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Credit: NTB Scanpix - Outside NYSE March 10th

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Ole Jakob Wold

Ole Jakob Wold is Portfolio Manager and the Head of our Systematic Active Equity team.

Ole Jakob joined DNB Asset Management in January 2017. He then came from a position as Portfolio Manager in Guggenheim Partners which he held for seven years. Before that he was the Head of Global Equities in Alfred Berg Asset Management for many years.

Ole Jakob is a Civil Economist from the Norwegian School of Economics (NHH).


The "fear index"peaked above 95 during the financial crisis of 2008, but that level was not sustained for very long.

With VIX index at 95, we likely have panic, and investors are taking equity money off the table. I will argue that we have not seen much of that yet in this downturn.

This isn't panic

Ole Jakob Wold

In a panic, it is harder to find pricing pattern in equity markets. Investors will typically sell everything, and seek other asset classes. In this downturn, it is fairly easy to find pricing patters. -And it is not the only risk that investors are selling. The once-beloved value factor is just as significant when it comes to explaining equity returns.

Fig 1: Style Quintile MTD Performance

In the table above (fig 1), we have ranked MSCI World index members on the styles scores listed and found the performance (USD) of five groups (Quintiles) based on this ranking. Quintile 1 shows the performance of the lowest ranking stocks in this style and vice versa. The last column shows the spread between Quintile 5 and 1. This is a good and simple measure of the "Style Performance" in March, as of 9th.

We can see that "Profitability" is the winner. Companies with higher reported profitability outperformed companies with lower. At the bottom of the ranking is "Value" and "Risk". Values stocks underperformed significantly again - and the relation is stronger than we see for "Risk" in general.

Fig 2: Value for MSCI World

The graphics in fig. 2 shows the performance (right hand bar-graph) of the Quintiles formed on "Value". The left bar-graph shows the weights in each Quintile in the MSCI World. High value score was associated with the worst returns found in the first days of March.

If we turn to the style winner, "Profitability", the graph shows the opposite, of course:

Fig 3: Profitability for MSCI World

High profitability equals strong relative returns so far in March!

It seems equity investors have a plan. It seems they are moving assets around in the market, rather than taking them to other asset classes. The expected returns found in the "main suspect", fixed income, could explain this. The S&P 500 index is now at P/E = 18. This computes to an earnings yield of around 5.5 %. This is still pretty attractive to the yield found in other asset classes, and probably protects the downside for equity markets in the current environment.

We haven't seen panic yet

This is not the behavior you would expect in a widespread panic. I don't know if the "perfect storm" that is fueled by the virus outbreak and the oil war will get us into panic-mode, but I don't think we have seen it yet.

And as long as we don't see panic, the normal safety measures should work. Risk control and diversified bets should keep portfolio risk, tracking error under control and downside protected. This is all good news.

In times of fear, volatility goes up.

Everybody expects portfolio risk to rise, but the volatility effects on tracking error are often forgotten. Tracking error is driven by the same volatility that drives portfolio volatility. If volatility doubles, so does tracking error. This is easy to show matematically, as the same covariance matrix is involved in calculating both measures.

Most tools used to calculate expected risk and tracking error use long periods to calculate a risk matrix. Don't expect them to be very accurate when volatility spikes. Such models are designed to give good estimates of risk when markets are experiencing the same level of risk as observed in the period used for the estimate. Normal horizons are 3-4 years. -Equity markets have been remarkably stable last 3-4 years.

If you know this, you should not be surprised when it comes to tracking error these days.

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