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MacroRisk Analytics provides the first statistically sound, scientifically tested methodology for measuring the economy’s influence on investment prices. It is built expressly for Investment Advisors and other financial professionals and it enables you to reduce your clients’ economic risk while taking advantage of the current economic climate.
MacroRisk Analytics’ patented system reliably accounts for, on average, 95% of price variation in most stocks, mutual funds, and ETFs. In our world of constant economic change, you cannot afford to ignore the economy’s impact on your clients’ investments. In contrast, professionals who understand how the economy affects individual assets and portfolios will set themselves apart in a new and powerful way.
After decades of statistical research, the MacroRisk scientists have determined the 18 most significant economic factors which, on average, explain 95% of price variation among stocks, mutual funds, ETFs, and indices. The scientists began their research to find these significant factors in the 1970’s when they sifted through thousands of economic factors that were typically used for analysis and forecasting. Using advanced statistics and algorithms, they found several competing models that fit the data well in the 1970’s. The scientists then tested these competing models on the data in the early 1980’s. They used each model to estimate asset prices, and they narrowed the list of models down to the ones with the lowest forecast errors. They found that the best-fitting model from the 1970’s was still the best through the 1980’s, even with the stock crash of 1987.
Using data through 1988, the scientists had a solid 18-factor model that gave the cleanest and most stable estimates across almost all asset types. Occasionally, one of the factors in the model is redefined to maintain equivalence. For example, before the Euro was introduced, the MacroRisk scientists had used other currencies.
Data made available on MacroRisk Analytics is limited to data from year 1988 and later. This is because the scientists were using earlier data to define the 18-factor model and providing access to earlier data could introduce bias. Now, MacroRisk Analytics’ 18-factor model consistently explains, on average, 95% of price variation among stocks, mutual funds, ETFs, and indices.
The concept of the “Five Risks” comes from a publication by PhDs James T. Chong, William P. Jennings, and G. Michael Phillips, called “Five Types of Risk and a Fistful of Dollars: Practical Risk Analysis for Investors.” In its abstract, “Financial planners and longer term investors face more kinds of investment risk than do “traders” who make frequent trades and have shorter holding periods. The five broad categories of risk investors face include market-related risk, behavioral risk, intrinsic value risk, residual risk, and attribution drift risk. We demonstrate the impact of controlling each of these on portfolio performance.”
The five types of risk are addressed by five of the MacroRisk measures that are available to use in portfolio analysis within MacroRisk Analytics.
Market-Related Risk is addressed by Down-Side Beta.
Behavioral Risk is addressed by the Price/High Price Ratio, a momentum measure.
Intrinsic Value Risk is addressed by the Eta® Pricing Model, Economic Climate Rating, and the corresponding MacroRisk Index.
Residual Risk is addressed by the Eta® Value at Risk.
Attribution Drift Risk is addressed by the Economy’s Influence (or R-squared).
The publication explaining each of these risks in greater detail can be found here.
MacroRisk Analytics provides investors with many different statistical measures to evaluate assets and portfolios. The main charts and measures found on many MacroRisk reports include the MacroRisk Index, Eta® Value at Risk, Economic Climate Rating, Economy’s Influence, Eta® Profile, and Current Economy graph.
MacroRisk Index: a measure of an asset’s sensitivity to economic change. It is calculated by taking the sum of the absolute values of each statistically significant Eta® measure for the asset. The higher the MacroRisk Index for a security, the more volatile it is when the economy changes.
Eta® Value at Risk: the percent of an asset’s value that is expected to change due to an unexpected event based on the underlying Eta® Pricing Model (using a 95% confidence interval).
Economic Climate Rating: a measure of how favorable the current economic climate is for an asset over the next 6 to 12 months. It is a 5 star scale: 1 being the worst, 5 being the best.
Economy’s Influence (R-Squared): a measure that shows how much of an asset’s price variation is explained by changes in the economy.
Eta® Profile: an asset’s Eta® Profile is the combination of its 18 Eta® measures. Each Eta® measure is a description of how an asset typically responds to a specific change in the economy. Eta® measures that are positive indicate that an asset tends to increase in value when the corresponding MacroRisk Factor rises; conversely, Eta® measures that are negative indicate that an asset’s price tends to decrease when the corresponding MacroRisk Factor rises. When the absolute values of the statistically significant Eta® measures are added together, we get the asset’s MacroRisk Index (MRI), which measures the overall economic risk. Together, the 18 Eta® measures show an asset’s overall relationship to the economy.
The Current Economy: the graph of The Current Economy shows how each of the 18 MacroRisk Factors’ current values compare to their “expected” value. Light gray MacroRisk Factor bars are within their expected range—less than 2 standard deviations away from their past year’s average values. Changes of less than 2 standard deviations in MacroRisk Factors do not often greatly influence asset prices. If a MacroRisk Factor is outside its expected range—greater than 2 standard deviations away from its past year’s average value, the bar turns red. Red bars, outside the 2 standard deviation boundary lines, signal that these economic factors may significantly impact your portfolios’ values.
Yes. The 18 macroeconomic factors used in MacroRisk Analytics explain, on average, 95% of the price variation of most common and preferred stock, mutual funds, ETFs, and indices. The MacroRisk measures are extremely powerful in analyzing each of these types of securities.
The tools used in MacroRisk Analytics are based on the Eta® Pricing Model, an innovative risk management method that is only possible with the advanced computational power of the 21st century. The Eta® Pricing Model shows that portfolios which are diversified across the most significant economic factors may outperform portfolios that are solely “diversified” using asset classes and industries criteria. While the MacroRisk tools can be used to provide superior diversification across asset class and industry indices and benchmarks, MacroRisk encourages financial advisors to take the next step and focus on asset level diversification. This facilitates diversifying portfolios across the broad range of economic forces and avoids excess exposure to any one MacroRisk Factor.
One way for financial advisors to incorporate the MacroRisk approach into their current asset allocation strategies is to separately optimize subportfolios of assets falling into different classes. MacroRisk’s optimization tool can properly diversify each group of assets across the economy. Or, advisors can use a list of benchmarks in the MacroRisk optimization tool to determine the optimal mix of asset classes. While we recommend diversifying at the asset level rather than within each asset class, these optimization methods are another approach to incorporate the Eta® Pricing Model into your practice.
The main difference between MacroRisk Analytics and other economy-based investment analysis software is that MacroRisk does not try to predict future economic scenarios and adjust portfolios based on predictions. Instead, MacroRisk shows you what the economy is doing right now and how it will affect the value of your portfolios in the coming months, based on current data and historical relationships. The Eta® Profile for an asset or portfolio shows you how that asset or portfolio’s value tends to change in response to changes in each of the 18 economic factors. Because the market does not instantly incorporate long term economic changes into asset prices, a change in a MacroRisk Factor today will tend to impact the value of your portfolios over the coming year with most of the impact taking place within the first six months. MacroRisk Analytics’ Economic Climate Rating clearly shows you whether your assets and portfolios are statistically expected to go up or down in value in the coming months.
With MacroRisk Analytics, you don’t have to have a crystal ball or even an opinion about future outcomes to identify and manage economic risk and to harness the power of the changing economy. Rather than trying to predict which uncertain event might happen in the economy’s future, MacroRisk Analytics uses current data and historical relationships to help you build portfolios that are designed to avoid exposure to “Black Swan” factors while capitalizing on economic opportunity.
MacroRisk Analytics offers an extensive suite of investment analysis resources, including numerous tools for portfolio risk management. While the platform can be used in many different ways, financial advisors typically use MacroRisk to complete the following process:
1. Import client or model portfolios into the My Data section.
2. View and run reports on portfolios to see how they are poised to perform given the current state of the economy.
3. Use Advanced Screening to screen for new assets and build solid buylists.
4. Use the Optimization tool to optimize portfolios based on client preferences, setting the newly created buylist as the purchasing universe. Make the recommended trades to build the optimized portfolio.
5. Use the Client Portfolio Analysis Report to show and explain to your clients how their portfolios respond to the economy and whether their portfolios are poised to go up or down in value given the current state of the economy.
The Eta® Pricing Model used by MacroRisk Analytics is especially designed for long-term investors; the MacroRisk portfolio management approach is designed so that financial advisors do not need to constantly view and re-optimize portfolios.
Simply put, advisors should tell their clients “the economy matters.” Changes in the economy account for many of the changes in the value of your client’s portfolio. MacroRisk Analytics allows you to see how your clients’ portfolios respond to the changing economy, and you can build portfolios for them that are expected to do well given the current state of the economy.
Depending on how informed your clients wish to be on the methodology behind your investment decisions, we recommend that you show the Client Portfolio Analysis Report to your clients if you wish to explain to them exactly how their portfolios tend to respond to changes in the economy and what each of the MacroRisk measures mean for their portfolios.
MacroRisk Analytics was created by a group of PhDs and financial experts after decades of practical research. There are numerous academic papers and publications that explain the foundations and evidence supporting this model. Some of this research can be found here.