Qontigo launches STOXX factor indices using Axioma risk models

Jan 28th, 2020 | By | Category: ETF and Index News

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Qontigo has launched a suite of factor indices combining STOXX‘s data and index technology with Axioma’s equity risk models.

Qontigo builds factor index suite off Axioma risk models

The Stoxx Factor Index suite harnesses factor insights from Axioma’s equity risk models.

The STOXX Factor Index suite is the first new batch of indices to be released by Qontigo since the firm was formed last September.

The suite has launched with 30 indices covering six factors (value, momentum, size, low risk, quality, and a multi-factor strategy) across five developed market equity universes – global, global ex-US, US, Europe, and Asia Pacific.

Each index aims to provide long-term outperformance compared to similar market-cap-weighted benchmarks by capturing risk premia related to its underlying factor strategy in a systematic and transparent process.

Methodology

The indices are derived from five broad market parent indices covering the different equity regions: the STOXX Global 1800 Index, STOXX Global 1800 ex USA Index, STOXX USA 900 Index, STOXX Europe 600 Index, and STOXX Asia/Pacific 600 Index.

Each constituent of the indices is assigned a factor score based on an analysis of the firm’s characteristics provided by Axioma’s equity risk models.

The value factor is derived from earnings yield, the momentum factor from medium-term stock price momentum, the quality factor from a blend of profitability and leverage, the size factor from market capitalization, the low risk factor from a blend of beta and price volatility, and the multifactor strategy uses an equal weight of the above five factors.

Each index uses an optimization process to maximize exposure to the target factor while constraining exposure to non-targeted factors, controlling for country and industry diversification, managing liquidity and turnover, and reducing tracking error. The indices are reconstituted and rebalanced on a quarterly basis.

Hamish Seegopaul, Managing Director, Quantitative and Multi-Asset Solutions, at Qontigo, commented, “The STOXX factor indices are built to be investable. On paper, factor exposures and factor performance can be stronger among small, illiquid stocks. A key objective of the STOXX indices is to ensure strong intended factor exposures while constraining exposure to less liquid securities.”

According to back-tested performance between December 2001 and August 2019, each factor index has delivered above-market returns across all five equity regions. The only exception to this is the value factor in Europe.

In particular, the global multi-factor strategy provided the best returns among the global set of factor indices, as well as the lowest volatility with the exception of the low risk index. According to Qontigo, this mirrors academic and empirical findings that explain the outperformance of multifactor portfolios as the aggregation of single factors that have positive performance but different cyclicality and often uncorrelated return profiles.

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