“market insights through the lens of a risk model” by olivier d'assier, head of applied...

The Current Risk Landscape:

Axioma Insight Findings

QuantCon Singapore 2017

Olivier d’Assier

Managing Director, Applied Research APAC

Axioma Inc.

August 2017

2

Market Risk

3QuantCon Singapore 2017 – Copyright © 2017 Axioma

Major Benchmark Risk and Return: Risk estimates have ticked up slightly in many cases

Market Risk

Source: FTSE Russell, Axioma

-8%

-4%

0%

4%

8%

12%

16%

6%

8%

10%

12%

14%

Aug Oct Dec Feb Apr Jun Aug

Russell 1000

-8%

-4%

0%

4%

8%

12%

16%

20%

8%

10%

12%

14%

16%

18%


Russell 2000

-4%

0%

4%

8%

12%

7%

8%

9%

10%

11%

12%


TSX Composite

-4%

0%

4%

8%

12%

16%

20%

24%

8%

10%

12%

14%

16%

18%

20%

22%

24%

26%


FTSE Japan

-4%

0%

4%

8%

12%

16%

8%

10%

12%

14%

16%

18%

20%


FTSE 350

-8%

-4%

0%

4%

8%

12%

16%

20%

8%

10%

12%

14%

16%

18%

20%

22%


FTSE Dev Europe

-8%

-4%

0%

4%

8%

12%

16%

20%

6%

8%

10%

12%

14%

16%


FTSE Developed

-8%

-4%

0%

4%

8%

12%

16%

20%

24%

8%

10%

12%

14%

16%

18%

20%


FTSE Emerging

4

Market Risk

APxJP and Emerging

Markets saw risk increase

since June, driven by

higher risk in China

A year ago Japan was the

riskiest of the major

markets; it is now closer to

the low end

*FTSE Europe minus FTSE Eurobloc

**Portugal, Italy, Ireland, Greece and Spain from FTSE Eurobloc

Source: FTSE Russell, Standard & Poor's, China Securities Index Company, Ltd, Axioma Inc.

0

5

10

15

20

25

Ru

ssel

l 10

00

Ru

ssel

l 20

00

TSX

Co

mp

osi

te

FTSE

35

0

FTSE

Eu

rob

loc

FTSE

Eu

rop

e

No

n-E

uro

blo

c*

Euro

Cri

sis*

*

FTSE

Asi

a P

acif

ic

FTSE

Asi

a P

acif

ic e

x-Ja

pan

SP-A

SX 2

00

Ch

ina

CSI

30

0

FTSE

Jap

an

FTSE

Dev

elo

ped

FTSE

Em

erg

ing

FTSE

-All

Wo

rld

North America Europe Asia-Pacific Global

Short-Horizon Predicted Volatility

30-Sep-16 30-Dec-16 31-Mar-17 30-Jun-17 31-Aug-17

5Confidential – Not for Redistribution – Copyright © 2017 Axioma

Market Risk

Both developed and emerging markets risk levels are near 17 year lows

Short-Horizon Fundamental Risk


0%

10%

20%

30%

40%

50%

60%

FTSE Developed

0%

10%

20%

30%

40%

50%

60%

70%

80%

2000 2002 2004 2006 2008 2010 2012 2014 2016

FTSE Emerging

• DM SH risk bottomed in early August and is up about

1% from that point

• EM SH risk bottomed in 2014 but also remains low

• EM/DM hit a recent low in early July and has climbed

since then

0.50

0.70

0.90

1.10

1.30

1.50

1.70

1.90

Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17

Emerging/Developed


Market Risk

The Russell 1000 hit a 35-year low of just above 6% on August 9, 2017 and is now about 1.3% higher

Short-Horizon Fundamental Risk


0%

10%

20%

30%

40%

50%

60%

1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

7

Country and Currency Risk



All three major components of risk have ticked back

up since the mid-August low. Increases in currency

and country risk are slight.

Major Components of Short-Horizon Risk: FTSE Global Developed Index (USD base)


0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

5.0%

7.0%

9.0%

11.0%

13.0%

15.0%

17.0%

19.0%

21.0%

Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug

Short Horizon

Market-SH (Left Scale)

Country-SH (Right Scale)

Currency-SH (Right Scale)



Risk of individual currencies has

declined steadily throughout the

last 12 months. Only CHF saw

an increase during Q3

Source: Axioma

Developed Market Currency Volatility (vs. USD)

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

JPY NZD GBP SEK NOK AUD CHF EUR DKK CAD SGD

9/30/2016 3/31/2017 6/30/2017 8/31/2017

10


Currency Correlations had a recent peak in

August 2016, but have fallen since then, so even

with similar levels of volatility, currency

movements are less aligned with each other

The biggest correlation increase was between

GBP and JPY, the biggest decrease between

CHF and SEK

Source: Axioma

-0.2

-0.1

0.0

0.1

0.2

0.3

0.4

0.5

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Worldwide Model Median Factor Correlations

Style Country Industry Currency



Increased geopolitical risk has not seemed to show up in equity markets

Switzerland’s risk relative to other countries has been edging up all year

Source: Axioma

Developed Countries Extra-Market Risk Levels

0%

2%

4%

6%

8%

10%

12%

14%

16%

9/30/2016 3/31/2017 6/30/2017 8/31/2017



EM currency risk has continued to fall but market

risk has gone up

Major Components of Short-Horizon Risk: FTSE Emerging Index (USD base)


0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

12.0%

13.0%

14.0%

Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug

Short Horizon

Market-SH (Left)

Country-SH (Right)

Currency-SH (Right)



Only CNY has higher

volatility since the end of

June, but the level remains

quite low

Even KRW continues to see

its volatility drop

Source: Axioma

Emerging Market Currency Volatility (vs. USD)

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

ZAR BRL MXN RUB TRY KRW INR THB TWD CNY IDR

9/30/2016 3/31/2017 6/30/2017 8/31/2017



South Korea’s equity risk has fallen as well as its currency risk

Most other countries have seen risk fall as well

Source: Axioma

Emerging Countries Extra-Market Risk Levels

0%

4%

8%

12%

16%

20%

9/30/2016 3/31/2017 6/30/2017 8/31/2017

15

Correlations and Dispersion


Renewed geopolitical concerns have not driven correlations back up

Correlations and Dispersion

Source: FTSE Russell, Standard and Poor’s, Axioma

0

0.1

0.2

0.3

0.4

0.5

0.6

Jan

-15

Ap

r-1

5

Jul-

15

Oct

-15

Jan

-16

Ap

r-1

6

Jul-

16

Oct

-16

Jan

-17

Ap

r-1

7

Jul-

17

Russell 1000 Russell 2000

0

0.1

0.2

0.3

0.4

0.5

0.6

Jan

-15

Ap

r-1

5

Jul-

15

Oct

-15

Jan

-16

Ap

r-1

6

Jul-

16

Oct

-16

Jan

-17

Ap

r-1

7

Jul-

17

TSX FTSE 350

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

Jan

-15

Ap

r-1

5

Jul-

15

Oct

-15

Jan

-16

Ap

r-1

6

Jul-

16

Oct

-16

Jan

-17

Ap

r-1

7

Jul-

17

FTSE Dev Europe FTSE APxJP

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

Jan

-15

Ap

r-1

5

Jul-

15

Oct

-15

Jan

-16

Ap

r-1

6

Jul-

16

Oct

-16

Jan

-17

Ap

r-1

7

Jul-

17

FTSE Japan ASX 200

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

Jan

-15

Ap

r-1

5

Jul-

15

Oct

-15

Jan

-16

Ap

r-1

6

Jul-

16

Oct

-16

Jan

-17

Ap

r-1

7

Jul-

17

FTSE Developed FTSE Emerging


Average monthly asset-return dispersion

Correlation and Dispersion

Dispersion is the cross-sectional standard deviation

of monthly returns for stocks included in each

benchmark

Asset dispersion has increased in many markets,

even with volatility so low

Low correlations, high dispersion and high specific

risk are all theoretically good indicators for stock

pickers, as the reward to picking the right stocks is

higher

Source: FTSE Russell, Axioma.

0%

2%

4%

6%

8%

10%

12%

14%

Russell1000

Russell2000

FTSE 350 FTSEDeveloped

Europe

FTSE AsiaPacific

FTSE Japan CSI 300 ASX 200 FTSEDeveloped

FTSEEmerging

Average Monthly Asset Dispersion

Long-Term Q4 2016 Q1 2017 Q2 2017 Q3 2017

18

Style Factor and Sample Portfolio Performance


Style Factor Performance

Momentum Has Been Quite Strong So Far in Q3

Source: Axioma

US Canada UK EuropeAsia Pac ex-

Japan Japan Australia WorldwideEmerging Markets

July-August Return (Highest and Lowest region for each factor is highlighted)

Momentum 2.23% 1.78% 2.19% 2.06% 2.50% 1.52% 0.46% 2.43% 2.61%

Value 0.62% 0.77% -0.05% 0.80% 0.65% 0.84% -0.91% 0.56% 0.76%

Volatility -1.12% -2.59% 0.03% 0.83% -0.25% -0.15% 1.32% -0.30% 0.72%

Growth 0.42% 0.06% 0.61% 0.38% 0.34% 0.27% -0.39% 0.32% 0.10%

Exch Rate Sens -0.74% — -0.31% -0.09% 0.32% 0.49% 2.45% -0.07% 0.40%

Size 1.77% -0.14% 1.49% 0.93% 2.99% -1.61% -1.94% 1.78% 3.00%

Leverage 0.20% 1.27% 0.80% 0.36% -0.14% -0.34% -0.12% -0.04% -0.12%

Liquidity -0.16% 0.90% -0.16% 0.05% 0.94% -0.30% 0.19% -0.09% 0.93%

Dividend Yield -0.86% — — — — 0.32% 0.70% — —

Profitability 0.38% — — — — 0.38% 2.58% — —

Earnings Yield 0.33% — — — — 0.51% — — —

July-August Risk Adjusted Return

Momentum 2.17 1.17 2.51 2.10 4.69 1.12 0.27 3.33 5.25

Value 1.03 0.87 -0.08 1.16 1.00 1.05 -0.74 1.14 1.29

Volatility -0.74 -1.26 0.04 0.59 -0.24 -0.13 0.51 -0.25 0.75

Growth 0.81 0.09 1.22 0.69 0.78 0.49 -0.31 0.96 0.24

Exch Rate Sens -1.40 — -0.18 -0.14 0.91 0.68 1.91 -0.17 1.17

Size 0.84 -0.12 1.03 0.50 1.65 -0.91 -0.85 1.52 1.68

Leverage 0.45 1.91 1.33 1.02 -0.39 -0.64 -0.13 -0.16 -0.36

Liquidity -0.25 1.02 -0.25 0.08 1.16 -0.33 0.15 -0.18 1.24

Dividend Yield -0.74 — — — — 0.49 2.45 — —

Profitability 0.61 — — — — 0.63 2.25 — —

Earnings Yield 0.41 — — — — 0.87 — — —



Momentum Really Stands Out in APxJP

Source: Axioma

US Canada UK EuropeAsia Pac ex-

Japan Japan Australia WorldwideEmerging Markets

YTD Return (Highest and Lowest region for each factor is highlighted)

Momentum 3.89% 4.48% 4.37% 4.17% 7.06% 3.26% 3.15% 5.05% 5.99%

Value 1.17% -1.04% -1.48% 1.69% 4.15% -0.74% 0.50% 1.98% 4.07%

Volatility -3.91% -10.09% -2.89% -2.56% -6.71% 0.59% -5.22% -5.10% -4.33%

Growth -0.57% -0.54% 2.01% -3.00% 2.41% -2.05% -4.09% -0.25% 0.68%

Exch Rate Sens 0.43% — -1.60% -0.27% 1.66% 1.33% 0.13% -0.36% 2.03%

Size 5.30% -0.31% 1.88% -3.78% 8.15% -5.71% -4.21% 2.45% 6.09%

Leverage -0.24% 1.46% 0.45% 0.05% 1.41% -0.74% -0.61% 0.16% 1.10%

Liquidity 0.73% -1.63% 0.98% 0.68% 1.11% 0.12% -1.77% 0.13% 1.08%

Dividend Yield -1.24% — — — — 1.43% -0.85% — —

Profitability 0.20% — — — — 0.56% 4.78% — —

Earnings Yield 0.14% — — — — 0.55% — — —

YTD Risk Adjusted Return

Momentum 1.34 1.22 2.13 1.66 4.83 0.95 0.81 2.37 4.31

Value 0.66 -0.48 -0.93 1.04 2.54 -0.38 0.17 1.58 2.75

Volatility -0.94 -2.12 -1.31 -0.54 -2.15 0.20 -0.87 -1.28 -1.52

Growth -0.47 -0.28 1.71 -2.09 2.70 -1.73 -1.55 -0.32 0.72

Exch Rate Sens 0.33 — -0.32 -0.22 1.96 0.86 0.05 -0.42 2.52

Size 1.08 -0.11 0.48 -0.68 1.87 -1.09 -0.78 0.74 1.41

Leverage -0.22 0.86 0.35 0.06 1.87 -0.56 -0.33 0.26 1.52

Liquidity 0.48 -0.72 0.65 0.40 0.58 0.05 -0.63 0.11 0.60

Dividend Yield -1.01 — — — — 1.37 -0.42 — —

Profitability 0.12 — — — — 0.43 1.82 — —

Earnings Yield 0.06 — — — — 0.37 — — —



Returns have been consistent, and Momentum portfolios have fared well

-1.5

-0.5

0.5

1.5

2.5

3.5

4.5

5.5

6.5

7.5US AU CA GB JP

-1.5

-0.5

0.5

1.5

2.5

3.5

4.5

5.5

6.5

7.5AP EM EU WW

Momentum Returns / Active Portfolio Returns



Value-based factors have had mixed results...

-3

-2

-1

0

1

2

3

4

5 ValueUS AU CA GB JP

-3

-1

1

3

5 Value

AP EM EU WW

-1.1

-0.6

-0.1

0.4

0.9 Earnings Yield

US JP



In portfolios, Low Volatility did well

Volatility Returns

-11

-9

-7

-5

-3

-1

1

3

US AU CA

GB JP -11

-9

-7

-5

-3

-1

1

3

AP EM EU WW



Growth did well in several regions

Growth Returns

-1

-0.5

0

0.5

1

1.5

2

2.5

3 Growth

US AU CA GB JP-1

-0.5

0

0.5

1

1.5

2

2.5

3

AP EM EU WW



Profitability has done very well in Australia since Q2

Profitability Returns

-1

0

1

2

3

4

5

US AU JP

Multi-Asset Class Risk Review

26

27

Overview

Confidential - Copyright © 2017 Axioma

• Multi-asset class risk review• Government bond yields driven by (geo-)political risk, as focus temporarily shifts away from economy and central banks

• Euro rises to highest level for almost 3 years on the back of dollar weakness, strong economic performance and prospect of tighter monetary policy

• Pound recovers after reaching 8-year low versus euro despite sluggish Brexit negotiations

• Swiss franc and Japanese yen dominated by safe-haven buying

• Portfolio risk• Multi-asset class risk factor correlations over time

• Negative correlation between equity and FX

• Positive correlation between equity and FX

• Positive correlation between stocks and bonds

• Current portfolio risk

28

Government Yields

Government bond yields driven by geopolitical riskas focus shifted away from economy, European politics and central banks

Geopolitical tensionsFocus on conflict with North Korea and White

House politics

European political riskInvestors relaxed about upcoming German

vote after relief of French election

European Central BankMarkets await further signals on bond-

purchase tapering

UK GiltsBoE faces dilemma of high inflation and

economic uncertainty, while Brexit talks stall

French

election

Geopolitical

tensions

Trump impeachment?

ECB

conference

Tory lead

shrinks

UK

election ECB

conferenceUK election

announced

BoE turmoil

BoE backpedals

29

EUR / USD Exchange Rate and Risk

Euro rises to highest level for almost 3 yearsas focus shifted away from economy, European politics and central banks

Political riskRally triggered by relief after French election;

markets relaxed about German vote

Dollar weaknessBased on concerns about White House policy

and geopolitical tensions

Eurozone economyShows signs of strong performance

Monetary policyProspect of tighter monetary conditions

French

election

Trump

Impeachment?

ECB

conference

31

Currency Risk – Swiss Franc and Japanese Yen

CHF and JPY driven by safe-haven buyingbut SNB dampens markets with intervention warning

CHF/USD USD/JPY

French

election

Trump

Impeachment?

ECB

conference

SNB

warns

markets

(Geo-)political

turmoil

Trump

Impeachment?

Geopolitical

tensions

32

Multi-Asset Class Risk Summary


• US Treasury yields driven by geopolitical tensions (North Korea) and concerns about current administration’s ability to implement policies

• European government bonds rocked by central bank comments

• Euro rose strongly on relief after French election, political uncertainty in the US, strong economic performance and prospect of tighter monetary policy

• Pound once again driven by Bank of England and Brexit negotiations

• Swiss franc profited from safe-haven buying, but was dampened by SNB concerns

• Yen provides diversification versus USD and EUR due to negative correlation

Portfolio Risk

33

34

Portfolio Risk Overview


• Multi-asset class risk factor correlations over time• Major factor correlations change as focus shifts from economy to political risk and inflation concerns subside

• Negative correlation between equity and FX (early March)• Focus on US economy

• Non-US equity gains offset by FX movements

• Positive correlation between equity and FX (end of April) • Focus on political events in Europe

• Global equity holdings seemed more correlated, increasing risk contribution

• Positive correlation between stocks and bonds (July)• Inflation concerns subside, while economic outlook remains strong

• Diversification benefit reduced significantly

• Current portfolio risk• Dominated by geopolitical concerns (negative correlation of equity with FX and interest rate returns)

• Contribution from gold increased significantly after strong rally

Risk Type FX Equity InflationInterest

RateIssuer Credit Vega Comdty

FX 1.00 -0.40 -0.29 0.55 -0.35 -0.51 0.30

Equity -0.40 1.00 0.32 -0.29 0.52 0.39 -0.06

Inflation -0.29 0.32 1.00 -0.28 0.32 0.24 0.06

Interest Rate 0.55 -0.29 -0.28 1.00 -0.65 -0.91 0.35

Issuer Credit -0.35 0.52 0.32 -0.65 1.00 0.59 -0.03

Vega -0.51 0.39 0.24 -0.91 0.59 1.00 -0.35

Commodity 0.30 -0.06 0.06 0.35 -0.03 -0.35 1.00



FX 1.00 0.32 -0.04 0.09 0.50 -0.01 0.56

Equity 0.32 1.00 -0.12 0.34 0.23 -0.13 0.49

Inflation -0.04 -0.12 1.00 -0.48 0.29 0.37 0.28

Interest Rate 0.09 0.34 -0.48 1.00 -0.36 -0.89 -0.05

Issuer Credit 0.50 0.23 0.29 -0.36 1.00 0.46 0.31

Vega -0.01 -0.13 0.37 -0.89 0.46 1.00 0.24

Commodity 0.56 0.49 0.28 -0.05 0.31 0.24 1.00

35

Multi-Asset Class Portfolio Risk Factor Correlations


July 28, 2017 Sep. 1, 2017

March 3, 2017 April 28, 2017



FX 1.00 -0.49 -0.03 0.53 -0.35 -0.34 0.74

Equity -0.49 1.00 -0.01 -0.46 0.58 0.41 -0.16

Inflation -0.03 -0.01 1.00 -0.59 0.03 0.52 -0.25

Interest Rate 0.53 -0.46 -0.59 1.00 -0.60 -0.62 0.64

Issuer Credit -0.35 0.58 0.03 -0.60 1.00 0.35 -0.31

Vega -0.34 0.41 0.52 -0.62 0.35 1.00 -0.45

Commodity 0.74 -0.16 -0.25 0.64 -0.31 -0.45 1.00



FX 1.00 0.04 -0.07 0.39 -0.18 -0.17 0.47

Equity 0.04 1.00 -0.06 -0.17 0.44 0.11 0.15

Inflation -0.07 -0.06 1.00 -0.64 -0.15 0.59 -0.51

Interest Rate 0.39 -0.17 -0.64 1.00 -0.33 -0.77 0.68

Issuer Credit -0.18 0.44 -0.15 -0.33 1.00 0.08 0.19

Vega -0.17 0.11 0.59 -0.77 0.08 1.00 -0.78

Commodity 0.47 0.15 -0.51 0.68 0.19 -0.78 1.00



FX 1.00 0.16 -0.36 -0.10 0.20 -0.11 -0.21

Equity 0.16 1.00 -0.09 -0.73 0.84 0.79 -0.40

Inflation -0.36 -0.09 1.00 0.02 -0.11 0.02 0.33

Interest Rate -0.10 -0.73 0.02 1.00 -0.77 -0.88 0.68

Issuer Credit 0.20 0.84 -0.11 -0.77 1.00 0.77 -0.49

Vega -0.11 0.79 0.02 -0.88 0.77 1.00 -0.50

Commodity -0.21 -0.40 0.33 0.68 -0.49 -0.50 1.00

8.11%

4.02%

-4.09%

36

Current Portfolio Risk (Sep. 1, 2017)

Less negative correlation between stocks and gold led to fivefold increase of risk contribution from gold future holdings

Asset Class weights and risk contributions Weighted risk contributions by Risk Type

37

Questions?

“market insights through the lens of a risk model” by olivier d'assier, head of applied...

Economy & Finance