Melissa Brown, Axioma Insights
Axioma’s Quarterly Risk Review, a comprehensive reference on the state of investment markets for portfolio managers, risk managers and other investment professionals reported today that results of its fourth-quarter analysis suggest that the likelihood of a “risk shock” may be receding, as agreement increased among the four Axioma risk models that serve as the basis for the Review.
“Agreement among our four risk models increased in developed markets in the fourth quarter,” noted Melissa Brown, Senior Director, Marketing. “Short-horizon models may lead their medium-horizon counterparts as risk changes, and statistical models may pick up new or different factors that are not detected by their fundamental counterparts, so we may be less likely to be in for a “risk shock” than we have been for a while.”
According to the latest Quarterly Risk Review, benchmark risk continued to rise globally at the end of 2011, although it peaked during the quarter and fell from that peak through the end of the quarter. Euro bloc markets, especially the so-called PIIGS (Portugal, Ireland, Italy, Greece and Spain), led the pack in predicted risk, in both local and USD terms. Japan and Australia (in local currencies) had the lowest risk, joined by non-Eurobloc euro-denominated benchmarks.
In developed markets, stock correlations eased at the end of the year, although there were still only a small percentage of stocks with negative correlations in most regions. However, Axioma’s analysis found that the change in risk for the quarter was largely the result of the change in volatility, not correlation. Currency correlations in developed markets hit a new high at the end of 2011.
Across the globe, a low volatility strategy would have been the most profitable in2011 among the style factors tracked by Axioma—albeit with higher risk—and, in general, medium-term momentum produced positive returns for the first three quarters of the year.
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