Morningstar Magazine - October/November 2016 - 41

lo al is odel nravels Brexit Uncertainty Analysis shows Britain's vote yielded positive risk premiums for exposure to ig -vola ili and lo -li idi ac ors e oc s speciﬁcall on ris in par ic lar a we can learn about equity market risk expectations before and after Brexit. BREXIT James Li Great Britain's vote to exit the European Union surprised the world and world markets. Equity markets dropped, volatility spiked, and investors poured into safe-haven assets. The concern, boiled down, was risk. Much has been written about Brexit, as the event is no n in e ﬁnancial media incl ding a ornings ar is ar icle ill no serve as a g ide o re i or i s economic ramiﬁca ions a er Our Global Risk Model As e s o ed in e ﬁrs ar icle o e po lig sec ion e ornings ar lo al is odel em odies o r ﬁrm s approac o assessing and orecas ing ris e ris model ses factors to understand equity- and portfolio-level ris glo all e model eval a es more an , stocks and , equity funds in ornings ar s da a ase o ild a compre ensive study of risk exposures. The model then uses these exposures and their premiums to forecast risk statistics at various time horizons. To illustrate, E X H I B I T 1 shows the exposure to the factors of Dodge o n erna ional oc DODFX on June . We study the risk model's outputs to learn about e glo al e i mar e ro g o e re i timeline. We ask, how do factor premiums c ange leading p o and a er e re i vo e and o do ris e pec a ions c ange e ore and after Brexit. Factor Return Premiums Academic and industry research have discovered several factors that consistently explain the varia ion in s oc re rns niversi o icago pro essors E gene ama and enne renc mos famously introduced the size and value risk ormer niversi o o ern premiums in ali ornia pro essor ar ar ar added , and A s li Asness momentum in Andrea Frazzini, and Lasse Pedersen published . their "quality minus junk" factor in ince en researc ers ave proposed man ac ors as so rces o asse re rns and ris ecen years have seen the tremendous adoption of is researc or inves ing per ormance eval a ion and new product development. EXHIBIT 1 Dodge & Cox International's Risk Signature e nd s e pos re o Eac ac or gro p is sor ed e e pos re si e in e por olio i ac ors are s o n in ars and gro ped e ig es posi ive e pos res lis ed ﬁrs ac or pe Dodge & Cox International Stock Fund Style Region 0.58 Fair Value 0.53 Ownership Popularity 0.26 Financial Health 0.11 Volatility 0.07 Liquidity 0.00 Economic Moat -0.13 Uncertainty -0.23 Ownership Risk Value-Growth -0.38 Momentum -0.63 Size o rce -1.43 Sector 0.41 Developed Europe Currency 0.26 Financial Services 0.21 Energy 0.18 EUR Developed Asia-Paciﬁc 0.18 Consumer Cyclical 0.17 CHF 0.08 Healthcare Emerging Americas 0.06 Emerging Asia-Paciﬁc 0.04 Emerging Europe 0.01 Emerging Middle East 0.99 JPY Developed Americas 0.56 0.25 0.12 NZD Technology 0.09 GBP Communication Services 0.06 CAD Industrials 0.03 AUD -0.59 Real Estate 0.02 Basic Materials 0.02 Consumer Defensive 0.01 Utilities 0.01 -0.03 -0.29 -0.54 ornings ar glo al mornings ar com ornings armaga ine 41 http://global.morningstar.com/Morningstarmagazine

Table of Contents for the Digital Edition of Morningstar Magazine - October/November 2016