Spotlight: is
e ec ivel n a ne e ample o is e or
ornings ar s an i a ive researc eam as
designed e lo al is odel
ic
ses
ac ors o decompose e so rces o re rn
and ris or a s oc or an e i por olio
an o ese ac ors are ased on ornings ar s
proprie ar ra ings s c as an i a ive air
al e Es ima e and ornings ar an i a ive
Economic oa
e model also incl des s le
sec or region and c rrenc c arac eris ics
e idea is o provide inves ors i a po er l
lens i
ic o nders and e po en ial ris s
o a s oc or por olio
ile e model is
oc sed ini iall on e i ies i ill e e panded
o incl de o er asse classes
Understanding the Model
is is in eren o inves ing Developing a
prospec ive vie o ris allo s inves ors o ma e
inves men decisions ailored o eir individ al
ris pre erences and l ima el increase e
ili derived rom eir inves men por olio
A ris model orecas s e dis ri ion o
re
asse re rns is dis ri ion con ains all
e in orma ion needed o assess e ris iness
o a por olio As e orecas dis ri ion
idens a indica es more ncer ain a o
e
re re rn po en ial o e por olio As ail
pro a ili ies increase a indica es e por olio
as ig er ris o e periencing an e reme
loss i
is orecas inves ors are empo ered
o eval a e e ris iness o asse s or por olios
o asse s
n essence e model see s o iden i a small
n m er o independen la en so rces
o re rn ovemen s in ese so rces drive e
movemen in a compara l small n m er o
in erpre a le ac ors An e ample o a ac or is e
e pos re o par ic lar c rrencies or e ample
o m c does an increase in e e ro S
dollar e c ange ra e drive an increase in e val e
o a s oc
ovemen s in e ac ors drive
asse re rns
everal me odological c oices m s e made
en ilding a ris model r c oices ere
made i
e goal o crea ing a ni e in erpre a le responsive and predic ive model e egan
i
e ollo ing ass mp ions a o asse
re rns a s aped o r me odological c oices
38
ornings ar c o er ovem er 2016
ere are a small n m er o independen so rces
o mar e movemen a drive e ma ori
o varia ion in asse re rns
3 Asse re rns are no normall dis ri ed
3 e dis ri ion o asse re rns c anges
ro g ime
3
ese ree concep s are ell-recogni ed and
noncon roversial al o g some or all
o em are o en ignored or convenience
ris -modeling prac i ioners
Under the Hood
everal ea res ma e e
ornings ar lo al
is odel ni e
3 e se proprie ar ndamen al- ased ac ors a
e elieve are s perior drivers o re rns
ornings ar s researc gro p provides or ardloo ing ra ings on asse s
ic ave een
s ccess l in predic ing e
re dis ri ion
o re rns ac ors ased on ese ra ings
also end o e ncorrela ed i radi ional ris
ac ors ma ing em a complemen ar addi ion
o o r ris ac or model i e ise e ave
dis illed ornings ar s proprie ar da a ase
o m al nd oldings in o ac ors a
are also ncorrela ed predic ors o e
re
dis ri ion o re rns
a Drives
Por olio is s and
e rns
T. Rowe Price Overseas Stock
Style
e ran o old-ra ed m al nds
o e Price verseas oc
and ppen eimer n erna ional ro
A
ro g o r lo al is odel
a process is ill s ra ed o e rig
sing ornings ar s is igna re ac or
e pos res are s o n in ars
ic
are gro ped
ac or pe and sor ed
e pos re si e o
nds ave a oveaverage ac or e pos res o s oc s
i economic moa s and s rd alance
s ee s and elo -average e pos re
o compan si e e o nds di er
on e pos res o emerging mar e s
in E rope and Asia and sec ors s c as
ind s rials and financial services
Uncertainty
0.49
Fair Value
Economic Moat
0.41
Financial Health
0.11
-0.04
Liquidity
-0.10
Value-Growth
-0.14
Ownership Popularity
-0.25
Momentum
-0.32
Volatility
-0.39
Ownership Risk
Size
-0.73
-1.48
Oppenheimer International Growth
0.59
Economic Moat
0.43
Financial Health
Value-Growth
0.24
Momentum
-0.03
Ownership Popularity
-0.03
Fair Value
-0.05
-0.18
Liquidity
-0.48
Uncertainty
-0.57
Volatility
Ownership Risk -0.83
Size
o rce
-1.22
ornings ar
Table of Contents for the Digital Edition of Morningstar Magazine - October/November 2016