Periodic Tables of Risk - Q4 2023

Published quarterly, the Periodic Tables of Risk highlight how select factors in the capital markets are affecting institutional investors’ portfolios. The percentages represent the trailing quarterly returns for each of these key factors.

Managing a large multi-asset class portfolio requires careful consideration of market assumptions and underlying risks. Investors can dissect portfolio returns and risk along these or any other customizable factors using Nasdaq Solovis.

Review the tables and accompanying commentary to understand what’s driving (or detracting) from returns for investors.

Asset Class Risk Factor Returns Q1 2021 to Q4 2023 (trailing 3 years)

• Rates appreciated considerably in Q4 as the Fed stressed the lag between monetary policy and its effects on the real economy. The US fed funds rate remained unchanged with the unemployment rate remaining steady and inflation ticking down considerably. With possible cuts by the Fed in 2024, and central banks forecasted to cut rates globally in 2024, investors must have a grasp on their portfolios’ rate risk, including duration and convexity, and inflation risk.
• Credit followed rates, posting a solid return during the quarter. Spreads tightened moderately for US investment grade, US high yield, and Euro high yield – US CCC-rated bonds were an exception with OAS widening slightly to end the year.
• Market returns rebounded strongly in Q4 for their best quarter since Q4 2020. The year-end surge was led by tech, communication services, and real estate. US, Japan, and India stocks fared well while China equities, both onshore and offshore, continued to sink. Understanding underlying portfolio exposures can be critical to assessing portfolio risk. Tech exposure, and therefore risk contribution, has likely increased for many investors over the quarter whether it be through direct investments, private equity and venture capital portfolio companies (and their relative preference for SaaS businesses), or additional weighting across long-only manager portfolios.
• In commodities, Brent spot, WTI, and LNG all slid in Q4 after robust performance in Q3. OPEC agreed to further cuts in November while demand from China continues to be a concern. Precious metals rallied during the quarter to offset weakness in the energy complex.

Key

Market: MSCI All Country World Stock Index

Rates: 20+ Year Treasuries

Credit: US Corporate Credit Index

Commodities: GSCI Commodities Index

Dollar: US Dollar versus basket of foreign currencies

 

Equity Style Risk Factor Returns Q1 2021 to Q4 2023 (trailing 3 years)

• Growth equities outperformed value as the “Magnificent Seven” (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla) continued upward. More broadly, the Nasdaq 100 index returned 14.34% in Q4 versus 11.69% for the S&P 500. As the market caps of large tech stocks continue to swell, investors should regularly monitor their concentration risk across their manager rosters to ensure they’re not over-allocated to any single names.
• Q4 was the best quarter for small cap stocks since Q4 2020 and fared better than large caps, globally, for the first time since Q4 2022. That said, investors should monitor their specific geographic exposures. Ex-US small caps only outperformed ex-US large caps by 39 bps (MSCI ACWI ex-US) versus 207 bps for US equities (Russell 1000/2000); Japan was the largest market in which small caps actually underperformed large caps in Q4.

Key

Market: MSCI All Country World Stock Index

Quality: MSCI Quality Index

Momentum: MSCI ACWI Momentum Index

Growth: MSCI ACWI Growth Index

Value: MSCI ACWI Value Index

Large: MSCI ACWI Large Cap Index

Small: MSCI ACWI Small Cap Index

 

 

While this commentary focuses on systematic risk in the capital markets, there are other factors that can also affect your portfolio.

Click here to learn how Nasdaq Solovis helps asset owners track other factors like custodial or counter-party risk and their potential impacts.  

 

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Tony Yiu

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Tony Yiu is the Director of Quantitative Research & Development for Nasdaq Solovis and currently leads the Risk Analytics team.

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