Stock price movements are influenced by various common factors that allow a portfolio’s risk forecast to be calculated and sliced into meaningful terms. Barra’s multi-factor risk models compute an asset’s sensitivities to intuitive factors, such as industry groups, market characteristics, and fundamental data.

GEM2 extends these concepts to the international equity markets, setting new standards for global equity multi-factor models. Through rigorous research and enhanced data management processes, MSCI has identified an enhanced set of fundamental factors that explain asset returns and uncover the risks associated with global equity portfolios. These common factors can be grouped into World, country, industry, style, and currency components.

Improved Accuracy

By using more frequent data, new style factors, and a new specific risk model, GEM2 provides improved global portfolio risk forecasts and better explanatory power of common sources of assets return.

More Responsive

GEM2 is more responsive to market trends. It uses a factor covariance matrix based on weekly data, adjusted for auto-correlation effects. Like other Barra Multiple-Horizon Models. GEM2 is available in short- and long-horizon versions (S/L), appropriate for investment horizons of 3 to 6 months and 6 months or more, respectively.

Intuitive Structure

The unique and intuitive structure of GEM2 accommodates the different investment processes used in developed and emerging markets. The GEM2 design incorporates a World factor and does not impose a hierarchy to country and industry factors.

Extensive Coverage

Leveraging the breadth and high quality of the MSCI Equity Indices database, the two GEM2 model versions are estimated on a universe of stocks covering developed and emerging markets. The model covers circa 45,000 stocks across 55 markets, including the GCC region and China A securities.

Key User Benefits

Delivered through Barra Portfolio Manager. Barra Aegis. or Models Direct flat files, GEM2 provides equity managers with an intuitive understanding of asset-level portfolio exposures and the sources of risk unique to international investing. By attributing risk and return to common fundamental factors of GEM2, such as countries, industries, styles (see below), and currencies, global equity managers can act to magnify or neutralize exposures according to their own judgment and different market insights.

Barra Global Equity Model — Styles

• Momentum
• Volatility
• Value
• Size
• Size Non-Linearity
• Growth
• Liquidity
• Financial Leverage

Uses of GEM2 (S/L) include the ability for equity fund managers to:

• Quantify ex-ante risk and separate its common-factor and asset-specific sources.
• Construct their optimally weighted international portfolios and run pre-trade scenarios.
• Evaluate risk-adjusted performance by identifying drivers of return and volatility.
• Compute predicted portfolio active risk versus a selected benchmark (tracking error).
• Create global portfolios that track indexes with fewer stocks and lower transaction costs.
• Run pre-trade ‘what if’ scenarios and marginal analysis to evaluate risk/return tradeoffs.
• Develop active ’tilt’ strategies using common factors.