MSCI: Insights For Times Like This

Mark Carver
Global Head of Equity Factors
MSCI

MSCI has been a leading voice in factor investing for years. Here, Mark Carver, MSCI’s global head of equity factors, discusses year-to-date factor performance and how investors can use MSCI’s data to analyze their portfolios.

Would you give me an overview about how the different factors have performed so far this year?
First, I like to say that every equity investor is a factor investor. We see this through their exposures to familiar styles like value or quality, but even if you don’t think of yourself that way, we can agree that looking at portfolios through the lens of factors provides deeper intelligence and illumination into the drivers of your risk and return. Knowing your exposures provides the investor more control in managing risks, which is always important, but especially in moments of crisis like now.

Performance this year has been really fascinating, and factors have shown resilience and performed mostly as investors might expect. To date, MSCI World, which represents the developed markets, is down 14.3%, but 2020 started out quite strongly, as we all know. Then we saw markets collapse, largely due to concerns with the spread of the virus, and what that spread meant for economic production. The result was that defensive factors have had strong relative performance, especially quality but also minimum volatility, particularly during the drawdown starting in mid-February, and momentum has also posted positive relative performance. On the other hand, the procyclical factors like value and yield have been relatively weak.

More specifically, as of May 1, MSCI World Momentum, Quality and Minimum Volatility are 6.9%, 6.7% and about 4%, respectively, ahead of MSCI World year to date. On the opposite end, World Enhanced Value trails MSCI World by 9.2%.*

The surprise to many is momentum, so we’re hearing a lot of questions about that factor, both from index and analytics clients. Some of the reasons for the strong performance have to do with the nature of momentum itself, as well as the holdings in the momentum index.

Momentum is a fast-moving factor. And price momentum is effectively agnostic to anything but price; in other words, the index will seek the stocks that are outperforming (I note that MSCI Momentum indexes use risk-adjusted price momentum). What this could mean is that in a period where defensive stocks have been the winners, a momentum strategy will own more defensive stocks. If there’s a period where another characteristic is winning, then the momentum strategies will hold those types of names. Momentum is a higher-turnover strategy, especially compared to fundamental factors like value or quality, for example. 

How can investors use MSCI’s factor data?
Investors use our factor models to formulate investment strategies and manage risk and use our indexes to gain exposure to specific factors through index replication, sometimes through financial products including ETFs offered by our asset manager clients. We also have a tool called MSCI FaCS, the Factor Classification Standard, which identifies the factor exposure in your mutual fund, your index, your ETF or your stock. We visualize this in a graphic called Factor Box, an intuitive picture of the FaCS exposures.

Sometimes you can be fooled by a label or product description. MSCI FaCS enhances the due diligence process, providing deeper insight into the exposures, enabling you to determine whether the fund or index fits into your asset allocation framework. Is it exposing you to risks you intended, or to things you hadn’t considered? MSCI FaCS is truth serum at the security level—which is valuable in all market environments.

Please visit https://www.msci.com/factor-index-scorecard for performance from sell-off 2/17/2020, and longer-term performance data, which may vary.