October 10, 2011 11:59 AM

Systematic risk premia such as value, size or momentum can account for a substantial part of long-term institutional portfolio performance. Over the last few years, we have seen the development of many new indices that reflect systematic risk premia, opening up the possibility to capture risk premia through indexation. Yet, the institutional asset allocation process continues to focus more heavily on the selection of active managers rather than the selection and combination of risk premia, despite growing evidence that risk premia contribute more to the long-term performance of the portfolio. We argue that the focus of institutional asset allocation may shift from diversification across managers in multiple alpha mandates towards diversification across strategy betas in multiple index mandates. Allocations to risk premia strategies could be based on the expected risk and performance characteristics of different strategies. Substituting traditional mandates with risk premia strategies has historically reduced volatility and enhanced long-term risk adjusted performance of a sample institutional portfolio. Indexation can play a crucial role in redefining institutional portfolio construction by providing low cost easily accessible building blocks for strategic asset allocation.

In a recent research paper, we investigate the relative strength of industry versus country effects in the global equity markets during the sample period 1994-2010. In particular, we examine three market segments: (a) the world market, (b) emerging markets, and (c) developed Europe. We employ a factor-based approach to construct portfolios that capture the pure effect of each industry or country, and measure the relative strength of the two effects. For the world market, we find that industry and country effects are of comparable strength, although each dominates during different sub-periods. For emerging markets, we find that countries have dominated industries during the entire sample period. In developed Europe, by contrast, we find that industries have dominated countries since the introduction of the euro. We also investigate the size dependency of the relative strength of industry versus country effects. In particular, we find that in the small-cap segment, industry effects become weaker, whereas country effects retain their full strength. Read the paper.

If you would like to gain a greater understanding of current practices and emerging trends in the implementation of global equity allocation policies, take a look at Global Equity Allocation, three of our most popular papers on this topic compiled into one easy-to-read publication. Read this 3-in-1 publication.

Defined Contribution (DC) plans are rapidly becoming the primary retirement investment vehicle for a majority of employees across the US and other markets around the globe. Asset allocation for DC plans has to strike a balance between growth and protection assets over the savings lifecycle while protecting the long-term purchasing power of the nest egg. Due to the long duration of retirement investing and various risks associated with it, implementing the right asset allocation has become critical and challenging for DC plans.

The MSCI Value Weighted Indices aim to provide a passive representation of what value investors often refer to as the value premium or the mispricing of value stocks over time. Each MSCI Value Weighted Index re-weights the constituents of a standard MSCI parent index on four fundamental accounting variables: sales, earnings, cash earnings and book value — effectively tilting the weight of the resulting index towards stocks with value characteristics and relatively lower valuations. Click here to find out about MSCI’s current offering of 16 Value Weighted Indices, including the MSCI EAFE Value Weighted Index and the MSCI Emerging Markets Value Weighted Index.

January 23, 2011 11:18 PM

A few large asset owners have expressed a preference for an expanded opportunity set that goes beyond the traditional equity universe comprised of large, mid, and small capitalization companies. These investors have typically focused on the domestic equity market. In order to address these needs, MSCI recently launched the MSCI All Cap Indices, which aim to provide comprehensive yet accessible coverage of all capitalization segments.

The universe of micro cap securities represents a dynamic and evolving segment of the global equity landscape. Although micro cap securities may be perceived as more risky compared to their large cap counterparts, they have differentiated performance characteristics from other size segments and may provide an opportunity for portfolio diversification. The inclusion of the micro cap segment within MSCI All Cap Indices nearly doubles the investment opportunity set for investors and can help to address the evolving needs of global investors.

This paper examines the recent trend of adding leverage to fixed income allocations of multi-asset class portfolios of large asset owners. We show that the optimality of adding leverage from a volatility-reduction perspective depends on the correlations between bonds and equities, the relative volatility of bonds versus equities, and the weights of the two asset classes in the portfolio. If correlations between bonds and equities are negative, adding leverage could reduce the volatility of a portfolio, especially if the weight in fixed income assets is low, leverage is moderate, and bonds have a low risk relative to equities. Negative correlations also increase the likelihood that adding leverage will improve the risk-return profile of the portfolio. Asset owners considering adding leverage to their fixed income allocation can examine these influences to decide whether negative correlations between bonds and equities, a low ratio of bond to equity volatility, and higher risk-adjusted returns of bonds relative to equities are likely to persist. Read more here.

December 2, 2010 10:16 AM

In this popular webinar, we examined and discussed some critical aspects of the increased adoption of global equity investing by many large and leading institutional investors. Some topics:

• How can global equity investment mandates be structured?
• Are there considerations that are specific to different segments of the global equity universe?
• Characteristics and drivers of equity return in developed markets, emerging markets and global small cap, and contrast them with the performance of active manager mandates in each of these segments
• Discuss what may be emerging as the New Classic in structuring the implementation of a global equity policy

Today. MSCI introduced a series of broad market All Cap Indiceswith large cap to micro cap representationfor the Developed Markets countries and regions. MSCI is the first major index provider to offer such extended market indices for each of 24 developed markets countries. Flagship All Cap country indices include the MSCI USA All Cap, MSCI UK All Cap and MSCI Japan All Cap Indices. The All Cap Indices maintain methodological consistency with the MSCI Global Equity Indices, enabling global views and cross regional comparisons across all size and sector segments. Read more.