Institutional investors’ increasing use of factor-based models to understand their portfolio risk exposures is the conduit for Russell Investments’ collaboration with Axioma to launch a series of factor-based indexes to rival MSCI/Barra, according to Rolf Agather, managing director of research and innovation at Russell.
The five factor-based indexes – Russell-Axioma Momentum, Leverage, Liquidity, Beta (market sensitivity), and Volatility – can be used by investors to manage their various exposures.
“If investors are using a risk management tool, such as Barra or Axioma, they can diagnose the problem. These indexes are a tool to then manage the problem – to ramp up or down those factors once you understand your exposures,” he says.
“The more sophisticated investors are using factor models to look at their portfolios to understand their risk exposures. For those constructing actively managed funds and putting active managers together, a lot (of investors) are finding they are highly exposed to momentum, this is a way to manage that.”
Agather said Axioma, which provides advanced tools for portfolio optimisation and risk analysis, was a natural partner for Russell.
“We have developed the methodology and intellectual property and we’ll license it to fund providers,” he said.
The factor with the largest impact, according to Agather, is beta, followed by size, value and momentum.
“The existing Russell indexes represent a size exposure, but it is not inconceivable that one (a size index) will be developed using this methodology,” he said.