Axioma Risk Monitor
Equity edition

Returns of developed countries pop to the top; Momentum and Growth go hand in hand; Small rebound in US Profitability, but beware of long-only constraints




Returns of developed countries pop to the top


The stock rally in recent weeks turned the six-month return of most countries positive, with major developed countries among the top performers. The situation flipped from the beginning of the year, when most countries had recorded six-month losses and emerging markets were outperforming their developed counterparts. Sweden and the Netherlands posted the highest six-month returns—over 20%—denominated in US dollars. France, Australia and the US followed closely, while Japan recorded the lowest six-month return among major developed markets. The US and Japan were the riskiest developed countries, with each country’s volatility at 15%, as measured by Axioma’s short-horizon Worldwide fundamental model and based on stocks in our worldwide universe. Singapore remained the least volatile developed country.

See graph from the Equity Risk Monitors as of 27 June 2019:


Momentum and Growth go hand in hand


US Medium-Term Momentum reported the highest positive correlation with the Growth style factor (of 0.38), among all style factor pair correlations in Axioma’s medium-horizon fundamental US model. This suggests that Growth stocks showed momentum and Momentum stocks offered growth. The only other factors showing positive correlations with Momentum (albeit of smaller magnitude) were Size (0.14) and MidCap (0.06). Momentum decoupled from all other style factors in the model, recording negative correlations will all other style factors, most notably Earnings Yield and Value, for which correlations were -0.34 and -0.33, respectively, last week.

See graph from the US Equity Risk Monitor as of 27 June 2019:



Small rebound in US Profitability, but beware of long-only constraints


US Profitability saw a rebound over the past month, but not large enough to offset prior losses. The Profitability style factor in Axioma’s US medium-horizon fundamental model posted a positive return of close to 1% at the one-month horizon. But the six-month cumulative return was still highly negative. At -1.77%, Profitability reported the third-largest negative six-month return after Volatility (which is expected to be negative) and Value.

For investors having a long-only mandate, the returns of a portfolio tilting on Profitability may have been even worse. More details on the effects of a long-only constraint on style factor portfolios can be found in our fresh-off-the-press white paper What Is a Factor? Part 2: The Impact of Long-Only Constraint and blog post What Is a Factor? The Impact of the Long-Only Constraint.

See graph from the US Equity Risk Monitor as of 27 June 2019:



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Date: July 10, 2019
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On the Blog

What Is a Factor? The Impact of the Long-Only Constraint

In a follow-up to a recent paper, we drill down into the impact of a long-only constraint.

Fixed Income factors: Why do we build credit curves?

We take a look at how we build credit curves to serve as a foundation for fixed income models and the advantages they have over some other methodologies.

Factor Performance Continued to Fall Short in Q2—and Constraints Only Made Things Worse

Momentum’s recovery in Q2 was a welcome event for many factor-based investors. Unfortunately, that recovery probably wasn’t enough to pull quant managers out of the hole.

The Truth About Fixed Income Factors

Traditional fixed income models are not well placed to live up to more advanced demands. So what to do?

Latest Research

What Is a Factor? Part 2: The Impact of the Long-Only Constraint

In this paper we extend our analysis of how the construction of a factor portfolio, even using the same underlying factor definition, can have substantial impact on the returns the factor generates.

The Stock-Bond Correlation: Where to from here?

In this paper, we review the historical relation between share and bond prices and relate it to recent developments. We examine the impact on portfolio risk, explore alternatives for diversification options and provide an outlook on a potential future relationship.

Introducing Axioma’s ROOF™ Score Methodology

This paper provides an attempt to design a measure that quantifies the current balance between risk-tolerant and risk-averse investors in the equity markets.

In the News

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Axioma Introduces Next Generation Fixed Income and Multi-Asset Models in Axioma Risk™

These new, bottom-up risk models are constructed using Axioma’s proprietary methodology for modeling global fixed income returns across both developed and emerging markets.

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