Podcast: Risk premia indices—the why and the how

In this episode of FactSet’s podcast, we speak with Dimitris Melas, Executive Director and Global Head of New Product Research at MSCI, and we discuss risk premia-based indices and strategies. As Melas tells us, historically, portfolio returns were attributed to passive market exposure and active portfolio management. Any returns in excess of these two areas were considered the result of active management, but Melas suggests that they are often the results of systematic risk premia. In this episode, we expand on MSCI’s research paper "Harvesting Risk Premia With Strategy Indices," and the proliferation of risk premia-based indices.

• Risk premia strategy indices aim to improve manager performance relative to the market in two ways: 1) By enhancing return by gaining exposure to a systematic factor such as value, 2) By trying to reduce risk in an index by overweighting securities that have low volatility or low correlation
• Historically, risk premia strategies and affiliated indices show overperformance compared with the market; a notable exception is during the tech bubble and credit crisis when value-weighted risk premia strategy indices underperformed, risk-weighted strategy indices by contrast performed well during those time periods
• MSCI emphasizes that asset managers use strategies that look for value and strategies that try to reduce risk as a way to balance out periods in which one style might underperform
• According to the study, it does not matter how you fund a risk premia strategy, the performance in the institutional portfolio sample that MSCI used saw enhanced performance; in addition, performance was enhanced in this test case using both strategies that emphasized enhancing returns and those that emphasized reducing risk

• There has been a shift out of traditional active management, according to Melas, we will see more funding out of active mandates and towards risk premia strategies and cap-weighted passive mandates