELSEN Frank, Subramanian Madhusudan

Traditional asset allocation approaches have not provided the full potential of diversification. Here, we introduce a different approach and look at structuring portfolios using risk premia within the traditional asset classes or from systematic trading strategies. We confirm the potential benefits of such an approach by comparing a typical 60/40 equity/fixed income allocation with an equal weighted allocation across eleven risk premia.

Publication: MSCI Barra Research Insights
Authors: BRIAND Remy, NIELSEN Frank, STEFEK Dan

The paper investigates if international small cap has been distinctly different from large caps and therefore deserved to be part of a policy benchmark. Our results indicated an increase in correlations between aggregated MSCI EAFE Small Cap and Standard Indexes in recent years. But the challenges in small cap investing have been different as the level of stock return dispersion has been larger than within the standard segment and decisions on country allocation had a bigger impact on portfolio performance within the small cap segment. We therefore conclude that an explicit allocation (or none at all) to international small cap would have provided additional diversification benefits during the period reviewed.

Publication: MSCI Barra Research Insights
Authors: NIELSEN Frank

Using monthly data from 1991 through 2004, we find evidence for dramatic convergence in properties of globally aggregated developed and emerging markets, greatly limiting the diversifying power of passive emerging markets investing. However, although equity returns in an 'average' emerging market follow the rest of the world more closely than a decade ago, emerging markets still constitute a dynamic and heterogeneous investment environment. We re-confirm that, given the importance of country selection, structuring the investment process along industries in a broad emerging markets universe may be premature. At the same time, there is a growing pool of emerging markets, where the importance of industry selection approaches that of country selection. Finally, we show that intra-market commonalities in equity returns offer significant diversification and return opportunities.

Publication: MSCI Barra Research Insights
Authors: NIELSEN Frank, PUCHKOV Anton V