the current risk landscape - cfa montreal€¦ · • equity risk fell from february through...

The Current Risk Landscape

Axioma Insight Findings

Melissa R. Brown, CFA

About Axioma

2

• Axioma provides portfolio construction, risk modeling and performance attribution tools to asset managers and asset owners

• We use risk data to assess and explain the environment in which managers are investing

• Today we will discuss some of the findings and insights about the market landscape from our risk models

• First, a quick review of the nature of the risk models

© Copyright, Axioma, Inc. 2015. All rights reserved

Risk

Risk (Financial)

Expected volatility (of a market, portfolio, etc.) over a predefined investment horizon

Risk Management

“The process of identification, analysis and either acceptance or mitigation of uncertainty in investment decision-making”

Investopedia

© Copyright, Axioma, Inc. 2015. All rights reserved 3

Axioma Risk Models

• Axioma’s standard product includes 4 risk models per region

• By horizon

– Short horizon: 1 to 2 month forecast

– Medium horizon: 3 to 6 month forecast

• By factor structure

– Fundamental: uses predefined set of factors, such as country, industry, currency, style

– Statistical: “lets the data speak”

• Models are provided for 14 countries/regions/global

• In addition, there is a macroeconomic model for the US

• Underlying each model is a set of volatilities and correlations, so we can “peel the onion” and see what is driving market risk

– Major components: Market, Industry, Style, Country, Currency, Stock Specific

© Copyright, Axioma, Inc. 2015. All rights reserved4

2014 Review


• Equity risk fell from February through mid-September 2014 in most regions, but then staged a sudden and substantial turnaround Risk was up across the board The biggest increases were in China and Japan

• Aggregate country, currency, style, industry and market risk all rose

• Almost all countries saw big volatility increases The differences between countries’ risk grew larger Canada saw the biggest increase of any developed country

• Most individual currencies saw risk increase as well

• Correlations remained low, but increased from recent bottoms Higher asset correlations had a large impact on risk

• Emerging market risk remained low relative to developed market

• US small cap risk relative to large-cap peaked in July, then tumbled

• Energy risk soared, even as weight fell

• The increase in risk has abated, but has not reversed appreciably Currency risk continued to increase Market and country risk have flattened

• Risk up sharply in most developed currencies, mixed for emerging CAD increase relative to USD second only to CHF

• Small-cap relative to large-cap risk still low

• Emerging relative to developed still low

• Energy risk remains elevated, although it has leveled off

• Asset dispersion has increased – good for stock pickers!

• Canada’s factor performance has been different from other markets

• Understanding the changing components of risk is quite important for asset managers!

2015 Themes


*FTSE Europe minus FTSE Eurobloc**FTSE Developed Europe minus FTSE Eurobloc***Portugal, Italy, Ireland, Greece and Spain from FTSE EuroblocSource: FTSE, Russell Investments, Standard & Poor's, China Securities Index Company, Ltd, Axioma Inc.

Risk, Up Sharply in Q4, Down Slightly YTD


7

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North America Europe Asia-Pacific Global

Short-Horizon Predicted Volatility

31-Dec-13




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30-Sep-14 31-Dec-13




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31-Dec-14 30-Sep-14 31-Dec-13




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27-Feb-15 31-Dec-14 30-Sep-14 31-Dec-13

Source: FTSE, Russell Investments, Standard & Poor’s, China Securities Index Co., Axioma Inc.

The Increase Has Leveled Off – But In General Hasn’t Reversed


11

Short-Horizon Fundamental Risk Forecast

7%

9%

11%

13%

15%

17%

19%

21%

Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec JanRussell 1000 Russell 2000

FTSE Developed Europe TSX Composite

8%

13%

18%

23%

28%

33%

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

FTSE Japan CSI 300 FTSE APxJP ASX 200

8%

9%

10%

11%

12%

13%

14%

15%

16%

17%

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

FTSE Global Developed FTSE Emerging

Small Cap Risk Has Stayed Unusually Low Relative to Large Cap


12Source: Russell Investments, Axioma Inc.

0.9

1

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

2007 2008 2009 2010 2011 2012 2013 2014 2015

Russell 2000 vs. Russell 1000 Risk


Developed Markets: SH Currency Risk Doubled From September to December

13Source: FTSE, Axioma, Inc.

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

12.0%

13.0%

Jan Mar May Jul Sep Nov Jan

Short Horizon

Market-SH (Left)

Country-SH (Right)

Currency-SH (Right)

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

12.0%


Medium Horizon

Market-MH (Left)

Country-MH (Right)

Currency-MH (Right)

Currency Risk Up Across-the-Board So Far This YearCAD Increase Quite High


14Source: Axioma, Inc.

Developed Market Currency Volatility (vs. USD)

As of March 3, 2015

-30%

-20%

-10%

0%

10%

20%

30%

40%

CHF CAD NOK GBP SEK AUD NZD DKK EUR SGD JPY

Change in Risk

Q1 2015 To Date

2014

0%

2%

4%

6%

8%

10%

12%

CHF CAD NOK GBP SEK AUD NZD DKK EUR SGD JPY

Risk Level

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

Canada’s Country Risk Remains Relatively Low



Extra-Market Country Risk Level: Developed

As of March 3, 2015

Many Countries Have Seen Risk SoarCanada Has Had The Biggest Increase of All



Change in Extra-Market Country Volatility: Developed

Through March 3, 2015

-40%

-20%

0%

20%

40%

60%

80%

100%

Q1 2015 To Date 2014

-10%

90%

190%

290%

Switzerland

Bonds Haven’t Reacted to Equity UncertaintyPotential central bank action is probably a bigger force


Source: Markit, Axioma, Inc.

-1%

0%

1%

2%

3%

4%

5%

6%

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

Sovereign Yields

US Germany UK Netherlands France

Ireland Italy Spain Portugal Canada

CDS Spreads Point to Higher Investor Confidence



0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0


Germany France Netherlands Spain Ireland Italy Portugal UK

EM Market, Country and Currency Risk Have Risen As Well…but less than DM

© Copyright, Axioma, Inc. 2015. All rights reserved 19Source: FTSE, Axioma, Inc.

FTSE Emerging Markets Index

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

12.0%

13.0%


Short Horizon

Market-SH (Left)Country-SH (Right)Currency-SH (Right)

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

12.0%


Medium Horizon

Market-MH (Left)Country-MH (Right)Currency-MH (Right)

0%

5%

10%

15%

20%

25%

30%

35%

40%

RUB BRL ZAR TRY MXN IDR INR THB TWD CNY

As of March 3, 2015

Big Difference in Currency Volatility Changes Last Year


Source: Axioma, Inc.

Change in Emerging Currency Volatility (vs. USD)

-60%

-40%

-20%

0%

20%

40%

60%

ZAR TRY CNY MXN INR BRL IDR THB

Q1 2015

2014

-30%

170%

370%

570%

770%

OMR UAH RUB

Russia and Oman are the Most Volatile



Extra-Market Country Risk: Emerging

As of March 3, 2015

0%

5%

10%

15%

20%

25%

30%

35%

Many Reversals in Country Volatility from Last Year



Change in Extra-Market Country Volatility: Emerging

Through March 3, 2015

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

140%

2014

Q1 2015

-20%

80%

180%

280%

Oman Ukraine

Most EM Sovereigns Have Been Relatively Flat…but Russia stands out



0%

2%

4%

6%

8%

10%

12%

14%

16%

18%


Sovereign Yields

China Malaysia Mexico Brazil Indonesia

Russia South Africa India Turkey


Russia Stands Out on CDS as Well


0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0


Brazil Malaysia China Indonesia South Africa Mexico Russia

EM Risk Still Low Relative to DM


25Source: FTSE, Axioma Inc.

Emerging vs. Developed Medium-Horizon Risk

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1.9

2007 2008 2009 2010 2011 2012 2013 2014 2015

EM Risk/Reward


-20%

-10%

0%

10%

20%

30%

40%

0% 10% 20% 30% 40%

September 30, 2014

Developed Emerging

-20%

-10%

0%

10%

20%

30%

40%

0% 10% 20% 30% 40%

February 27, 2015

Developed Emerging

Currency Correlations Have Trended Down Since Late 2012



-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

Worldwide Model Median Factor Correlations

Style Country Industry Currency

0

10

20

30

40

50

60

70

80

90

100

2007 2008 2009 2010 2011 2012 2013 2014 2015

VIX VIX Average VSTOXX VSTOXX Average

VIX and VSTOXX:


Average since 1999Source: Yahoo! Finance, STOXX, Axioma Inc.

0

5

10

15

20

25

30

35

Jan Feb Mar

Source: FTSE, Russell Investments, China Securities Index Company Ltd., Axioma Inc.

Although Still Low, Asset Correlations Increased in Q4


Median 60-day realized asset-asset correlation

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

2000 2002 2004 2006 2008 2010 2012 2014

Russell 1000 Russell 2000 TSX Composite

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

2000 2002 2004 2006 2008 2010 2012 2014

FTSE Developed Europe FTSE Asia ex-Japan

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

2000 2002 2004 2006 2008 2010 2012 2014

FTSE Japan CSI 300

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

2000 2002 2004 2006 2008 2010 2012 2014

FTSE Developed FTSE Emerging

Source: FTSE, Russell Investments, Standard & Poor's, China

Securities Index Company, Ltd, Axioma Inc.

Asset Dispersion Is Has RisenStyle Dispersion Generally Did Not


0%

1%

1%

2%

2%

3%

3%

US Europe Asia ex-Japan Japan China Australia Worldwide Emerging

Average Style Factor Dispersion

Jan-Feb 2015 Q4 2014 2014 Long-Term

0%

2%

4%

6%

8%

10%

12%

14%

16%

Russell 1000 Russell 2000 TSXComposite

FTSEDeveloped

Europe

FTSE Asia ex-Japan

FTSE Japan CSI 300 ASX 200 FTSEDeveloped

FTSEEmerging

Average Monthly Asset Dispersion

Jan-Feb 2015 Q4 2014 2014 Long-Term

Source: Axioma Inc.

Factor Performance: Momentum Stumbled Badly in FebruaryValue Has Fallen Far Short in Canada, Especially in Q4


-4

-2

0

2

4

6

8

10

Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb

Momentum

US EU AP JP AU CA

-8

-6

-4

-2

0

2

4

6


Value

US EU AP JP AU CA

Source: Axioma Inc.

Factor Performance: Growth and Leverage Stood out in Canada


-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0


Leverage

US EU AP JP AU CA

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0


Growth

US EU AP JP AU CA

Source: Axioma Inc.

Factor Performance: Low Volatility Has Worked Well Globally; Liquidity Had A Wild Ride in Canada


-14

-12

-10

-8

-6

-4

-2

0

2


Volatility

US EU AP JP AU CA

-5

-4

-3

-2

-1

0

1

2

3


Liquidity

US EU AP JP AU CA

ENERGY


Energy’s Risk Has Risen Substantially Since May


Source: Federal Reserve Bank of St. Louis, Axioma, Inc.

0

20

40

60

80

100

120

140

160

0.0

0.5

1.0

1.5

2.0

2.5

3.0

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Risk: Energy/Russell 1000 (Left)

WTI Oil Price (Right)

Energy’s % of Risk Continued to Exceed Its Benchmark Weight


36Source: Russell Investments, Axioma, Inc.

7.0%

7.5%

8.0%

8.5%

9.0%

9.5%

10.0%

10.5%

11.0%


Russell 1000

Weight Percent of Risk

Energy Weight Vs. Percent of Risk

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

Jan Mar May Jul Sep Nov Jan Mar

TSX Composite:Energy Weight Vs. Percent of Risk

Weight Percent of Risk

Risk for Energy-Related Industries In Most Regions Has Leveled Off

© Copyright, Axioma, Inc. 2015. All rights reserved37Source: Axioma, Inc.

Oil-Related Industry Extra-Market Risk

0%

5%

10%

15%

20%

25%

30%

35%


US:Energy Equipment & Services

US:Oil, Gas & Consumable Fuels

CA:Energy

EU:Energy

0%

5%

10%

15%

20%

25%

30%

35%


AP:EnergyJP:EnergyAU:EnergyCN:Energy ex Coal

Oil and Energy Have Seen The Biggest Changes In Correlations


Change in US3 MH Factor Correlation, May 31, 2014 – March 3, 2015

Daily Risk Monitors

• We provide daily risk monitors for

– US

– Canada

– Europe

– Asia-Pacific ex-Japan

– Japan

– China

– Australia

– Taiwan

– Emerging Markets

– Global Developed

• Look on www.axioma.com for daily updates of this data

• Sign up to get a weekly reminder about the reports


http://www.axioma.com/

Summary: Major Findings

• Risk rose last year, in some cases doubling from low levels reached last fall.

– Markets have been calmer this year, and risk changes have been much smaller

• Increases in volatility were driven by a number of factors

– Will economies slow in in Europe, China, Japan?

– Will euro be broken up?

– Will oil continue to tumble?

– Will we see deflation, especially in Europe?

– Etc.

• For a global benchmark market, country and currency risk all rose last year, and remain elevated

– The stronger US dollar meant volatility of most currencies relative to USD increased sharply in Q4, and into this year

– Despite the widespread increases currency correlations actually fell

– Individual country volatility changes were mixed but some rose substantially

• Momentum had some very difficult days in February, especially in the US, Canada and Europe.

– Returns have settled down since then.

– Canada has seen streaks of unusually good or bad performance (sometimes both) in Value, Leverage, Growth, and Liquidity


Summary: Major Findings

• In the US, after a peak in relative volatility in July, small-cap stocks have fallen to low volatility levels relative to large-cap.

• Emerging market risk stayed low relative to developed.

• Canada’s risk has risen quite a bit relative to that in other markets

• Energy stock risk experienced a sudden and steep increase, and energy correlations with other factors have changed substantially.

• Bond yields and CDS spreads generally remained stable or fell


Summary: Implications for Portfolio Managers

• 2014 was a tough year for active management. A low-risk environment may have truncated opportunities.

• Flip-flopping factor performance meant a difficult environment for factor-based managers as well.

• While volatility has gone up since the fall, driving risk up, the impact of asset correlations has also been surprisingly high in some regions.

• Correlations (especially currency and style factor) have changed substantially in many markets.

• Factor volatility rose in many cases (but remains low relative to longer history).

• Changes in the components of risk (correlations, volatility, and specific factors like energy, emerging vs. developed, and currency markets) suggest it may be a good time for portfolio managers to reevaluate their portfolios’ sources of risk.

• Increasing differentiation in risk – and potential reward – may be good for active managers who are able to effectively sort the winners from the losers. Scaling bets appropriately, as always, will be key.


For more information on any of these slides or any of Axioma’sother offerings, please contact your account representative or [email protected]

I can also be reached at [email protected] or 212-991-4507


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the current risk landscape - cfa montreal€¦ · • equity risk fell from february through...

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