Morningstar launches first global risk model

Morningstar has launched its first Global Risk Model with 36 factors that help decompose the sources of return and risk for a stock or a portfolio.

The model will help investors understand an investment’s factor exposures and to forecast the future return distribution of individual stocks and equity portfolios. The company plans to eventually expand the risk model to additional asset classes.

Morningstar’s Global Risk Model has 36 different factors across style, sector, region, and currency characteristics.

Six of the 36 factors are based on Morningstar’s proprietary ratings: Quantitative Fair Value Estimate, Morningstar Quantitative Economic Moat Rating, Quantitative Uncertainty Rating, Quantitative Financial Health, Ownership Risk, and Ownership Popularity.

The model evaluates more than 40,000 stocks and 10,000 equity fund portfolios in Morningstar’s database and then builds a comprehensive forecast of future returns for various time horizons based on all 36 factor exposures.

In addition, the Global Risk Model can assess an equity portion of a client’s multiasset portfolio. Investors can screen individual stocks or equity funds or make comparisons based on any of the factors. Morningstar updates the factor exposures and forecasts daily.

“Risk analysis is paramount to the investment decision-making process. Our model uses unique factors such as sustainable competitive advantage and ownership data to provide a powerful lens with which to understand the risk of a stock or portfolio,” said Warren Miller, head of asset management software for Morningstar.

“In addition, our risk model methodology incorporates ‘fat tails,’ or extreme events, among investment returns when forecasting the distribution of future returns, instead of relying on a normal distribution,”  Miller said.

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