Morningstar Magazine - October/November 2016 - 44
0
Spotlight: Risk
factor, a proprietary Morningstar factor. The model
signals a decrease in variance and a similar
decrease in VAR and CVAR six and 12 months out.
This implies that the longer-term return distribution
has shifted toward the positive expected
returns with less risk. Additionally, this pattern
appeared for funds highly exposed to the growth
end of the value-growth spectrum.
-50
-25
Variance
Skewness
Kurtosis
Value at Risk
Conditional
Value at Risk
-75
-50
Variance
EXHIBIT 7
Skewness
Kurtosis
Value at Risk
Conditional
Value at Risk
-75
Risk: Economic Moat The model showed a decrease in variance, VAR, and CVAR,
implying a shift toward positive expected returns with less risk.
Period
1M
3M
6M
1Y
Median Delta (%)
Period
1M
3M
6M
1Y
20
Median Delta (%)
200
Last, E X H I B I T 8 visualizes the short-term (one
month) and long-term (one year) forecast
risk statistics for Dodge & Cox International Stock.
Comparing its post-Brexit forecast with the
pre-Brexit one, the risk model finds increased
variance, skewness, and kurtosis while signaling
decreased VAR and CVAR. This suggests
greater return volatility paired with higher
expected return in the year ahead for the fund.
-200
-20
-40
Variance
Through the Morningstar Global Risk Model, we
have demonstrated the unique analysis that risk
modeling can bear upon global events. Risk
modeling decomposes security risk and return into
their primary drivers, or factors. This enables
investors to examine multiple dimensions of their
portfolio and strategically optimize their exposures.
This capacity becomes critical as we encounter
events in the world. Brexit has not yet
concluded, with significant uncertainty remaining
on triggering Article 50 and the negotiation
process. The United Kingdom's move sparked
European Union-exit sentiment in other European
nations. The U.S. election arrives shortly.
We will follow the global markets through the risk
model and look forward to its insights. K
James Li is a quantitative analyst with Morningstar.
44
Morningstar October/November 2016
Kurtosis
Value at Risk
Conditional
Value at Risk
-40
-60
Skewness
Kurtosis
Value at Risk
Conditional
Value at Risk
-60
Source: Morningstar.
Variance
Using the Morningstar Global Risk Model
Our analysis of the risk model's output reveals
deeper insights into the market reaction to
Brexit. We saw the rotation to defensive sectors,
the recovery of the financial services sector,
and the strengthening of the U.S. dollar. Uniquely,
we found positive risk premiums for exposure
to high volatility and low liquidity. Finally, we
observed significant changes in forecast risk from
before Brexit to after Brexit in funds highly
exposed to financial services, developed Americas,
and economic moat.
Skewness
EXHIBIT 8
Risk: DODFX The chart shows the fund's post- and pre-Brexit forecasts. It implies
Variance
Brexit
Timeline
greater
return volatility but higher
expected return Value
over theSkewness
next year.
Value
Before Brexit
AfterTimeline
Brexit
Brexit
0.04
Value
0.010
Value
0.008
0.010
Variance
Before Brexit
After Brexit
Skewness
0.04
0.03
0.006
0.008
0.03
0.02
0.004
0.006
0.02
0.01
0.002
0.004
1M
1Y
0.000
0.002
1M
1Y
0.01
0.00
Kurtosis
Value
1M
1Y
Value at Risk
0.000
Value
1M
1Y
0.00
Conditional Value at Risk Value
Kurtosis
4
Value
Value at Risk
0.0
Value
Conditional Value at Risk Value
0.0
-0.2
0.0
-0.2
-0.2
-0.4
-0.2
-0.4
43
32
21
0.0
1M
1Y
10
1M
1Y
-0.4
-0.6
1M
1Y
-0.4
-0.6
1M
1Y
0
1M
1Y
-0.6
1M
1Y
-0.6
Source: Morningstar.
Table of Contents for the Digital Edition of Morningstar Magazine - October/November 2016
Contents
Morningstar Magazine - October/November 2016 - Cover1
Morningstar Magazine - October/November 2016 - Cover2
Morningstar Magazine - October/November 2016 - 1
Morningstar Magazine - October/November 2016 - 2
Morningstar Magazine - October/November 2016 - Contents
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