How a multi-hundred billion dollar global fundamental investment portfolio boosted return by 29.6% and reduced volatility factor drag by 53.6%I hope you all have had a very gratifying summer and your September is off to a superb start! And for those of you affected by Hurricanes Harvey and Irma, we hope that you and your families were able to withstand the storms in safety.
Following our partnership with Axioma (a leading provider of market risk and portfolio management solutions), our team has been hard at work integrating Axioma’s global factor models into the Omega Point visualization platform. The unified Axioma-Omega Point solution enables full portfolio risk decomposition through factor, industry and asset-specific analytics, with integrated historical factor returns for full factor-based performance attribution.
Omega Point makes it intuitively simple for fundamental portfolio managers to improve realized returns by mitigating unwanted systematic risk and emphasizing stock-specific alpha, without any changes to existing strategies or workflows. We will be showcasing the joint Omega Point and Axioma offering at several industry events this fall, including Learn 2 Quant in Hong Kong on September 14 and London on October 11.
The power of factor analysis tools: now the proof is in the pudding
As an increasing number of discretionary portfolio managers are now discovering, using quantitative tools such as factor risk models and optimizers are giving fundamental bottom-up stock pickers a comparative advantage. Leveraging these tools helps them identify and lessen potential issues in their portfolio, while still maintaining their investment views and goals. To demonstrate the extraordinary results traditional portfolio managers can achieve by using a “quantamental” approach in fundamental investing, we are thrilled to announce the publication of a must-read case study we conducted with Axioma.
Unravelling Risk & Alpha: Applying Factor Insights to Fundamentally Managed Portfolios shows how a multi-hundred billion dollar global fundamental investment portfolio boosted return by 29.6% and reduced volatility factor drag by 53.6% with our easy-to-use quantitative tools.
In the study, we take a step-by-step approach using the Omega Point platform’s built-in visualization features for a deep dive into the portfolio, which had been marginally underperforming its FTSE All-World Index benchmark across the timeframe of 2007-2015.
Using Axioma’s WW4 risk model, myriad insights emerged highlighting specific factors that were inadvertently increasing risk and dragging down returns. We then applied various optimization criteria to rebalance the portfolio, increase alpha and outperform its benchmark. The new portfolio looks almost like the old one, but performs much better, thanks to a constrained portfolio rebalancing resulting in:
- Decrease in predicted active risk
- Risk shifts from factor to stock-specific
- Substantially reduced factor drag
- Increased alpha
- Improvement in almost all sources of return
Overall, the changes allowed for the creation of a portfolio that beat its benchmark rather than marginally underperforming.
You can download the full case study here.
Not all fundamental managers are not focused on quantitative factors, but their strategies inevitably take positions that are aligned with various risk factors and guided by a variety of risk protocols. For example, there’s typically a limit on the percentage of the portfolio that a portfolio manager can put into one stock. Some managers may have minimum or maximum sector weightings, or rules about geographic diversification. The purpose of these rules is to avoid exposure to unexpected risk.
Quantitative factor models provide another perspective on mitigating unwanted systematic risk. Tools built around factor analysis can ensure that unwanted risk factors are lessened in order to put the emphasis of the portfolio on the stock-specific alpha being generated by the manager.
Understanding your portfolio’s active factor risk is the first step. The next step is deciding which of those risks are purposeful and which need to be controlled. If investors are certain that they are great bottom-up stock-pickers, then their process should ensure their portfolio’s active returns are driven by alpha rather than factor-driven returns.
Ready to jump in?
Now that you’ve seen the power of quantitative tools such as factor risk models and optimizers, please don’t be intimidated by the thought of trying to use them yourself!
Omega Point provides easy-to-use software that integrates with your portfolio and automatically performs customized and scalable factor analysis. In minutes, you’ll be able to discover, analyze and manage your portfolio factor risk using our intuitive visualization platform. And with seamless one-stop access to Axioma’s extensive global factor data sets, more options now exist to boost portfolio performance irrespective of strategy.
Please contact us here to learn more about this innovative platform — including our limited-time free trial.