Axioma Risk Monitor
Equity edition

Russell Recon Leads to Temporary Jump in Risk; Info Tech Sees a Substantial Increase in Weight and Index Risk Contribution; Growth Factor Comes to Life in Most Regions




Russell Recon Leads to Temporary Jump in Risk


Last week’s reconstitution of the Russell 2000 index led to a brief increase in the index’s short-horizon fundamental forecast, according to Axioma’s US Small Cap model. In contrast, there was almost no change in the comparable Russell 1000 risk estimate. The increase in the Russell 2000—which was related to the rebalance—seems to have been short-lived, however, as the risk forecast began to back down the next day. The decomposition of the change in risk at the stock level for the week ended July 3 attributed most of the change to a sudden increase in correlation. The drop in correlation is not surprising, as many investors trade into the new index in advance of the official rebalance date, thereby causing stocks to move together more than they otherwise might. This also suggests the jump is temporary (all other things being equal), as prices of the newly minted Russell 2000 names settle back down to reflecting company characteristics.

See graph and table from US Small Cap Risk Monitor as of 3 July, 2019:


Info Tech Sees a Substantial Increase in Weight and Index Risk Contribution


The index weight and contribution to risk of most sectors in the FTSE Developed index have remained remarkably steady over the past six months, even as benchmark risk has dropped by more than a third. The major exception is Information Technology, which saw an increase in both weight and, proportionally, risk contribution. The increases in the Global Developed index mirror results in the Russell 1000 and FTSE Japan, but not most other regions. In the Russell 2000, both weight and risk contribution fell over this period. Asia ex-Japan saw an increase in percent of index risk, while Tech’s weight remained steady, and other places saw little change in either. The heavy weight of Technology in the US (more than 20% of the Russell 1000 and considerably more than that of another other sector), along with its relative riskiness, may explain why the US remains one of the riskiest of the markets we track closely.

See graph from Global Developed Markets Risk Monitor as of 3 July, 2019:



Growth Factor Comes to Life in Most Regions


The Growth factor has had a good few months in a number of regions. While it does not have the highest magnitude of return among the multitude of factors across our regional and single-country models, it is one of the few to have experienced unusually high risk-adjusted returns in Europe, Emerging Markets, and in the Worldwide model. Its positive return in each of those regions was more than two standard deviations above its (negative) long-term average. It has also been strong in the US and Asia Pacific, although not enough to fall outside the “normal” range of returns. It only produced negative returns in Canada, Australia and Japan. One potential explanation for the factor’s strength is that growth is slowing down in many parts of the world. When economic growth is strong, and everything is growing, this factor may not sort out winners from losers. But when growth slows, those stocks that continue to exhibit growth become relatively more attractive as investors look for where they can get growth into their portfolios.

Note: The chart below does not appear in the risk monitors, which are produced by region, but is available on request. In the regional monitors Growth’s return is shown relative to other factors for that regional model.



Stay Connected


Webinar | Axioma Insight™ Q2 2019 Risk Review

Date: July 10, 2019
Time: 11:00 AM ET / 4:00 PM BST

In this webinar, Melissa Brown, Managing Director of Applied Research, provides illuminating insights into key drivers of risk and the resulting implications for portfolio managers, risk managers, investment strategists and all those wrestling with the uncertainties facing today’s markets.

Register here.


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

The impact of potential US tariffs on the German auto sector

Axioma's Christoph Schon speaks to BBC World News about the trade relationship between the US and the EU, and potential US tariffs on European car exports.

A recession in Germany could mean economic damage for these countries

The German economy relies heavily on its car manufacturers. A slowdown could impact jobs in Germany, but also in the rest of Europe.

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.

Axioma Risk Monitor

A Report on Market Risk

The Axioma Risk Monitor reports use Axioma’s solutions to bring you insights on trends in market and portfolio risk. You can subscribe to both the multi-asset class and equity edition here.


Note: The recent decision by FTSE to add China A Stock Connect stocks to its indices had little effect on their risk, since the A shares were added initially with a small (25%) weight. However, the addition of so many names has had an impact on the average daily trading volume which accounts for the new names at full weight. That is the source of the huge jump in chart 25 in some of the risk monitors.

MiFID II Statement: Axioma believes that the research we provide falls outside the purview of the MiFID II regulations, which are intended to provide transactional transparency and unbundle research and trading costs. Axioma does not provide recommendation research, is not a regulated company and our business is not transactional. As such, we do not believe that we are subject to MiFID II regulation. For more information, please click here: MiFID II Statement.

Axioma  17 State Street, 2700    New York  NY  10004  United States